WHEREFORE, judgment is hereby rendered, ordering the defendants to countermand the
II. FORM AND INTERPRETATION
G.R. No. L-22405 June 30, 1971
PHILIPPINE EDUCATION CO., INC., plaintiff-appellant, vs. MAURICIO A. SORIANO, ET
AL., defendant-appellees.
DIZON, J.:
An appeal from a decision of the Court of First Instance of Manila dismissing the complaint filed by
the Philippine Education Co., Inc. against Mauricio A. Soriano, Enrico Palomar and Rafael Contreras.
On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post Office ten (10) money
orders of P200.00 each payable to E.P. Montinola withaddress at Lucena, Quezon. After the postal
teller had made out money ordersnumbered 124685, 124687-124695, Montinola offered to pay for
them with a private checks were not generally accepted in payment of money orders, the teller
advised him to see the Chief of the Money Order Division, but instead of doing so, Montinola
managed to leave building with his own check and the ten(10) money orders without the
knowledge of the teller.
On the same date, April 18, 1958, upon discovery of the disappearance of the unpaid money
orders, an urgent message was sent to all postmasters, and the following day notice was likewise
served upon all banks, instructing them not to pay anyone of the money orders aforesaid if
presented for payment. The Bank of America received a copy of said notice three days later.
On April 23, 1958 one of the above-mentioned money orders numbered 124688 was received by
appellant as part of its sales receipts. The following day it deposited the same with the Bank of
America, and one day thereafter the latter cleared it with the Bureau of Posts and received from the
latter its face value of P200.00.
On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order Division of the
Manila Post Office, acting for and in behalf of his co-appellee, Postmaster Enrico Palomar, notified
the Bank of America that money order No. 124688 attached to his letter had been found to have
been irregularly issued and that, in view thereof, the amount it represented had been deducted
from the bank's clearing account. For its part, on August 2 of the same year, the Bank of America
debited appellant's account with the same amount and gave it advice thereof by means of a debit
memo.
On October 12, 1961 appellant requested the Postmaster General to reconsider the action taken by
his office deducting the sum of P200.00 from the clearing account of the Bank of America, but his
request was denied. So was appellant's subsequent request that the matter be referred to the
Secretary of Justice for advice. Thereafter, appellant elevated the matter to the Secretary of Public
Works and Communications, but the latter sustained the actions taken by the postal officers.
In connection with the events set forth above, Montinola was charged with theft in the Court of
First Instance of Manila (Criminal Case No. 43866) but after trial he was acquitted on the ground of
reasonable doubt.
On January 8, 1962 appellant filed an action against appellees in the Municipal Court of Manila
praying for judgment as follows:
WHEREFORE, plaintiff prays that after hearing defendants be ordered:
(a) To countermand the notice given to the Bank of America on September 27, 1961,
deducting from the said Bank's clearing account the sum of P200.00 represented by postal
money order No. 124688, or in the alternative indemnify the plaintiff in the same amount with
interest at 8-% per annum from September 27, 1961, which is the rate of interest being
paid by plaintiff on its overdraft account;
(b) To pay to the plaintiff out of their own personal funds, jointly and severally, actual and
moral damages in the amount of P1,000.00 or in such amount as will be proved and/or
determined by this Honorable Court: exemplary damages in the amount of P1,000.00,
attorney's fees of P1,000.00, and the costs of action.
Plaintiff also prays for such other and further relief as may be deemed just and equitable.
On November 17, 1962, after the parties had submitted the stipulation of facts reproduced at pages
12 to 15 of the Record on Appeal, the above-named court rendered judgment as follows:
1
notice given to the Bank of America on September 27, 1961, deducting from said Bank's
clearing account the sum of P200.00 representing the amount of postal money order No.
124688, or in the alternative, to indemnify the plaintiff in the said sum of P200.00 with
interest thereon at the rate of 8-% per annum from September 27, 1961 until fully paid;
without any pronouncement as to cost and attorney's fees.
The case was appealed to the Court of First Instance of Manila where, after the parties had
resubmitted the same stipulation of facts, the appealed decision dismissing the complaint, with
costs, was rendered.
The first, second and fifth assignments of error discussed in appellant's brief are related to the
other and will therefore be discussed jointly. They raise this main issue: that the postal money
order in question is a negotiable instrument; that its nature as such is not in anyway affected by
the letter dated October 26, 1948 signed by the Director of Posts and addressed to all banks with a
clearing account with the Post Office, and that money orders, once issued, create a contractual
relationship of debtor and creditor, respectively, between the government, on the one hand, and
the remitters payees or endorses, on the other.
It is not disputed that our postal statutes were patterned after statutes in force in the United
States. For this reason, ours are generally construed in accordance with the construction given in
the United States to their own postal statutes, in the absence of any special reason justifying a
departure from this policy or practice. The weight of authority in the United States is that postal
money orders are not negotiable instruments (Bolognesi vs. U.S. 189 Fed. 395; U.S. vs. Stock
Drawers National Bank, 30 Fed. 912), the reason behind this rule being that, in establishing and
operating a postal money order system, the government is not engaging in commercial transactions
but merely exercises a governmental power for the public benefit.
It is to be noted in this connection that some of the restrictions imposed upon money orders by
postal laws and regulations are inconsistent with the character of negotiable instruments. For
instance, such laws and regulations usually provide for not more than one endorsement; payment
of money orders may be withheld under a variety of circumstances (49 C.J. 1153).
Of particular application to the postal money order in question are the conditions laid down in the
letter of the Director of Posts of October 26, 1948 (Exhibit 3) to the Bank of America for the
redemption of postal money orders received by it from its depositors. Among others, the condition
is imposed that "in cases of adverse claim, the money order or money orders involved will be
returned to you (the bank) and the, corresponding amount will have to be refunded to the
Postmaster, Manila, who reserves the right to deduct the value thereof from any amount due you if
such step is deemed necessary." The conditions thus imposed in order to enable the bank to
continue enjoying the facilities theretofore enjoyed by its depositors, were accepted by the Bank of
America. The latter is therefore bound by them. That it is so is clearly referred from the fact that,
upon receiving advice that the amount represented by the money order in question had been
deducted from its clearing account with the Manila Post Office, it did not file any protest against
such action.
Moreover, not being a party to the understanding existing between the postal officers, on the one
hand, and the Bank of America, on the other, appellant has no right to assail the terms and
conditions thereof on the ground that the letter setting forth the terms and conditions aforesaid is
void because it was not issued by a Department Head in accordance with Sec. 79 (B) of the Revised
Administrative Code. In reality, however, said legal provision does not apply to the letter in
question because it does not provide for a department regulation but merely sets down certain
conditions upon the privilege granted to the Bank of Amrica to accept and pay postal money orders
presented for payment at the Manila Post Office. Such being the case, it is clear that the Director of
Posts had ample authority to issue it pursuant to Sec. 1190 of the Revised Administrative Code.
In view of the foregoing, We do not find it necessary to resolve the issues raised in the third and
fourth assignments of error.
WHEREFORE, the appealed decision being in accordance with law, the same is hereby affirmed with
costs.
-----

G.R. No. 97753 August 10, 1992
CALTEX (PHILIPPINES), INC., petitioner, vs. COURT OF APPEALS and SECURITY BANK AND
TRUST COMPANY, respondents.
REGALADO, J.:
This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by
respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with modifications, the
earlier decision of the Regional Trial Court of Manila, Branch XLII, 2 which dismissed the complaint
filed therein by herein petitioner against respondent bank.
The undisputed background of this case, as found by the court a quo and adopted by respondent
court, appears of record:
1. On various dates, defendant, a commercial banking institution, through its Sucat Branch
issued 280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz who deposited
with herein defendant the aggregate amount of P1,120,000.00, as follows: (Joint Partial
Stipulation of Facts and Statement of Issues, Original Records, p. 207; Defendant's Exhibits 1
to 280);
CTD CTD
Dates Serial Nos. Quantity Amount
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
AND TRUST COMPANY
Total 280 P1,120,000
===== ========
2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in
connection with his purchased of fuel products from the latter (Original Record, p. 208).
3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat Branch
Manger, that he lost all the certificates of time deposit in dispute. Mr. Tiangco advised said
depositor to execute and submit a notarized Affidavit of Loss, as required by defendant bank's
procedure, if he desired replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required
Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit of loss, 280
replacement CTDs were issued in favor of said depositor (Defendant's Exhibits 282-561).
5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in
the amount of Eight Hundred Seventy Five Thousand Pesos (P875,000.00). On the same date,
said depositor executed a notarized Deed of Assignment of Time Deposit (Exhibit 562) which
stated, among others, that he (de la Cruz) surrenders to defendant bank "full control of the
indicated time deposits from and after date" of the assignment and further authorizes said
bank to pre-terminate, set-off and "apply the said time deposits to the payment of whatever
amount or amounts may be due" on the loan upon its maturity (TSN, February 9, 1987, pp.
60-62).
6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc.,
went to the defendant bank's Sucat branch and presented for verification the CTDs declared
lost by Angel dela Cruz alleging that the same were delivered to herein plaintiff "as security for
purchases made with Caltex Philippines, Inc." by said depositor (TSN, February 9, 1987, pp.
54-68).
2
7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from herein
plaintiff formally informing it of its possession of the CTDs in question and of its decision to
pre-terminate the same.
8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the former "a
copy of the document evidencing the guarantee agreement with Mr. Angel dela Cruz" as well
as "the details of Mr. Angel dela Cruz" obligation against which plaintiff proposed to apply the
time deposits (Defendant's Exhibit 564).
9. No copy of the requested documents was furnished herein defendant.
10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of the
value of the CTDs in a letter dated February 7, 1983 (Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell due
and on August 5, 1983, the latter set-off and applied the time deposits in question to the
payment of the matured loan (TSN, February 9, 1987, pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant bank
be ordered to pay it the aggregate value of the certificates of time deposit of P1,120,000.00
plus accrued interest and compounded interest therein at 16% per annum, moral and
exemplary damages as well as attorney's fees.
3
After trial, the court a quo rendered its decision dismissing the instant complaint.
On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint,
hence this petition wherein petitioner faults respondent court in ruling (1) that the subject
certificates of deposit are non-negotiable despite being clearly negotiable instruments; (2) that
petitioner did not become a holder in due course of the said certificates of deposit; and (3) in
disregarding the pertinent provisions of the Code of Commerce relating to lost instruments payable
to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to provide a better
understanding of the issues involved in this recourse.
SECURITY BANK
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR
THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine
Currency, repayable to said depositor 731 days. after date, upon presentation and
surrender of this certificate, with interest at the rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)
5
AUTHORIZED SIGNATURES
Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as
follows:
. . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued, it is
important to note that after the word "BEARER" stamped on the space provided supposedly for
the name of the depositor, the words "has deposited" a certain amount follows. The document
further provides that the amount deposited shall be "repayable to said depositor" on the
period indicated. Therefore, the text of the instrument(s) themselves manifest with clarity that
they are payable, not to whoever purports to be the "bearer" but only to the specified person
indicated therein, the depositor. In effect, the appellee bank acknowledges its depositor Angel
dela Cruz as the person who made the deposit and further engages itself to pay said depositor
the amount indicated thereon at the stipulated date. 6
We disagree with these findings and conclusions, and hereby hold that the CTDs in question are
negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments
Law, enumerates the requisites for an instrument to become negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties'
bone of contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P.
Tiangco, Security Bank's Branch Manager way back in 1982, testified in open court that the
depositor reffered to in the CTDs is no other than Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are saying that per books of the bank, the depositor
referred (sic) in these certificates states that it was Angel dela Cruz?
witness:
a Yes, your Honor, and we have the record to show that Angel dela Cruz was the one who
cause (sic) the amount.
Atty. Calida:
q And no other person or entity or company, Mr. Witness?
witness:
7
a None, your Honor.
xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor identified in all of these certificates of time deposit insofar
as the bank is concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is
determined from the writing, that is, from the face of the instrument itself. 9 In the construction of
a bill or note, the intention of the parties is to control, if it can be legally ascertained. 10 While the
writing may be read in the light of surrounding circumstances in order to more perfectly understand
the intent and meaning of the parties, yet as they have constituted the writing to be the only
outward and visible expression of their meaning, no other words are to be added to it or substituted
in its stead. The duty of the court in such case is to ascertain, not what the parties may have
secretly intended as contradistinguished from what their words express, but what is the meaning of
the words they have used. What the parties meant must be determined by what they said. 11
Contrary to what respondent court held, the CTDs are negotiable instruments. The documents
provide that the amounts deposited shall be repayable to the depositor. And who, according to the
document, is the depositor? It is the "bearer." The documents do not say that the depositor is
Angel de la Cruz and that the amounts deposited are repayable specifically to him. Rather, the
amounts are to be repayable to the bearer of the documents or, for that matter, whosoever may be
the bearer at the time of presentment.
If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could
have with facility so expressed that fact in clear and categorical terms in the documents, instead of
having the word "BEARER" stamped on the space provided for the name of the depositor in each
CTD. On the wordings of the documents, therefore, the amounts deposited are repayable to
whoever may be the bearer thereof. Thus, petitioner's aforesaid witness merely declared that Angel
3
de la Cruz is the depositor "insofar as the bank is concerned," but obviously other parties not privy
to the transaction between them would not be in a position to know that the depositor is not the
bearer stated in the CTDs. Hence, the situation would require any party dealing with the CTDs to go
behind the plain import of what is written thereon to unravel the agreement of the parties thereto
through facts aliunde. This need for resort to extrinsic evidence is what is sought to be avoided by
the Negotiable Instruments Law and calls for the application of the elementary rule that the
interpretation of obscure words or stipulations in a contract shall not favor the party who caused
the obscurity. 12
The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in
the negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this
suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without
informing respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are
bearer instruments, a valid negotiation thereof for the true purpose and agreement between it and
De la Cruz, as ultimately ascertained, requires both delivery and indorsement. For, although
petitioner seeks to deflect this fact, the CTDs were in reality delivered to it as a security for De la
Cruz' purchases of its fuel products. Any doubt as to whether the CTDs were delivered as payment
for the fuel products or as a security has been dissipated and resolved in favor of the latter by
petitioner's own authorized and responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr.,
Caltex Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel
dela Cruz to guarantee his purchases of fuel products" (Emphasis ours.) 13 This admission is
conclusive upon petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an
admission or representation is rendered conclusive upon the person making it, and cannot be
denied or disproved as against the person relying thereon. 14 A party may not go back on his own
acts and representations to the prejudice of the other party who relied upon them. 15 In the law of
evidence, whenever a party has, by his own declaration, act, or omission, intentionally and
deliberately led another to believe a particular thing true, and to act upon such belief, he cannot, in
any litigation arising out of such declaration, act, or omission, be permitted to falsify it. 16
If it were true that the CTDs were delivered as payment and not as security, petitioner's credit
manager could have easily said so, instead of using the words "to guarantee" in the letter
aforequoted. Besides, when respondent bank, as defendant in the court below, moved for a bill of
particularity therein 17 praying, among others, that petitioner, as plaintiff, be required to aver with
sufficient definiteness or particularity (a) the due date or dates ofpayment of the alleged
indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt showing that
the CTDs were delivered to it by De la Cruz as payment of the latter's alleged indebtedness to it,
plaintiff corporation opposed the motion. 18 Had it produced the receipt prayed for, it could have
proved, if such truly was the fact, that the CTDs were delivered as payment and not as security.
Having opposed the motion, petitioner now labors under the presumption that evidence willfully
suppressed would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs.
Philippine National Bank, et al. 20 is apropos:
. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom:
The character of the transaction between the parties is to be determined by their
intention, regardless of what language was used or what the form of the transfer was. If
it was intended to secure the payment of money, it must be construed as a pledge; but if
there was some other intention, it is not a pledge. However, even though a transfer, if
regarded by itself, appears to have been absolute, its object and character might still be
qualified and explained by contemporaneous writing declaring it to have been a deposit of
the property as collateral security. It has been said that a transfer of property by the
debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should
be treated as a pledge if the debt continues in inexistence and is not discharged by the
transfer, and that accordingly the use of the terms ordinarily importing conveyance of
absolute ownership will not be given that effect in such a transaction if they are also
commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a
transfer of absolute ownership, in the absence of clear and unambiguous language or
other circumstances excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable
Instruments Law, an instrument is negotiated when it is transferred from one person to another in
such a manner as to constitute the transferee the holder thereof, 21 and a holder may be the payee
or indorsee of a bill or note, who is in possession of it, or the bearer thereof. 22 In the present case,
however, there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor
of petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have
sufficed. Here, the delivery thereof only as security for the purchases of Angel de la Cruz (and we
even disregard the fact that the amount involved was not disclosed) could at the most constitute
petitioner only as a holder for value by reason of his lien. Accordingly, a negotiation for such
purpose cannot be effected by mere delivery of the instrument since, necessarily, the terms thereof
and the subsequent disposition of such security, in the event of non-payment of the principal
obligation, must be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the instrument arising from
contract, he is deemed a holder for value to the extent of his lien. 23 As such holder of collateral
security, he would be a pledgee but the requirements therefor and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions on
pledge of incorporeal rights, 24 which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged.
The instrument proving the right pledged shall be delivered to the creditor, and if negotiable,
must be indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description of the thing
pledged and the date of the pledge do not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of
respondent court quoted at the start of this opinion show that petitioner failed to produce any
document evidencing any contract of pledge or guarantee agreement between it and Angel de la
Cruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right
effective against and binding upon respondent bank. The requirement under Article 2096
aforementioned is not a mere rule of adjective law prescribing the mode whereby proof may be
made of the date of a pledge contract, but a rule of substantive law prescribing a condition without
which the execution of a pledge contract cannot affect third persons adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent
bank was embodied in a public instrument. 27 With regard to this other mode of transfer, the Civil
Code specifically declares:
Art. 1625. An assignment of credit, right or action shall produce no effect as against third
persons, unless it appears in a public instrument, or the instrument is recorded in the Registry
of Property in case the assignment involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as
purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent
of its lien nor the execution of any public instrument which could affect or bind private respondent.
Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the
better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question of whether or not
private respondent observed the requirements of the law in the case of lost negotiable instruments
and the issuance of replacement certificates therefor, on the ground that petitioner failed to raised
that issue in the lower court. 28
On this matter, we uphold respondent court's finding that the aspect of alleged negligence of
private respondent was not included in the stipulation of the parties and in the statement of issues
submitted by them to the trial court. 29 The issues agreed upon by them for resolution in this case
are:
1. Whether or not the CTDs as worded are negotiable instruments.
2. Whether or not defendant could legally apply the amount covered by the CTDs against the
depositor's loan by virtue of the assignment (Annex "C").
3. Whether or not there was legal compensation or set off involving the amount covered by
the CTDs and the depositor's outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the
maturity date provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
4
6. Whether or not the parties can recover damages, attorney's fees and litigation expenses
from each other.
As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the
foregoing enumeration does not include the issue of negligence on the part of respondent bank. An
issue raised for the first time on appeal and not raised timely in the proceedings in the lower court
is barred by estoppel. 30 Questions raised on appeal must be within the issues framed by the
parties and, consequently, issues not raised in the trial court cannot be raised for the first time on
appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case
are properly raised. Thus, to obviate the element of surprise, parties are expected to disclose at a
pre-trial conference all issues of law and fact which they intend to raise at the trial, except such as
may involve privileged or impeaching matters. The determination of issues at a pre-trial conference
bars the consideration of other questions on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed negligence may be considered
encompassed by the issues on its right to preterminate and receive the proceeds of the CTDs would
be tantamount to saying that petitioner could raise on appeal any issue. We agree with private
respondent that the broad ultimate issue of petitioner's entitlement to the proceeds of the
questioned certificates can be premised on a multitude of other legal reasons and causes of action,
of which respondent bank's supposed negligence is only one. Hence, petitioner's submission, if
accepted, would render a pre-trial delimitation of issues a useless exercise. 33
Still, even assuming arguendo that said issue of negligence was raised in the court below,
petitioner still cannot have the odds in its favor. A close scrutiny of the provisions of the Code of
Commerce laying down the rules to be followed in case of lost instruments payable to bearer, which
it invokes, will reveal that said provisions, even assuming their applicability to the CTDs in the case
at bar, are merely permissive and not mandatory. The very first article cited by petitioner speaks
for itself.
Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the judge
or court of competent jurisdiction, asking that the principal, interest or dividends due or about
to become due, be not paid a third person, as well as in order to prevent the ownership of the
instrument that a duplicate be issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory but discretionary on the
part of the "dispossessed owner" to apply to the judge or court of competent jurisdiction for the
issuance of a duplicate of the lost instrument. Where the provision reads "may," this word shows
that it is not mandatory but discretional. 34 The word "may" is usually permissive, not
mandatory. 35 It is an auxiliary verb indicating liberty, opportunity, permission and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of
Commerce, on which petitioner seeks to anchor respondent bank's supposed negligence, merely
established, on the one hand, a right of recourse in favor of a dispossessed owner or holder of a
bearer instrument so that he may obtain a duplicate of the same, and, on the other, an option in
favor of the party liable thereon who, for some valid ground, may elect to refuse to issue a
replacement of the instrument. Significantly, none of the provisions cited by petitioner categorically
restricts or prohibits the issuance a duplicate or replacement instrument sans compliance with the
procedure outlined therein, and none establishes a mandatory precedent requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed
decision is hereby AFFIRMED.
SO ORDERED.
-----
G.R. No. 88866 February 18, 1991
METROPOLITAN BANK & TRUST COMPANY, petitioner, vs. COURT OF APPEALS, GOLDEN
SAVINGS & LOAN ASSOCIATION, INC., LUCIA CASTILLO, MAGNO CASTILLO and GLORIA
CASTILLO, respondents.
CRUZ, J.:
This case, for all its seeming complexity, turns on a simple question of negligence. The facts,
pruned of all non-essentials, are easily told.
The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the Philippines
and even abroad. Golden Savings and Loan Association was, at the time these events happened,
operating in Calapan, Mindoro, with the other private respondents as its principal officers.
In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and deposited
over a period of two months 38 treasury warrants with a total value of P1,755,228.37. They were
all drawn by the Philippine Fish Marketing Authority and purportedly signed by its General Manager
and countersigned by its Auditor. Six of these were directly payable to Gomez while the others
appeared to have been indorsed by their respective payees, followed by Gomez as second
indorser. 1
On various dates between June 25 and July 16, 1979, all these warrants were subsequently
indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Savings Account No.
2498 in the Metrobank branch in Calapan, Mindoro. They were then sent for clearing by the branch
office to the principal office of Metrobank, which forwarded them to the Bureau of Treasury for
special clearing. 2
More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several times to
ask whether the warrants had been cleared. She was told to wait. Accordingly, Gomez was
meanwhile not allowed to withdraw from his account. Later, however, "exasperated" over Gloria's
repeated inquiries and also as an accommodation for a "valued client," the petitioner says it finally
decided to allow Golden Savings to withdraw from the proceeds of the
warrants. 3
The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the second on July
13, 1979, in the amount of P310,000.00, and the third on July 16, 1979, in the amount of
P150,000.00. The total withdrawal was P968.000.00. 4
In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own account,
eventually collecting the total amount of P1,167,500.00 from the proceeds of the apparently
cleared warrants. The last withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been dishonored
by the Bureau of Treasury on July 19, 1979, and demanded the refund by Golden Savings of the
amount it had previously withdrawn, to make up the deficit in its account.
The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court of
Mindoro. 5 After trial, judgment was rendered in favor of Golden Savings, which, however, filed a
motion for reconsideration even as Metrobank filed its notice of appeal. On November 4, 1986, the
lower court modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:
1. Dismissing the complaint with costs against the plaintiff;
2. Dissolving and lifting the writ of attachment of the properties of defendant Golden Savings
and Loan Association, Inc. and defendant Spouses Magno Castillo and Lucia Castillo;
3. Directing the plaintiff to reverse its action of debiting Savings Account No. 2498 of the sum
of P1,754,089.00 and to reinstate and credit to such account such amount existing before the
debit was made including the amount of P812,033.37 in favor of defendant Golden Savings
and Loan Association, Inc. and thereafter, to allow defendant Golden Savings and Loan
Association, Inc. to withdraw the amount outstanding thereon before the debit;
4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association, Inc.
attorney's fees and expenses of litigation in the amount of P200,000.00.
5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and Lucia Castillo
attorney's fees and expenses of litigation in the amount of P100,000.00.
SO ORDERED.
On appeal to the respondent court, 6 the decision was affirmed, prompting Metrobank to file this
petition for review on the following grounds:
1. Respondent Court of Appeals erred in disregarding and failing to apply the clear contractual
terms and conditions on the deposit slips allowing Metrobank to charge back any amount
erroneously credited.
(a) Metrobank's right to charge back is not limited to instances where the checks or
treasury warrants are forged or unauthorized.
5
(b) Until such time as Metrobank is actually paid, its obligation is that of a mere collecting
agent which cannot be held liable for its failure to collect on the warrants.
2. Under the lower court's decision, affirmed by respondent Court of Appeals, Metrobank is
made to pay for warrants already dishonored, thereby perpetuating the fraud committed by
Eduardo Gomez.
3. Respondent Court of Appeals erred in not finding that as between Metrobank and Golden
Savings, the latter should bear the loss.
4. Respondent Court of Appeals erred in holding that the treasury warrants involved in this
case are not negotiable instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the Court that Metrobank was indeed negligent
in giving Golden Savings the impression that the treasury warrants had been cleared and that,
consequently, it was safe to allow Gomez to withdraw the proceeds thereof from his account with it.
Without such assurance, Golden Savings would not have allowed the withdrawals; with such
assurance, there was no reason not to allow the withdrawal. Indeed, Golden Savings might even
have incurred liability for its refusal to return the money that to all appearances belonged to the
depositor, who could therefore withdraw it any time and for any reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited
them to its account with Metrobank. Golden Savings had no clearing facilities of its own. It relied on
Metrobank to determine the validity of the warrants through its own services. The proceeds of the
warrants were withheld from Gomez until Metrobank allowed Golden Savings itself to withdraw
them from its own deposit. 7 It was only when Metrobank gave the go-signal that Gomez was finally
allowed by Golden Savings to withdraw them from his own account.
The argument of Metrobank that Golden Savings should have exercised more care in checking the
personal circumstances of Gomez before accepting his deposit does not hold water. It was Gomez
who was entrusting the warrants, not Golden Savings that was extending him a loan; and
moreover, the treasury warrants were subject to clearing, pending which the depositor could not
withdraw its proceeds. There was no question of Gomez's identity or of the genuineness of his
signature as checked by Golden Savings. In fact, the treasury warrants were dishonored allegedly
because of the forgery of the signatures of the drawers, not of Gomez as payee or indorser. Under
the circumstances, it is clear that Golden Savings acted with due care and diligence and cannot be
faulted for the withdrawals it allowed Gomez to make.
By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not trifling
more than one and a half million pesos (and this was 1979). There was no reason why it should
not have waited until the treasury warrants had been cleared; it would not have lost a single
centavo by waiting. Yet, despite the lack of such clearance and notwithstanding that it had not
received a single centavo from the proceeds of the treasury warrants, as it now repeatedly stresses
it allowed Golden Savings to withdraw not once, not twice, but thrice from
the uncleared treasury warrants in the total amount of P968,000.00
Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the clearance
and it also wanted to "accommodate" a valued client. It "presumed" that the warrants had been
cleared simply because of "the lapse of one week." 8 For a bank with its long experience, this
explanation is unbelievably naive.
And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on the
dorsal side of the deposit slips through which the treasury warrants were deposited by Golden
Savings with its Calapan branch. The conditions read as follows:
Kindly note that in receiving items on deposit, the bank obligates itself only as the depositor's
collecting agent, assuming no responsibility beyond care in selecting correspondents, and until
such time as actual payment shall have come into possession of this bank, the right is
reserved to charge back to the depositor's account any amount previously credited, whether
or not such item is returned. This also applies to checks drawn on local banks and bankers and
their branches as well as on this bank, which are unpaid due to insufficiency of funds, forgery,
unauthorized overdraft or any other reason. (Emphasis supplied.)
According to Metrobank, the said conditions clearly show that it was acting only as a collecting
agent for Golden Savings and give it the right to "charge back to the depositor's account any
amount previously credited, whether or not such item is returned. This also applies to checks ". . .
which are unpaid due to insufficiency of funds, forgery, unauthorized overdraft of any other
reason." It is claimed that the said conditions are in the nature of contractual stipulations and
became binding on Golden Savings when Gloria Castillo, as its Cashier, signed the deposit slips.
Doubt may be expressed about the binding force of the conditions, considering that they have
apparently been imposed by the bank unilaterally, without the consent of the depositor. Indeed, it
could be argued that the depositor, in signing the deposit slip, does so only to identify himself and
not to agree to the conditions set forth in the given permit at the back of the deposit slip. We do
not have to rule on this matter at this time. At any rate, the Court feels that even if the deposit slip
were considered a contract, the petitioner could still not validly disclaim responsibility thereunder in
the light of the circumstances of this case.
In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to be
suggesting that as a mere agent it cannot be liable to the principal. This is not exactly true. On the
contrary, Article 1909 of the Civil Code clearly provides that
Art. 1909. The agent is responsible not only for fraud, but also for negligence, which shall
be judged 'with more or less rigor by the courts, according to whether the agency was or was
not for a compensation.
The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was the
clearance given by it that assured Golden Savings it was already safe to allow Gomez to withdraw
the proceeds of the treasury warrants he had deposited Metrobank misled Golden Savings. There
may have been no express clearance, as Metrobank insists (although this is refuted by Golden
Savings) but in any case that clearance could be implied from its allowing Golden Savings to
withdraw from its account not only once or even twice but three times. The total withdrawal was in
excess of its original balance before the treasury warrants were deposited, which only added to its
belief that the treasury warrants had indeed been cleared.
Metrobank's argument that it may recover the disputed amount if the warrants are not paid for any
reason is not acceptable. Any reason does not mean no reason at all. Otherwise, there would have
been no need at all for Golden Savings to deposit the treasury warrants with it for clearance. There
would have been no need for it to wait until the warrants had been cleared before paying the
proceeds thereof to Gomez. Such a condition, if interpreted in the way the petitioner suggests, is
not binding for being arbitrary and unconscionable. And it becomes more so in the case at bar when
it is considered that the supposed dishonor of the warrants was not communicated to Golden
Savings before it made its own payment to Gomez.
The belated notification aggravated the petitioner's earlier negligence in giving express or at least
implied clearance to the treasury warrants and allowing payments therefrom to Golden Savings.
But that is not all. On top of this, the supposed reason for the dishonor, to wit, the forgery of the
signatures of the general manager and the auditor of the drawer corporation, has not been
established. 9 This was the finding of the lower courts which we see no reason to disturb. And as we
said in MWSS v. Court of Appeals: 10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be
established by clear, positive and convincing evidence. This was not done in the present case.
A no less important consideration is the circumstance that the treasury warrants in question are not
negotiable instruments. Clearly stamped on their face is the word "non-negotiable." Moreover, and
this is of equal significance, it is indicated that they are payable from a particular fund, to wit, Fund
501.
The following sections of the Negotiable Instruments Law, especially the underscored parts, are
pertinent:
Sec. 1. Form of negotiable instruments. An instrument to be negotiable must conform to
the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.
xxx xxx xxx
6
Sec. 3. When promise is unconditional. An unqualified order or promise to pay is
unconditional within the meaning of this Act though coupled with
(a) An indication of a particular fund out of which reimbursement is to be made or a particular
account to be debited with the amount; or
(b) A statement of the transaction which gives rise to the instrument judgment.
But an order or promise to pay out of a particular fund is not unconditional.
The indication of Fund 501 as the source of the payment to be made on the treasury warrants
makes the order or promise to pay "not unconditional" and the warrants themselves non-
negotiable. There should be no question that the exception on Section 3 of the Negotiable
Instruments Law is applicable in the case at bar. This conclusion conforms to Abubakar vs. Auditor
General 11 where the Court held:
The petitioner argues that he is a holder in good faith and for value of a negotiable instrument
and is entitled to the rights and privileges of a holder in due course, free from defenses. But
this treasury warrant is not within the scope of the negotiable instrument law. For one thing,
the document bearing on its face the words "payable from the appropriation for food
administration, is actually an Order for payment out of "a particular fund," and is not
unconditional and does not fulfill one of the essential requirements of a negotiable instrument
(Sec. 3 last sentence and section [1(b)] of the Negotiable Instruments Law).
Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed that
they were "genuine and in all respects what they purport to be," in accordance with Section 66 of
the Negotiable Instruments Law. The simple reason is that this law is not applicable to the non-
negotiable treasury warrants. The indorsement was made by Gloria Castillo not for the purpose of
guaranteeing the genuineness of the warrants but merely to deposit them with Metrobank for
clearing. It was in fact Metrobank that made the guarantee when it stamped on the back of the
warrants: "All prior indorsement and/or lack of endorsements guaranteed, Metropolitan Bank &
Trust Co., Calapan Branch."
The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine Islands, 12 but we
feel this case is inapplicable to the present controversy.1wphi1 That case involved checks whereas
this case involves treasury warrants. Golden Savings never represented that the warrants were
negotiable but signed them only for the purpose of depositing them for clearance. Also, the fact of
forgery was proved in that case but not in the case before us. Finally, the Court found the Jai Alai
Corporation negligent in accepting the checks without question from one Antonio Ramirez
notwithstanding that the payee was the Inter-Island Gas Services, Inc. and it did not appear that
he was authorized to indorse it. No similar negligence can be imputed to Golden Savings.
We find the challenged decision to be basically correct. However, we will have to amend it insofar
as it directs the petitioner to credit Golden Savings with the full amount of the treasury checks
deposited to its account.
The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which Gomez was
allowed to withdraw P1,167,500.00 before Golden Savings was notified of the dishonor. The
amount he has withdrawn must be charged not to Golden Savings but to Metrobank, which must
bear the consequences of its own negligence. But the balance of P586,589.00 should be debited to
Golden Savings, as obviously Gomez can no longer be permitted to withdraw this amount from his
deposit because of the dishonor of the warrants. Gomez has in fact disappeared. To also credit the
balance to Golden Savings would unduly enrich it at the expense of Metrobank, let alone the fact
that it has already been informed of the dishonor of the treasury warrants.
WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3 of the
dispositive portion of the judgment of the lower court shall be reworded as follows:
3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and thereafter allowing
defendant Golden Savings & Loan Association, Inc. to withdraw the amount outstanding
thereon, if any, after the debit.
SO ORDERED.
-----
 G.R. No. 89252 May 24, 1993
RAUL SESBREO, petitioner, vs. HON. COURT OF APPEALS, DELTA MOTORS CORPORATION
AND PILIPINAS BANK, respondents.
FELICIANO, J.:
On 9 February 1981, petitioner Raul Sesbreo made a money market placement in the amount of
P300,000.00 with the Philippine Underwriters Finance Corporation ("Philfinance"), Cebu Branch; the
placement, with a term of thirty-two (32) days, would mature on 13 March 1981, Philfinance, also
on 9 February 1981, issued the following documents to petitioner:
(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of one (1) Delta
Motors Corporation Promissory Note ("DMC PN") No. 2731 for a term of 32 days at 17.0% per
annum;
(b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale of DMC PN No.
2731 to petitioner, with the notation that the said security was in custodianship of Pilipinas
Bank, as per Denominated Custodian Receipt ("DCR") No. 10805 dated 9 February 1981; and
(c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of petitioner's
investment), with petitioner as payee, Philfinance as drawer, and Insular Bank of Asia and
America as drawee, in the total amount of P304,533.33.
On 13 March 1981, petitioner sought to encash the postdated checks issued by Philfinance.
However, the checks were dishonored for having been drawn against insufficient funds.
On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private
respondent Pilipinas Bank ("Pilipinas"). It reads as follows:
PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila
February 9, 1981
21 March 1989, the Court of Appeals denied the appeal and held: 6
VALUE DATE
TO Raul Sesbreo
April 6, 1981
MATURITY DATE
NO. 10805
DENOMINATED CUSTODIAN RECEIPT
This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE
UNDERWRITES FINANCE CORPORATION, we have in our custody the following securities
to you [sic] the extent herein indicated.
SERIAL MAT. FACE ISSUED REGISTERED AMOUNT
NUMBER DATE VALUE BY HOLDER PAYEE
2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33
UNDERWRITERS
FINANCE CORP.
We further certify that these securities may be inspected by you or your duly authorized
representative at any time during regular banking hours.
Upon your written instructions we shall undertake physical delivery of the above
securities fully assigned to you should this Denominated Custodianship Receipt remain
outstanding in your favor thirty (30) days after its maturity.
PILIPINAS BANK
(By Elizabeth De Villa
Illegible Signature) 1
On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas, Makati
Branch, and handed her a demand letter informing the bank that his placement with Philfinance in
7
the amount reflected in the DCR No. 10805 had remained unpaid and outstanding, and that he in
effect was asking for the physical delivery of the underlying promissory note. Petitioner then
examined the original of the DMC PN No. 2731 and found: that the security had been issued on 10
April 1980; that it would mature on 6 April 1981; that it had a face value of P2,300,833.33, with
the Philfinance as "payee" and private respondent Delta Motors Corporation ("Delta") as "maker;"
and that on face of the promissory note was stamped "NON NEGOTIABLE." Pilipinas did not deliver
the Note, nor any certificate of participation in respect thereof, to petitioner.
Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981, 2 again asking
private respondent Pilipinas for physical delivery of the original of DMC PN No. 2731. Pilipinas
allegedly referred all of petitioner's demand letters to Philfinance for written instructions, as has
been supposedly agreed upon in "Securities Custodianship Agreement" between Pilipinas and
Philfinance. Philfinance did not provide the appropriate instructions; Pilipinas never released DMC
PN No. 2731, nor any other instrument in respect thereof, to petitioner.
Petitioner also made a written demand on 14 July 1981 3 upon private respondent Delta for the
partial satisfaction of DMC PN No. 2731, explaining that Philfinance, as payee thereof, had assigned
to him said Note to the extent of P307,933.33. Delta, however, denied any liability to petitioner on
the promissory note, and explained in turn that it had previously agreed with Philfinance to offset
its DMC PN No. 2731 (along with DMC PN No. 2730) against Philfinance PN No. 143-A issued in
favor of Delta.
In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the
Securities and exchange commission ("SEC") and the Central Bank. Pilipinas delivered to the SEC
DMC PN No. 2731, which to date apparently remains in the custody of the SEC. 4
As petitioner had failed to collect his investment and interest thereon, he filed on 28 September
1982 an action for damages with the Regional Trial Court ("RTC") of Cebu City, Branch 21, against
private respondents Delta and Pilipinas. 5 The trial court, in a decision dated 5 August 1987,
dismissed the complaint and counterclaims for lack of merit and for lack of cause of action, with
costs against petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision dated
Be that as it may, from the evidence on record, if there is anyone that appears liable for the
travails of plaintiff-appellant, it is Philfinance. As correctly observed by the trial court:
This act of Philfinance in accepting the investment of plaintiff and charging it against DMC
PN No. 2731 when its entire face value was already obligated or earmarked for set-off or
compensation is difficult to comprehend and may have been motivated with bad faith.
Philfinance, therefore, is solely and legally obligated to return the investment of plaintiff,
together with its earnings, and to answer all the damages plaintiff has suffered incident
thereto. Unfortunately for plaintiff, Philfinance was not impleaded as one of the
defendants in this case at bar; hence, this Court is without jurisdiction to pronounce
judgement against it. (p. 11, Decision)
WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby
affirmed in toto. Cost against plaintiff-appellant.
Petitioner moved for reconsideration of the above Decision, without success.
Hence, this Petition for Review on Certiorari.
After consideration of the allegations contained and issues raised in the pleadings, the Court
resolved to give due course to the petition and required the parties to file their respective
memoranda. 7
Petitioner reiterates the assignment of errors he directed at the trial court decision, and contends
that respondent court of Appeals gravely erred: (i) in concluding that he cannot recover from
private respondent Delta his assigned portion of DMC PN No. 2731; (ii) in failing to hold private
respondent Pilipinas solidarily liable on the DMC PN No. 2731 in view of the provisions stipulated in
DCR No. 10805 issued in favor r of petitioner, and (iii) in refusing to pierce the veil of corporate
entity between Philfinance, and private respondents Delta and Pilipinas, considering that the three
(3) entities belong to the "Silverio Group of Companies" under the leadership of Mr. Ricardo
Silverio, Sr. 8
There are at least two (2) sets of relationships which we need to address: firstly, the relationship of
petitioner vis-a-visDelta; secondly, the relationship of petitioner in respect of Pilipinas. Actually, of
course, there is a third relationship that is of critical importance: the relationship of petitioner and
Philfinance. However, since Philfinance has not been impleaded in this case, neither the trial court
nor the Court of Appeals acquired jurisdiction over the person of Philfinance. It is, consequently,
not necessary for present purposes to deal with this third relationship, except to the extent it
necessarily impinges upon or intersects the first and second relationships.
I.
We consider first the relationship between petitioner and Delta.
The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect of the
Delta promissory note (DMC PN No. 2731) which Philfinance sold "without recourse" to petitioner,
to the extent of P304,533.33. The Court of Appeals said on this point:
Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 as the same is
"non-negotiable" as stamped on its face (Exhibit "6"), negotiation being defined as the
transfer of an instrument from one person to another so as to constitute the transferee the
holder of the instrument (Sec. 30, Negotiable Instruments Law). A person not a holder cannot
sue on the instrument in his own name and cannot demand or receive payment (Section
51, id.) 9
Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note had been
validly transferred, in part to him by assignment and that as a result of such transfer, Delta as
debtor-maker of the Note, was obligated to pay petitioner the portion of that Note assigned to him
by the payee Philfinance.
Delta, however, disputes petitioner's contention and argues:
(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise transferred by
Philfinance as manifested by the word "non-negotiable" stamp across the face of the
Note 10 and because maker Delta and payee Philfinance intended that this Note would be offset
against the outstanding obligation of Philfinance represented by Philfinance PN No. 143-A
issued to Delta as payee;
(2) that the assignment of DMC PN No. 2731 by Philfinance was without Delta's consent, if not
against its instructions; and
(3) assuming (arguendo only) that the partial assignment in favor of petitioner was valid,
petitioner took the Note subject to the defenses available to Delta, in particular, the offsetting
of DMC PN No. 2731 against Philfinance PN No. 143-A. 11
We consider Delta's arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be
distinguished from theassignment or transfer of an instrument whether that be negotiable or non-
negotiable. Only an instrument qualifying as a negotiable instrument under the relevant statute
may be negotiated either by indorsement thereof coupled with delivery, or by delivery alone where
the negotiable instrument is in bearer form. A negotiable instrument may, however, instead of
being negotiated, also be assigned or transferred. The legal consequences of negotiation as
distinguished from assignment of a negotiable instrument are, of course, different. A non-
negotiable instrument may, obviously, not be negotiated; but it may be assigned or transferred,
absent an express prohibition against assignment or transfer written in the face of the instrument:
The words "not negotiable," stamped on the face of the bill of lading, did not destroy its
assignability, but the sole effect was to exempt the bill from the statutory provisions relative
thereto, and a bill, though not negotiable, may be transferred by assignment; the assignee
taking subject to the equities between the original parties. 12 (Emphasis added)
DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-
transferable" or "non-assignable." It contained no stipulation which prohibited Philfinance from
assigning or transferring, in whole or in part, that Note.
Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which
should be quoted in full:
8
April 10, 1980
Philippine Underwriters Finance Corp.
Benavidez St., Makati,
Metro Manila.
Attention: Mr.
Alfredo O. Banaria
SVP-Treasurer
GENTLEMEN:
This refers to our outstanding placement of P4,601,666.67 as evidenced by your Promissory
Note No. 143-A, dated April 10, 1980, to mature on April 6, 1981.
As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and 2731 for
P2,000,000.00 each, dated April 10, 1980, to be offsetted [sic] against your PN No. 143-A
upon co-terminal maturity.
Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.
Very Truly Yours,
(Sgd.)
Florencio B. Biagan
Senior Vice President 13
We find nothing in his "Letter of Agreement" which can be reasonably construed as a prohibition
upon Philfinance assigning or transferring all or part of DMC PN No. 2731, before the maturity
thereof. It is scarcely necessary to add that, even had this "Letter of Agreement" set forth an
explicit prohibition of transfer upon Philfinance, such a prohibition cannot be invoked against an
assignee or transferee of the Note who parted with valuable consideration in good faith and without
notice of such prohibition. It is not disputed that petitioner was such an assignee or transferee. Our
conclusion on this point is reinforced by the fact that what Philfinance and Delta were doing by their
exchange of their promissory notes was this: Delta invested, by making a money market placement
with Philfinance, approximately P4,600,000.00 on 10 April 1980; but promptly, on the same day,
borrowed back the bulk of that placement, i.e., P4,000,000.00, by issuing its two (2) promissory
notes: DMC PN No. 2730 and DMC PN No. 2731, both also dated 10 April 1980. Thus, Philfinance
was left with not P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta promissory
notes.
Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been
effected without the consent of Delta, we note that such consent was not necessary for the validity
and enforceability of the assignment in favor of petitioner. 14 Delta's argument that Philfinance's
sale or assignment of part of its rights to DMC PN No. 2731 constituted conventional subrogation,
which required its (Delta's) consent, is quite mistaken. Conventional subrogation, which in the first
place is never lightly inferred, 15 must be clearly established by the unequivocal terms of the
substituting obligation or by the evident incompatibility of the new and old obligations on every
point. 16 Nothing of the sort is present in the instant case.
It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No. 2731 to
Philfinance, an entity engaged in the business of buying and selling debt instruments and other
securities, and more generally, in money market transactions. In Perez v. Court of Appeals, 17 the
Court, speaking through Mme. Justice Herrera, made the following important statement:
There is another aspect to this case. What is involved here is a money market transaction. As
defined by Lawrence Smith "the money market is a market dealing in standardized short-term
credit instruments (involving large amounts) where lenders and borrowers do not deal directly
with each other but through a middle manor a dealer in the open market." It involves
"commercial papers" which are instruments "evidencing indebtness of any person or entity. . .,
which are issued, endorsed, sold or transferred or in any manner conveyed to another person
or entity, with or without recourse". The fundamental function of the money market device in
its operation is to match and bring together in a most impersonal manner both the "fund
users" and the "fund suppliers." The money market is an "impersonal market", free from
personal considerations. "The market mechanism is intended to provide quick mobility of
money and securities."
The impersonal character of the money market device overlooks the individuals or entities
concerned. The issuer of a commercial paper in the money market necessarily knows in
 advance that it would be expenditiously transacted and transferred to any investor/lender
without need of notice to said issuer. In practice, no notification is given to the borrower or
issuer of commercial paper of the sale or transfer to the investor.
xxx xxx xxx
There is need to individuate a money market transaction, a relatively novel institution in the
Philippine commercial scene. It has been intended to facilitate the flow and acquisition of
capital on an impersonal basis. And as specifically required by Presidential Decree No. 678, the
investing public must be given adequate and effective protection in availing of the credit of a
borrower in the commercial paper market.18 (Citations omitted; emphasis supplied)
We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No.
2731 and Philfinance PN No. 143-A. It is important to note that at the time Philfinance sold part of
its rights under DMC PN No. 2731 to petitioner on 9 February 1981, no compensation had as yet
taken place and indeed none could have taken place. The essential requirements of compensation
are listed in the Civil Code as follows:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consists in a sum of money, or if the things due are consumable, they be
of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor. (Emphasis supplied)
On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was
explicitly recognized by Delta in its 10 April 1980 "Letter of Agreement" with Philfinance, where
Delta acknowledged that the relevant promissory notes were "to be offsetted (sic) against
[Philfinance] PN No. 143-A upon co-terminal maturity."
As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49) days
before the "co-terminal maturity" date, that is to say, before any compensation had taken place.
Further, the assignment to petitioner would have prevented compensation had taken place between
Philfinance and Delta, to the extent of P304,533.33, because upon execution of the assignment in
favor of petitioner, Philfinance and Delta would have ceased to be creditors and debtors of each
other in their own right to the extent of the amount assigned by Philfinance to petitioner. Thus, we
conclude that the assignment effected by Philfinance in favor of petitioner was a valid one and that
petitioner accordingly became owner of DMC PN No. 2731 to the extent of the portion thereof
assigned to him.
The record shows, however, that petitioner notified Delta of the fact of the assignment to him only
on 14 July 1981, 19that is, after the maturity not only of the money market placement made by
petitioner but also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other
words, petitioner notified Delta of his rights as assignee after compensation had taken place by
operation of law because the offsetting instruments had both reached maturity. It is a firmly settled
doctrine that the rights of an assignee are not any greater that the rights of the assignor, since the
assignee is merely substituted in the place of the assignor 20 and that the assignee acquires his
rights subject to the equities i.e., the defenses which the debtor could have set up against the
original assignor before notice of the assignment was given to the debtor. Article 1285 of the Civil
Code provides that:
Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in
favor of a third person, cannot set up against the assignee the compensation which would
pertain to him against the assignor, unless the assignor was notified by the debtor at the time
he gave his consent, that he reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not consent thereto, the
latter may set up the compensation of debts previous to the cession, but not of subsequent
ones.
9
If the assignment is made without the knowledge of the debtor, he may set up the
compensation of all credits prior to the same and also later ones until he had knowledge of the
assignment. (Emphasis supplied)
Article 1626 of the same code states that: "the debtor who, before having knowledge of the
assignment, pays his creditor shall be released from the obligation." In Sison v. Yap-Tico, 21 the
Court explained that:
[n]o man is bound to remain a debtor; he may pay to him with whom he contacted to pay;
and if he pay before notice that his debt has been assigned, the law holds him exonerated, for
the reason that it is the duty of the person who has acquired a title by transfer to demand
payment of the debt, to give his debt or notice. 22
At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July
1981, DMC PN No. 2731 had already been discharged by compensation. Since the assignor
Philfinance could not have then compelled payment anew by Delta of DMC PN No. 2731, petitioner,
as assignee of Philfinance, is similarly disabled from collecting from Delta the portion of the Note
assigned to him.
It bears some emphasis that petitioner could have notified Delta of the assignment or sale was
effected on 9 February 1981. He could have notified Delta as soon as his money market placement
matured on 13 March 1981 without payment thereof being made by Philfinance; at that time,
compensation had yet to set in and discharge DMC PN No. 2731. Again petitioner could have
notified Delta on 26 March 1981 when petitioner received from Philfinance the Denominated
Custodianship Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in favor of
petitioner. Petitioner could, in fine, have notified Delta at any time before the maturity date of DMC
PN No. 2731. Because petitioner failed to do so, and because the record is bare of any indication
that Philfinance had itself notified Delta of the assignment to petitioner, the Court is compelled to
uphold the defense of compensation raised by private respondent Delta. Of course, Philfinance
remains liable to petitioner under the terms of the assignment made by Philfinance to petitioner.
II.
We turn now to the relationship between petitioner and private respondent Pilipinas. Petitioner
contends that Pilipinas became solidarily liable with Philfinance and Delta when Pilipinas issued DCR
No. 10805 with the following words:
Upon your written instruction, we [Pilipinas] shall undertake physical delivery of the above
securities fully assigned to you . 23
The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the part of
Pilipinas to pay petitioner the amount of P307,933.33 nor any assumption of liability in solidum with
Philfinance and Delta under DMC PN No. 2731. We read the DCR as a confirmation on the part of
Pilipinas that:
(1) it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 of a certain
face value, to mature on 6 April 1981 and payable to the order of Philfinance;
(2) Pilipinas was, from and after said date of the assignment by Philfinance to petitioner (9
February 1981), holding that Note on behalf and for the benefit of petitioner, at least to the
extent it had been assigned to petitioner by payee Philfinance; 24
(3) petitioner may inspect the Note either "personally or by authorized representative", at any
time during regular bank hours; and
(4) upon written instructions of petitioner, Pilipinas would physically deliver the DMC PN No.
2731 (or a participation therein to the extent of P307,933.33) "should this Denominated
Custodianship receipt remain outstanding in [petitioner's] favor thirty (30) days after its
maturity."
Thus, we find nothing written in printers ink on the DCR which could reasonably be read as
converting Pilipinas into an obligor under the terms of DMC PN No. 2731 assigned to petitioner,
either upon maturity thereof or any other time. We note that both in his complaint and in his
testimony before the trial court, petitioner referred merely to the obligation of private respondent
Pilipinas to effect the physical delivery to him of DMC PN No. 2731. 25 Accordingly, petitioner's
theory that Pilipinas had assumed a solidary obligation to pay the amount represented by a portion
of the Note assigned to him by Philfinance, appears to be a new theory constructed only after the
trial court had ruled against him. The solidary liability that petitioner seeks to impute Pilipinas
cannot, however, be lightly inferred. Under article 1207 of the Civil Code, "there is a solidary
liability only when the law or the nature of the obligation requires solidarity," The record here
exhibits no express assumption of solidary liability vis-a-vis petitioner, on the part of Pilipinas.
Petitioner has not pointed to us to any law which imposed such liability upon Pilipinas nor has
petitioner argued that the very nature of the custodianship assumed by private respondent Pilipinas
necessarily implies solidary liability under the securities, custody of which was taken by Pilipinas.
Accordingly, we are unable to hold Pilipinas solidarily liable with Philfinance and private respondent
Delta under DMC PN No. 2731.
We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respect of
petitioner under the terms of the DCR. To the contrary, we find, after prolonged analysis and
deliberation, that private respondent Pilipinas had breached its undertaking under the DCR to
petitioner Sesbreo.
We believe and so hold that a contract of deposit was constituted by the act of Philfinance in
designating Pilipinas as custodian or depositary bank. The depositor was initially Philfinance; the
obligation of the depository was owed, however, to petitioner Sesbreo as beneficiary of the
custodianship or depository agreement. We do not consider that this is a simple case of a
stipulation pour autri. The custodianship or depositary agreement was established as an integral
part of the money market transaction entered into by petitioner with Philfinance. Petitioner bought
a portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited that Note with Pilipinas in
order that the thing sold would be placed outside the control of the vendor. Indeed, the constituting
of the depositary or custodianship agreement was equivalent to constructive delivery of the Note
(to the extent it had been sold or assigned to petitioner) to petitioner. It will be seen that
custodianship agreements are designed to facilitate transactions in the money market by providing
a basis for confidence on the part of the investors or placers that the instruments bought by them
are effectively taken out of the pocket, as it were, of the vendors and placed safely beyond their
reach, that those instruments will be there available to the placers of funds should they have need
of them. The depositary in a contract of deposit is obliged to return the security or the thing
deposited upon demand of the depositor (or, in the presented case, of the beneficiary) of the
contract, even though a term for such return may have been established in the said
contract. 26 Accordingly, any stipulation in the contract of deposit or custodianship that runs counter
to the fundamental purpose of that agreement or which was not brought to the notice of and
accepted by the placer-beneficiary, cannot be enforced as against such beneficiary-placer.
We believe that the position taken above is supported by considerations of public policy. If there is
any party that needs the equalizing protection of the law in money market transactions, it is the
members of the general public whom place their savings in such market for the purpose of
generating interest revenues. 27 The custodian bank, if it is not related either in terms of equity
ownership or management control to the borrower of the funds, or the commercial paper dealer, is
normally a preferred or traditional banker of such borrower or dealer (here, Philfinance). The
custodian bank would have every incentive to protect the interest of its client the borrower or
dealer as against the placer of funds. The providers of such funds must be safeguarded from the
impact of stipulations privately made between the borrowers or dealers and the custodian banks,
and disclosed to fund-providers only after trouble has erupted.
In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security deposited
with it when petitioner first demanded physical delivery thereof on 2 April 1981. We must again
note, in this connection, that on 2 April 1981, DMC PN No. 2731 had not yet matured and
therefore, compensation or offsetting against Philfinance PN No. 143-A had not yet taken place.
Instead of complying with the demand of the petitioner, Pilipinas purported to require and await the
instructions of Philfinance, in obvious contravention of its undertaking under the DCR to effect
physical delivery of the Note upon receipt of "written instructions" from petitioner Sesbreo. The
ostensible term written into the DCR (i.e., "should this [DCR] remain outstanding in your favor
thirty [30] days after its maturity") was not a defense against petitioner's demand for physical
surrender of the Note on at least three grounds: firstly, such term was never brought to the
attention of petitioner Sesbreo at the time the money market placement with Philfinance was
made; secondly, such term runs counter to the very purpose of the custodianship or depositary
agreement as an integral part of a money market transaction; and thirdly, it is inconsistent with the
provisions of Article 1988 of the Civil Code noted above. Indeed, in principle, petitioner became
entitled to demand physical delivery of the Note held by Pilipinas as soon as petitioner's money
market placement matured on 13 March 1981 without payment from Philfinance.
We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages
sustained by arising out of its breach of duty. By failing to deliver the Note to the petitioner as
depositor-beneficiary of the thing deposited, Pilipinas effectively and unlawfully deprived petitioner
10
of the Note deposited with it. Whether or not Pilipinas itself benefitted from such conversion or
unlawful deprivation inflicted upon petitioner, is of no moment for present purposes.Prima facie, the
damages suffered by petitioner consisted of P304,533.33, the portion of the DMC PN No. 2731
assigned to petitioner but lost by him by reason of discharge of the Note by compensation, plus
legal interest of six percent (6%) per annum containing from 14 March 1981.
The conclusion we have reached is, of course, without prejudice to such right of reimbursement as
Pilipinas may havevis-a-vis Philfinance.
III.
The third principal contention of petitioner that Philfinance and private respondents Delta and
Pilipinas should be treated as one corporate entity need not detain us for long.
In the first place, as already noted, jurisdiction over the person of Philfinance was never acquired
either by the trial court nor by the respondent Court of Appeals. Petitioner similarly did not seek to
implead Philfinance in the Petition before us.
Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been
organized as separate corporate entities. Petitioner asks us to pierce their separate corporate
entities, but has been able only to cite the presence of a common Director Mr. Ricardo Silverio,
Sr., sitting on the Board of Directors of all three (3) companies. Petitioner has neither alleged nor
proved that one or another of the three (3) concededly related companies used the other two (2)
as mere alter egos or that the corporate affairs of the other two (2) were administered and
managed for the benefit of one. There is simply not enough evidence of record to justify
disregarding the separate corporate personalities of delta and Pilipinas and to hold them liable for
any assumed or undetermined liability of Philfinance to petitioner. 28
WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in C.A.-G.R.
CV No. 15195 dated 21 march 1989 and 17 July 1989, respectively, are hereby MODIFIED and SET
ASIDE, to the extent that such Decision and Resolution had dismissed petitioner's complaint against
Pilipinas Bank. Private respondent Pilipinas bank is hereby ORDERED to indemnify petitioner for
damages in the amount of P304,533.33, plus legal interest thereon at the rate of six percent
(6%) per annum counted from 2 April 1981. As so modified, the Decision and Resolution of the
Court of Appeals are hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.
-----
G.R. No. 113236 March 5, 2001
FIRESTONE TIRE & RUBBER COMPANY OF THE PHILIPPINES, petitioner, vs. COURT OF
APPEALS and LUZON DEVELOPMENT BANK, respondents.
QUISUMBING, J.:
This petition assails the decision 1 dated December 29, 1993 of the Court of Appeals in CA-G.R. CV
No. 29546, which affirmed the judgment 2 of the Regional Trial Court of Pasay City, Branch 113 in
Civil Case No. PQ-7854-P, dismissing Firestone's complaint for damages.
The facts of this case, adopted by the CA and based on findings by the trial court, are as follows:
. . . [D]efendant is a banking corporation. It operates under a certificate of authority issued by
the Central Bank of the Philippines, and among its activities, accepts savings and time
deposits. Said defendant had as one of its client-depositors the Fojas-Arca Enterprises
Company ("Fojas-Arca" for brevity). Fojas-Arca maintaining a special savings account with the
defendant, the latter authorized and allowed withdrawals of funds therefrom through the
medium of special withdrawal slips. These are supplied by the defendant to Fojas-Arca.
In January 1978, plaintiff and Fojas-Arca entered into a "Franchised Dealership Agreement"
(Exh. B) whereby Fojas-Arca has the privilege to purchase on credit and sell plaintiff's
products.
On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid Agreement, Fojas-Arca
purchased on credit Firestone products from plaintiff with a total amount of P4,896,000.00. In
payment of these purchases, Fojas-Arca delivered to plaintiff six (6) special withdrawal slips
drawn upon the defendant. In turn, these were deposited by the plaintiff with its current
account with the Citibank. All of them were honored and paid by the defendant. This singular
circumstance made plaintiff believe [sic] and relied [sic] on the fact that the succeeding
special withdrawal slips drawn upon the defendant would be equally sufficiently funded.
 Relying on such confidence and belief and as a direct consequence thereof, plaintiff extended
to Fojas-Arca other purchases on credit of its products.
On the following dates Fojas-Arca purchased Firestone products on credit (Exh. M, I, J, K) and
delivered to plaintiff the corresponding special withdrawal slips in payment thereof drawn upon
the defendant, to wit:
DATE WITHDRAWAL SLIP NO. AMOUNT
June 15, 1978 42127 P1,198,092.80
July 15, 1978 42128 940,190.00
Aug. 15, 1978 42129 880,000.00
Sep. 15, 1978 42130 981,500.00
These were likewise deposited by plaintiff in its current account with Citibank and in turn the
Citibank forwarded it [sic] to the defendant for payment and collection, as it had done in
respect of the previous special withdrawal slips. Out of these four (4) withdrawal slips only
withdrawal slip No. 42130 in the amount of P981,500.00 was honored and paid by the
defendant in October 1978. Because of the absence for a long period coupled with the fact
that defendant honored and paid withdrawal slips No. 42128 dated July 15, 1978, in the
amount of P981,500.00 plaintiff's belief was all the more strengthened that the other
withdrawal slips were likewise sufficiently funded, and that it had received full value and
payment of Fojas-Arca's credit purchased then outstanding at the time. On this basis, plaintiff
was induced to continue extending to Fojas-Arca further purchase on credit of its products as
per agreement (Exh. "B").
However, on December 14, 1978, plaintiff was informed by Citibank that special withdrawal
slips No. 42127 dated June 15, 1978 for P1,198,092.80 and No. 42129 dated August 15, 1978
for P880,000.00 were dishonored and not paid for the reason 'NO ARRANGEMENT.' As a
consequence, the Citibank debited plaintiff's account for the total sum of P2,078,092.80
representing the aggregate amount of the above-two special withdrawal slips. Under such
situation, plaintiff averred that the pecuniary losses it suffered is caused by and directly
attributable to defendant's gross negligence.
On September 25, 1979, counsel of plaintiff served a written demand upon the defendant for
the satisfaction of the damages suffered by it. And due to defendant's refusal to pay plaintiff's
claim, plaintiff has been constrained to file this complaint, thereby compelling plaintiff to incur
litigation expenses and attorney's fees which amount are recoverable from the defendant.
Controverting the foregoing asseverations of plaintiff, defendant asserted, inter alia that the
transactions mentioned by plaintiff are that of plaintiff and Fojas-Arca only, [in] which
defendant is not involved; Vehemently, it was denied by defendant that the special withdrawal
slips were honored and treated as if it were checks, the truth being that when the special
withdrawal slips were received by defendant, it only verified whether or not the signatures
therein were authentic, and whether or not the deposit level in the passbook concurred with
the savings ledger, and whether or not the deposit is sufficient to cover the withdrawal; if
plaintiff treated the special withdrawal slips paid by Fojas-Arca as checks then plaintiff has to
blame itself for being grossly negligent in treating the withdrawal slips as check when it is
clearly stated therein that the withdrawal slips are non-negotiable; that defendant is not a
privy to any of the transactions between Fojas-Arca and plaintiff for which reason defendant is
not duty bound to notify nor give notice of anything to plaintiff. If at first defendant had given
notice to plaintiff it is merely an extension of usual bank courtesy to a prospective client; that
defendant is only dealing with its depositor Fojas-Arca and not the plaintiff. In summation,
defendant categorically stated that plaintiff has no cause of action against it (pp. 1-3, Dec.;
pp. 368-370, id).3
Petitioner's complaint4 for a sum of money and damages with the Regional Trial Court of Pasay
City, Branch 113, docketed as Civil Case No. 29546, was dismissed together with the counterclaim
of defendant.
Petitioner appealed the decision to the Court of Appeals. It averred that respondent Luzon
Development Bank was liable for damages under Article 21765 in relation to Articles 196 and 207 of
the Civil Code. As noted by the CA, petitioner alleged the following tortious acts on the part of
private respondent: 1) the acceptance and payment of the special withdrawal slips without the
presentation of the depositor's passbook thereby giving the impression that the withdrawal slips are
11
instruments payable upon presentment; 2) giving the special withdrawal slips the general
appearance of checks; and 3) the failure of respondent bank to seasonably warn petitioner that it
would not honor two of the four special withdrawal slips.
On December 29, 1993, the Court of Appeals promulgated its assailed decision. It denied the
appeal and affirmed the judgment of the trial court. According to the appellate court, respondent
bank notified the depositor to present the passbook whenever it received a collection note from
another bank, belying petitioner's claim that respondent bank was negligent in not requiring a
passbook under the subject transaction. The appellate court also found that the special withdrawal
slips in question were not purposely given the appearance of checks, contrary to petitioner's
assertions, and thus should not have been mistaken for checks. Lastly, the appellate court ruled
that the respondent bank was under no obligation to inform petitioner of the dishonor of the special
withdrawal slips, for to do so would have been a violation of the law on the secrecy of bank
deposits.
Hence, the instant petition, alleging the following assignment of error:
25. The CA grievously erred in holding that the [Luzon Development] Bank was free from any
fault or negligence regarding the dishonor, or in failing to give fair and timely advice of the
dishonor, of the twointermediate LDB Slips and in failing to award damages to Firestone
pursuant to Article 2176 of the New Civil Code.8
The issue for our consideration is whether or not respondent bank should be held liable for
damages suffered by petitioner, due to its allegedly belated notice of non-payment of the subject
withdrawal slips.
The initial transaction in this case was between petitioner and Fojas-Arca, whereby the latter
purchased tires from the former with special withdrawal slips drawn upon Fojas-Arca's special
savings account with respondent bank. Petitioner in turn deposited these withdrawal slips with
Citibank. The latter credited the same to petitioner's current account, then presented the slips for
payment to respondent bank. It was at this point that the bone of contention arose.
On December 14, 1978, Citibank informed petitioner that special withdrawal slips Nos. 42127 and
42129 dated June 15, 1978 and August 15, 1978, respectively, were refused payment by
respondent bank due to insufficiency of Fojas-Arca's funds on deposit. That information came about
six months from the time Fojas-Arca purchased tires from petitioner using the subject withdrawal
slips. Citibank then debited the amount of these withdrawal slips from petitioner's account, causing
the alleged pecuniary damage subject of petitioner's cause of action.
At the outset, we note that petitioner admits that the withdrawal slips in question were non-
negotiable.9 Hence, the rules governing the giving of immediate notice of dishonor of negotiable
instruments do not apply in this case.10 Petitioner itself concedes this point.11 Thus, respondent
bank was under no obligation to give immediate notice that it would not make payment on the
subject withdrawal slips. Citibank should have known that withdrawal slips were not negotiable
instruments. It could not expect these slips to be treated as checks by other entities. Payment or
notice of dishonor from respondent bank could not be expected immediately, in contrast to the
situation involving checks.
In the case at bar, it appears that Citibank, with the knowledge that respondent Luzon
Development Bank, had honored and paid the previous withdrawal slips, automatically credited
petitioner's current account with the amount of the subject withdrawal slips, then merely waited for
the same to be honored and paid by respondent bank. It presumed that the withdrawal slips were
"good."
It bears stressing that Citibank could not have missed the non-negotiable nature of the withdrawal
slips. The essence of negotiability which characterizes a negotiable paper as a credit instrument lies
in its freedom to circulate freely as a substitute for money. 12 The withdrawal slips in question lacked
this character.
A bank is under obligation to treat the accounts of its depositors with meticulous care, whether
such account consists only of a few hundred pesos or of millions of pesos. 13 The fact that the other
withdrawal slips were honored and paid by respondent bank was no license for Citibank to presume
that subsequent slips would be honored and paid immediately. By doing so, it failed in its fiduciary
duty to treat the accounts of its clients with the highest degree of care. 14
In the ordinary and usual course of banking operations, current account deposits are accepted by
the bank on the basis of deposit slips prepared and signed by the depositor, or the latter's agent or
representative, who indicates therein the current account number to which the deposit is to be
credited, the name of the depositor or current account holder, the date of the deposit, and the
amount of the deposit either in cash or in check.15
The withdrawal slips deposited with petitioner's current account with Citibank were not checks, as
petitioner admits. Citibank was not bound to accept the withdrawal slips as a valid mode of deposit.
But having erroneously accepted them as such, Citibank and petitioner as account-holder
must bear the risks attendant to the acceptance of these instruments. Petitioner and Citibank could
not now shift the risk and hold private respondent liable for their admitted mistake.
WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in CA-G.R. CV No.
29546 is AFFIRMED. Costs against petitioner.
SO ORDERED.
-----
G.R. No. L-2516 September 25, 1950
ANG TEK LIAN, petitioner, vs. THE COURT OF APPEALS, respondent.
BENGZON, J.:
For having issued a rubber check, Ang Tek Lian was convicted of estafa in the Court of First
Instance of Manila. The Court of Appeals affirmed the verdict.
It appears that, knowing he had no funds therefor, Ang Tek Lian drew on Saturday, November 16,
1946, the check Exhibits A upon the China Banking Corporation for the sum of P4,000, payable to
the order of "cash". He delivered it to Lee Hua Hong in exchange for money which the latter handed
in act. On November 18, 1946, the next business day, the check was presented by Lee Hua Hong to
the drawee bank for payment, but it was dishonored for insufficiency of funds, the balance of the
deposit of Ang Tek Lian on both dates being P335 only.
The Court of Appeals believed the version of Lee Huan Hong who testified that "on November 16,
1946, appellant went to his (complainant's) office, at 1217 Herran, Paco, Manila, and asked him to
exchange Exhibit A which he (appellant) then brought with him with cash alleging that he
needed badly the sum of P4,000 represented by the check, but could not withdraw it from the
bank, it being then already closed; that in view of this request and relying upon appellant's
assurance that he had sufficient funds in the blank to meet Exhibit A, and because they used to
borrow money from each other, even before the war, and appellant owns a hotel and restaurant
known as the North Bay Hotel, said complainant delivered to him, on the same date, the sum of
P4,000 in cash; that despite repeated efforts to notify him that the check had been dishonored by
the bank, appellant could not be located any-where, until he was summoned in the City Fiscal's
Office in view of the complaint for estafa filed in connection therewith; and that appellant has not
paid as yet the amount of the check, or any part thereof."
Inasmuch as the findings of fact of the Court of Appeals are final, the only question of law for
decision is whether under the facts found, estafa had been accomplished.
Article 315, paragraph (d), subsection 2 of the Revised Penal Code, punishes swindling committed
"By post dating a check, or issuing such check in payment of an obligation the offender knowing
that at the time he had no funds in the bank, or the funds deposited by him in the bank were not
sufficient to cover the amount of the check, and without informing the payee of such
circumstances".
We believe that under this provision of law Ang Tek Lian was properly held liable. In this
connection, it must be stated that, as explained in People vs. Fernandez (59 Phil., 615), estafa is
committed by issuing either a postdated check or an ordinary check to accomplish the deceit.
It is argued, however, that as the check had been made payable to "cash" and had not been
endorsed by Ang Tek Lian, the defendant is not guilty of the offense charged. Based on the
proposition that "by uniform practice of all banks in the Philippines a check so drawn is invariably
dishonored," the following line of reasoning is advanced in support of the argument:
. . . When, therefore, he (the offended party ) accepted the check (Exhibit A) from the
appellant, he did so with full knowledge that it would be dishonored upon presentment. In that
sense, the appellant could not be said to have acted fraudulently because the complainant, in
so accepting the check as it was drawn, must be considered, by every rational consideration,
to have done so fully aware of the risk he was running thereby." (Brief for the appellant, p.
11.)
12
We are not aware of the uniformity of such practice. Instances have undoubtedly occurred wherein
the Bank required the indorsement of the drawer before honoring a check payable to "cash." But
cases there are too, where no such requirement had been made . It depends upon the
circumstances of each transaction.
Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable to the order of "cash" is
a check payable to bearer, and the bank may pay it to the person presenting it for payment without
the drawer's indorsement.
A check payable to the order of cash is a bearer instrument. Bacal vs. National City Bank of
New York (1933), 146 Misc., 732; 262 N. Y. S., 839; Cleary vs. De Beck Plate Glass Co.
(1907), 54 Misc., 537; 104 N. Y. S., 831; Massachusetts Bonding & Insurance
Co. vs. Pittsburgh Pipe & Supply Co. (Tex. Civ. App., 1939), 135 S. W. (2d), 818. See also H.
Cook & Son vs. Moody (1916), 17 Ga. App., 465; 87 S. E., 713.
Where a check is made payable to the order of "cash", the word cash "does not purport to be
the name of any person", and hence the instrument is payable to bearer. The drawee bank
need not obtain any indorsement of the check, but may pay it to the person presenting it
without any indorsement. . . . (Zollmann, Banks and Banking, Permanent Edition, Vol. 6, p.
494.)
Of course, if the bank is not sure of the bearer's identity or financial solvency, it has the right to
demand identification and /or assurance against possible complications, for instance, (a) forgery
of drawer's signature, (b) loss of the check by the rightful owner, (c) raising of the amount payable,
etc. The bank may therefore require, for its protection, that the indorsement of the drawer or of
some other person known to it be obtained. But where the Bank is satisfied of the identity and
/or the economic standing of the bearer who tenders the check for collection, it will pay the
instrument without further question; and it would incur no liability to the drawer in thus acting.
A check payable to bearer is authority for payment to holder. Where a check is in the ordinary
form, and is payable to bearer, so that no indorsement is required, a bank, to which it is
presented for payment, need not have the holder identified, and is not negligent in falling to
do so. . . . (Michie on Banks and Banking, Permanent Edition, Vol. 5, p. 343.)
. . . Consequently, a drawee bank to which a bearer check is presented for payment need not
necessarily have the holder identified and ordinarily may not be charged with negligence in
failing to do so. See Opinions 6C:2 and 6C:3 If the bank has no reasonable cause for
suspecting any irregularity, it will be protected in paying a bearer check, "no matter what facts
unknown to it may have occurred prior to the presentment." 1 Morse, Banks and Banking, sec.
393.
Although a bank is entitled to pay the amount of a bearer check without further inquiry, it is
entirely reasonable for the bank to insist that holder give satisfactory proof of his identity. . . .
(Paton's Digest, Vol. I, p. 1089.)
Anyway, it is significant, and conclusive, that the form of the check Exhibit A was totally
unconnected with its dishonor. The Court of Appeals declared that it was returned
unsatisfied because the drawer had insufficient funds not because the drawer's indorsement was
lacking.
Wherefore, there being no question as to the correctness of the penalty imposed on the appellant,
the writ ofcertiorari is denied and the decision of the Court of Appeals is hereby affirmed, with
costs.
-----
G.R. No. 85419 March 9, 1993
DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner, vs. SIMA WEI and/or LEE KIAN HUAT,
MARY CHENG UY, SAMSON TUNG, ASIAN INDUSTRIAL PLASTIC CORPORATION and
PRODUCERS BANK OF THE PHILIPPINES, defendants-respondents.
CAMPOS, JR., J.:
On July 6, 1986, the Development Bank of Rizal (petitioner Bank for brevity) filed a complaint for a
sum of money against respondents Sima Wei and/or Lee Kian Huat, Mary Cheng Uy, Samson Tung,
Asian Industrial Plastic Corporation (Plastic Corporation for short) and the Producers Bank of the
Philippines, on two causes of action:
 (1) To enforce payment of the balance of P1,032,450.02 on a promissory note executed by
respondent Sima Wei on June 9, 1983; and
(2) To enforce payment of two checks executed by Sima Wei, payable to petitioner, and drawn
against the China Banking Corporation, to pay the balance due on the promissory note.
Except for Lee Kian Huat, defendants filed their separate Motions to Dismiss alleging a common
ground that the complaint states no cause of action. The trial court granted the defendants' Motions
to Dismiss. The Court of Appeals affirmed this decision, * to which the petitioner Bank, represented
by its Legal Liquidator, filed this Petition for Review by Certiorari, assigning the following as the
alleged errors of the Court of Appeals: 1
(1) THE COURT OF APPEALS ERRED IN HOLDING THAT THE PLAINTIFF-PETITIONER HAS NO
CAUSE OF ACTION AGAINST DEFENDANTS-RESPONDENTS HEREIN.
(2) THE COURT OF APPEALS ERRED IN HOLDING THAT SECTION 13, RULE 3 OF THE REVISED
RULES OF COURT ON ALTERNATIVE DEFENDANTS IS NOT APPLICABLE TO HEREIN
DEFENDANTS-RESPONDENTS.
The antecedent facts of this case are as follows:
In consideration for a loan extended by petitioner Bank to respondent Sima Wei, the latter
executed and delivered to the former a promissory note, engaging to pay the petitioner Bank or
order the amount of P1,820,000.00 on or before June 24, 1983 with interest at 32% per annum.
Sima Wei made partial payments on the note, leaving a balance of P1,032,450.02. On November
18, 1983, Sima Wei issued two crossed checks payable to petitioner Bank drawn against China
Banking Corporation, bearing respectively the serial numbers 384934, for the amount of
P550,000.00 and 384935, for the amount of P500,000.00. The said checks were allegedly issued in
full settlement of the drawer's account evidenced by the promissory note. These two checks were
not delivered to the petitioner-payee or to any of its authorized representatives. For reasons not
shown, these checks came into the possession of respondent Lee Kian Huat, who deposited the
checks without the petitioner-payee's indorsement (forged or otherwise) to the account of
respondent Plastic Corporation, at the Balintawak branch, Caloocan City, of the Producers Bank.
Cheng Uy, Branch Manager of the Balintawak branch of Producers Bank, relying on the assurance of
respondent Samson Tung, President of Plastic Corporation, that the transaction was legal and
regular, instructed the cashier of Producers Bank to accept the checks for deposit and to credit
them to the account of said Plastic Corporation, inspite of the fact that the checks were crossed and
payable to petitioner Bank and bore no indorsement of the latter. Hence, petitioner filed the
complaint as aforestated.
The main issue before Us is whether petitioner Bank has a cause of action against any or all of the
defendants, in the alternative or otherwise.
A cause of action is defined as an act or omission of one party in violation of the legal right or rights
of another. The essential elements are: (1) legal right of the plaintiff; (2) correlative obligation of
the defendant; and (3) an act or omission of the defendant in violation of said legal right. 2
The normal parties to a check are the drawer, the payee and the drawee bank. Courts have long
recognized the business custom of using printed checks where blanks are provided for the date of
issuance, the name of the payee, the amount payable and the drawer's signature. All the drawer
has to do when he wishes to issue a check is to properly fill up the blanks and sign it. However, the
mere fact that he has done these does not give rise to any liability on his part, until and unless the
check is delivered to the payee or his representative. A negotiable instrument, of which a check is,
is not only a written evidence of a contract right but is also a species of property. Just as a deed to
a piece of land must be delivered in order to convey title to the grantee, so must a negotiable
instrument be delivered to the payee in order to evidence its existence as a binding contract.
Section 16 of the Negotiable Instruments Law, which governs checks, provides in part:
Every contract on a negotiable instrument is incomplete and revocable until delivery of the
instrument for the purpose of giving effect thereto. . . .
Thus, the payee of a negotiable instrument acquires no interest with respect thereto until its
delivery to him. 3Delivery of an instrument means transfer of possession, actual or constructive,
from one person to another. 4 Without the initial delivery of the instrument from the drawer to the
payee, there can be no liability on the instrument. Moreover, such delivery must be intended to
give effect to the instrument.
13
The allegations of the petitioner in the original complaint show that the two (2) China Bank checks,
numbered 384934 and 384935, were not delivered to the payee, the petitioner herein. Without the
delivery of said checks to petitioner-payee, the former did not acquire any right or interest therein
and cannot therefore assert any cause of action, founded on said checks, whether against the
drawer Sima Wei or against the Producers Bank or any of the other respondents.
In the original complaint, petitioner Bank, as plaintiff, sued respondent Sima Wei on the promissory
note, and the alternative defendants, including Sima Wei, on the two checks. On appeal from the
orders of dismissal of the Regional Trial Court, petitioner Bank alleged that its cause of action was
not based on collecting the sum of money evidenced by the negotiable instruments stated but
on quasi-delict a claim for damages on the ground of fraudulent acts and evident bad faith of the
alternative respondents. This was clearly an attempt by the petitioner Bank to change not only the
theory of its case but the basis of his cause of action. It is well-settled that a party cannot change
his theory on appeal, as this would in effect deprive the other party of his day in court. 5
Notwithstanding the above, it does not necessarily follow that the drawer Sima Wei is freed from
liability to petitioner Bank under the loan evidenced by the promissory note agreed to by her. Her
allegation that she has paid the balance of her loan with the two checks payable to petitioner Bank
has no merit for, as We have earlier explained, these checks were never delivered to petitioner
Bank. And even granting, without admitting, that there was delivery to petitioner Bank, the delivery
of checks in payment of an obligation does not constitute payment unless they are cashed or their
value is impaired through the fault of the creditor. 6 None of these exceptions were alleged by
respondent Sima Wei.
Therefore, unless respondent Sima Wei proves that she has been relieved from liability on the
promissory note by some other cause, petitioner Bank has a right of action against her for the
balance due thereon.
However, insofar as the other respondents are concerned, petitioner Bank has no privity with them.
Since petitioner Bank never received the checks on which it based its action against said
respondents, it never owned them (the checks) nor did it acquire any interest therein. Thus,
anything which the respondents may have done with respect to said checks could not have
prejudiced petitioner Bank. It had no right or interest in the checks which could have been violated
by said respondents. Petitioner Bank has therefore no cause of action against said respondents, in
the alternative or otherwise. If at all, it is Sima Wei, the drawer, who would have a cause of action
against her
co-respondents, if the allegations in the complaint are found to be true.
With respect to the second assignment of error raised by petitioner Bank regarding the applicability
of Section 13, Rule 3 of the Rules of Court, We find it unnecessary to discuss the same in view of
Our finding that the petitioner Bank did not acquire any right or interest in the checks due to lack of
delivery. It therefore has no cause of action against the respondents, in the alternative or
otherwise.
In the light of the foregoing, the judgment of the Court of Appeals dismissing the petitioner's
complaint is AFFIRMED insofar as the second cause of action is concerned. On the first cause of
action, the case is REMANDED to the trial court for a trial on the merits, consistent with this
decision, in order to determine whether respondent Sima Wei is liable to the Development Bank of
Rizal for any amount under the promissory note allegedly signed by her.
SO ORDERED.
-----
G.R. Nos. L-25836-37 January 31, 1981
THE PHILIPPINE BANK OF COMMERCE, plaintiff-appellee, vs. JOSE M. ARUEGO, defendant-
appellant.
FERNANDEZ, J.:
The defendant, Jose M. Aruego, appealed to the Court of Appeals from the order of the Court of
First Instance of Manila, Branch XIII, in Civil Case No. 42066 denying his motion to set aside the
order declaring him in default, 1and from the order of said court in the same case denying his
motion to set aside the judgment rendered after he was declared in default. 2 These two appeals of
the defendant were docketed as CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R, respectively.
Upon motion of the defendant on July 25, 1960, 3 he was allowed by the Court of Appeals to file
one consolidated record on appeal of CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R. 4
In a resolution promulgated on March 1, 1966, the Court of Appeals, First Division, certified the
5
consolidated appeal to the Supreme Court on the ground that only questions of law are involved.
On December 1, 1959, the Philippine Bank of Commerce instituted against Jose M. Aruego Civil
Case No. 42066 for the recovery of the total sum of about P35,000.00 with daily interest thereon
from November 17, 1959 until fully paid and commission equivalent to 3/8% for every thirty (30)
days or fraction thereof plus attorney's fees equivalent to 10% of the total amount due and
costs. 6 The complaint filed by the Philippine Bank of Commerce contains twenty-two (22) causes of
action referring to twenty-two (22) transactions entered into by the said Bank and Aruego on
different dates covering the period from August 28, 1950 to March 14, 1951. 7 The sum sought to
be recovered represents the cost of the printing of "World Current Events," a periodical published
by the defendant. To facilitate the payment of the printing the defendant obtained a credit
accommodation from the plaintiff. Thus, for every printing of the "World Current Events," the
printer, Encal Press and Photo Engraving, collected the cost of printing by drawing a draft against
the plaintiff, said draft being sent later to the defendant for acceptance. As an added security for
the payment of the amounts advanced to Encal Press and Photo-Engraving, the plaintiff bank also
required defendant Aruego to execute a trust receipt in favor of said bank wherein said defendant
undertook to hold in trust for plaintiff the periodicals and to sell the same with the promise to turn
over to the plaintiff the proceeds of the sale of said publication to answer for the payment of all
obligations arising from the draft. 8
Aruego received a copy of the complaint together with the summons on December 2, 1959. 9 On
December 14, 1959 defendant filed an urgent motion for extension of time to plead, and set the
hearing on December 16, 1959. 10 At the hearing, the court denied defendant's motion for
extension. Whereupon, the defendant filed a motion to dismiss the complaint on December 17,
1959 on the ground that the complaint states no cause of action because:
a) When the various bills of exchange were presented to the defendant as drawee for acceptance,
the amounts thereof had already been paid by the plaintiff to the drawer (Encal Press and Photo
Engraving), without knowledge or consent of the defendant drawee.
b) In the case of a bill of exchange, like those involved in the case at bar, the defendant drawee is
an accommodating party only for the drawer (Encal Press and Photo-Engraving) and win be liable in
the event that the accommodating party (drawer) fails to pay its obligation to the plaintiff. 11
The complaint was dismissed in an order dated December 22, 1959, copy of which was received by
the defendant on December 24, 1959. 12
On January 13, 1960, the plaintiff filed a motion for reconsideration. 13 On March 7, 1960, acting
upon the motion for reconsideration filed by the plaintiff, the trial court set aside its order
dismissing the complaint and set the case for hearing on March 15, 1960 at 8:00 in the
morning. 14 A copy of the order setting aside the order of dismissal was received by the defendant
on March 11, 1960 at 5:00 o'clock in the afternoon according to the affidavit of the deputy sheriff of
Manila, Mamerto de la Cruz. On the following day, March 12, 1960, the defendant filed a motion to
postpone the trial of the case on the ground that there having been no answer as yet, the issues
had not yet been joined. 15 On the same date, the defendant filed his answer to the complaint
interposing the following defenses: That he signed the document upon which the plaintiff sues in
his capacity as President of the Philippine Education Foundation; that his liability is only secondary;
and that he believed that he was signing only as an accommodation party. 16
On March 15, 1960, the plaintiff filed an ex parte motion to declare the defendant in default on the
ground that the defendant should have filed his answer on March 11, 1960. He contends that by
filing his answer on March 12, 1960, defendant was one day late. 17 On March 19, 1960 the trial
court declared the defendant in default. 18 The defendant learned of the order declaring him in
default on March 21, 1960. On March 22, 1960 the defendant filed a motion to set aside the order
of default alleging that although the order of the court dated March 7, 1960 was received on March
11, 1960 at 5:00 in the afternoon, it could not have been reasonably expected of the defendant to
file his answer on the last day of the reglementary period, March 11, 1960, within office hours,
especially because the order of the court dated March 7, 1960 was brought to the attention of
counsel only in the early hours of March 12, 1960. The defendant also alleged that he has a good
and substantial defense. Attached to the motion are the affidavits of deputy sheriff Mamerto de la
Cruz that he served the order of the court dated March 7, 1960 on March 11, 1960, at 5:00 o'clock
in the afternoon and the affidavit of the defendant Aruego that he has a good and substantial
defense. 19 The trial court denied the defendant's motion on March 25, 1960. 20 On May 6, 1960,
the trial court rendered judgment sentencing the defendant to pay to the plaintiff the sum of
P35,444.35 representing the total amount of his obligation to the said plaintiff under the twenty-
14
two (22) causes of action alleged in the complaint as of November 15, 1957 and the sum of
P10,000.00 as attorney's fees. 21
On May 9, 1960 the defendant filed a notice of appeal from the order dated March 25, 1961
denying his motion to set aside the order declaring him in default, an appeal bond in the amount of
P60.00, and his record on appeal. The plaintiff filed his opposition to the approval of defendant's
record on appeal on May 13, 1960. The following day, May 14, 1960, the lower court dismissed
defendant's appeal from the order dated March 25, 1960 denying his motion to set aside the order
of default. 22 On May 19, 1960, the defendant filed a motion for reconsideration of the trial court's
order dismissing his appeal. 23 The plaintiff, on May 20, 1960, opposed the defendant's motion for
reconsideration of the order dismissing appeal. 24 On May 21, 1960, the trial court reconsidered its
previous order dismissing the appeal and approved the defendant's record on appeal. 25 On May 30,
1960, the defendant received a copy of a notice from the Clerk of Court dated May 26, 1960,
informing the defendant that the record on appeal filed ed by the defendant was forwarded to the
Clerk of Court of Appeals. 26
On June 1, 1960 Aruego filed a motion to set aside the judgment rendered after he was declared in
default reiterating the same ground previously advanced by him in his motion for relief from the
order of default. 27 Upon opposition of the plaintiff filed on June 3, 1960, 28 the trial court denied
the defendant's motion to set aside the judgment by default in an order of June 11, 1960. 29 On
June 20, 1960, the defendant filed his notice of appeal from the order of the court denying his
motion to set aside the judgment by default, his appeal bond, and his record on appeal. The
defendant's record on appeal was approved by the trial court on June 25, 1960. 30 Thus, the
defendant had two appeals with the Court of Appeals: (1) Appeal from the order of the lower court
denying his motion to set aside the order of default docketed as CA-G.R. NO. 27734-R; (2) Appeal
from the order denying his motion to set aside the judgment by default docketed as CA-G.R. NO.
27940-R.
In his brief, the defendant-appellant assigned the following errors:
I
THE LOWER COURT ERRED IN HOLDING THAT THE DEFENDANT WAS IN DEFAULT.
II
THE LOWER COURT ERRED IN ENTERTAINING THE MOTION TO DECLARE DEFENDANT IN
DEFAULT ALTHOUGH AT THE TIME THERE WAS ALREADY ON FILE AN ANSWER BY HIM
WITHOUT FIRST DISPOSING OF SAID ANSWER IN AN APPROPRIATE ACTION.
III
THE LOWER COURT ERRED IN DENYING DEFENDANT'S PETITION FOR RELIEF OF ORDER OF
DEFAULT AND FROM JUDGMENT BY DEFAULT AGAINST DEFENDANT. 31
It has been held that to entitle a party to relief from a judgment taken against him through his
mistake, inadvertence, surprise or excusable neglect, he must show to the court that he has a
meritorious defense. 32 In other words, in order to set aside the order of default, the defendant
must not only show that his failure to answer was due to fraud, accident, mistake or excusable
negligence but also that he has a meritorious defense.
The record discloses that Aruego received a copy of the complaint together with the summons on
December 2, 1960; that on December 17, 1960, the last day for filing his answer, Aruego filed a
motion to dismiss; that on December 22, 1960 the lower court dismissed the complaint; that on
January 23, 1960, the plaintiff filed a motion for reconsideration and on March 7, 1960, acting upon
the motion for reconsideration, the trial court issued an order setting aside the order of dismissal;
that a copy of the order was received by the defendant on March 11, 1960 at 5:00 o'clock in the
afternoon as shown in the affidavit of the deputy sheriff; and that on the following day, March 12,
1960, the defendant filed his answer to the complaint.
The failure then of the defendant to file his answer on the last day for pleading is excusable. The
order setting aside the dismissal of the complaint was received at 5:00 o'clock in the afternoon. It
was therefore impossible for him to have filed his answer on that same day because the courts then
held office only up to 5:00 o'clock in the afternoon. Moreover, the defendant immediately filed his
answer on the following day.
However, while the defendant successfully proved that his failure to answer was due to excusable
negligence, he has failed to show that he has a meritorious defense. The defendant does not have a
good and substantial defense.
Defendant Aruego's defenses consist of the following:
a) The defendant signed the bills of exchange referred to in the plaintiff's complaint in a
representative capacity, as the then President of the Philippine Education Foundation Company,
publisher of "World Current Events and Decision Law Journal," printed by Encal Press and Photo-
Engraving, drawer of the said bills of exchange in favor of the plaintiff bank;
b) The defendant signed these bills of exchange not as principal obligor, but as accommodation or
additional party obligor, to add to the security of said plaintiff bank. The reason for this statement
is that unlike real bills of exchange, where payment of the face value is advanced to the drawer
only upon acceptance of the same by the drawee, in the case in question, payment for the
supposed bills of exchange were made before acceptance; so that in effect, although these
documents are labelled bills of exchange, legally they are not bills of exchange but mere
instruments evidencing indebtedness of the drawee who received the face value thereof, with the
defendant as only additional security of the same. 33
The first defense of the defendant is that he signed the supposed bills of exchange as an agent of
the Philippine Education Foundation Company where he is president. Section 20 of the Negotiable
Instruments Law provides that "Where the instrument contains or a person adds to his signature
words indicating that he signs for or on behalf of a principal or in a representative capacity, he is
not liable on the instrument if he was duly authorized; but the mere addition of words describing
him as an agent or as filing a representative character, without disclosing his principal, does not
exempt him from personal liability."
An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he
was signing as a representative of the Philippine Education Foundation Company. 34 He merely
signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE ARGUEGO For failure to disclose his
principal, Aruego is personally liable for the drafts he accepted.
The defendant also contends that he signed the drafts only as an accommodation party and as
such, should be made liable only after a showing that the drawer is incapable of paying. This
contention is also without merit.
An accommodation party is one who has signed the instrument as maker, drawer, indorser, without
receiving value therefor and for the purpose of lending his name to some other person. Such
person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of
the taking of the instrument knew him to be only an accommodation party. 35 In lending his name
to the accommodated party, the accommodation party is in effect a surety for the latter. He lends
his name to enable the accommodated party to obtain credit or to raise money. He receives no part
of the consideration for the instrument but assumes liability to the other parties thereto because he
wants to accommodate another. In the instant case, the defendant signed as a drawee/acceptor.
Under the Negotiable Instrument Law, a drawee is primarily liable. Thus, if the defendant who is a
lawyer, he should not have signed as an acceptor/drawee. In doing so, he became primarily and
personally liable for the drafts.
The defendant also contends that the drafts signed by him were not really bills of exchange but
mere pieces of evidence of indebtedness because payments were made before acceptance. This is
also without merit. Under the Negotiable Instruments Law, a bill of exchange is an unconditional
order in writting addressed by one person to another, signed by the person giving it, requiring the
person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum
certain in money to order or to bearer. 36 As long as a commercial paper conforms with the
definition of a bill of exchange, that paper is considered a bill of exchange. The nature of
acceptance is important only in the determination of the kind of liabilities of the parties involved,
but not in the determination of whether a commercial paper is a bill of exchange or not.
It is evident then that the defendant's appeal can not prosper. To grant the defendant's prayer will
result in a new trial which will serve no purpose and will just waste the time of the courts as well as
of the parties because the defense is nil or ineffective. 37
WHEREFORE, the order appealed from in Civil Case No. 42066 of the Court of First Instance of
Manila denying the petition for relief from the judgment rendered in said case is hereby affirmed,
without pronouncement as to costs.
SO ORDERED.
-----
15
G.R. No. 116320 November 29, 1999
ADALIA FRANCISCO, petitioner, vs. COURT OF APPEALS, HERBY COMMERCIAL &
CONSTRUCTION CORPORATION AND JAIME C. ONG,respondents.
GONZAGA-REYES, J.:
Assailed in this petition for review on certiorari is the decision 1 of the Court of Appeals affirming
the decision 2rendered by Branch 168 of the Regional Trial Court of Pasig in Civil Case No. 35231 in
favor of private respondents.
The controversy before this Court finds its origins in a Land Development and Construction Contract
which was entered into on June 23, 1977 by A. Francisco Realty & Development Corporation
(AFRDC), of which petitioner Adalia Francisco (Francisco) is the president, and private respondent
Herby Commercial & Construction Corporation (HCCC), represented by its President and General
Manager private respondent Jaime C. Ong (Ong), pursuant to a housing project of AFRDC at San
Jose del Monte, Bulacan, financed by the Government Service Insurance System (GSIS). Under the
contract, HCCC agreed to undertake the construction of 35 housing units and the development of
35 hectares of land. The payment of HCCC for its services was on a turn-key basis, that is, HCCC
was to be paid on the basis of the completed houses and developed lands delivered to and accepted
by AFRDC and the GSIS. To facilitate payment, AFRDC executed a Deed of Assignment in favor of
HCCC to enable the latter to collect payments directly from the GSIS. Furthermore, the GSIS and
AFRDC put up an Executive Committee Account with the Insular Bank of Asia & America (IBAA) in
the amount of P4,000,000.00 from which checks would be issued and co-signed by petitioner
Francisco and the GSIS Vice-President Armando Diaz (Diaz).
On February 10, 1978, HCCC filed a complaint 3 with the Regional Trial Court of Quezon City
against Francisco, AFRDC and the GSIS for the collection of the unpaid balance under the Land
Development and Construction Contract in the amount of P515,493.89 for completed and delivered
housing units and land development. However, the parties eventually arrived at an amicable
settlement of their differences, which was embodied in a Memorandum Agreement executed by
HCCC and AFRDC on July 21, 1978. Under the agreement, the parties stipulated that HCCC had
turned over 83 housing units which have been accepted and paid for by the GSIS. The GSIS
acknowledged that it still owed HCCC P520,177.50 representing incomplete construction of housing
units, incomplete land development and 5% retention, which amount will be discharged when the
defects and deficiencies are finally completed by HCCC. It was also provided that HCCC was
indebted to AFRDC in the amount of P180,234.91 which the former agreed would be paid out of the
proceeds from the 40 housing units still to be turned over by HCCC or from any amount due to
HCCC from the GSIS. Consequently, the trial court dismissed the case upon the filing by the parties
of a joint motion to dismiss.
Sometime in 1979, after an examination of the records of the GSIS, Ong discovered that Diaz and
Francisco had executed and signed seven checks 4, of various dates and amounts, drawn against
the IBAA and payable to HCCC for completed and delivered work under the contract. Ong, however,
claims that these checks were never delivered to HCCC. Upon inquiry with Diaz, Ong learned that
the GSIS gave Francisco custody of the checks since she promised that she would deliver the same
to HCCC. Instead, Francisco forged the signature of Ong, without his knowledge or consent, at the
dorsal portion of the said checks to make it appear that HCCC had indorsed the checks; Francisco
then indorsed the checks for a second time by signing her name at the back of the checks and
deposited the checks in her IBAA savings account. IBAA credited Francisco's account with the
amount of the checks and the latter withdrew the amount so credited.
On June 7, 1979, Ong filed complaints with the office of the city fiscal of Quezon City, charging
Francisco with estafa thru falsification of commercial documents. Francisco denied having forged
Ong's signature on the checks, claiming that Ong himself indorsed the seven checks in behalf of
HCCC and delivered the same to Francisco in payment of the loans extended by Francisco to HCCC.
According to Francisco, she agreed to grant HCCC the loans in the total amount of P585,000.00 and
covered by eighteen promissory notes in order to obviate the risk of the non-completion of the
project. As a means of repayment, Ong allegedly issued a Certification authorizing Francisco to
collect HCCC's receivables from the GSIS. Assistant City Fiscal Ramon M. Gerona gave credence to
Francisco's claims and accordingly, dismissed the complaints, which dismissal was affirmed by the
Minister of Justice in a resolution issued on June 5, 1981.
The present case was brought by private respondents on November 19, 1979 against Francisco and
IBAA for the recovery of P370,475.00, representing the total value of the seven checks, and for
damages, attorney's fees, expenses of litigation and costs. After trial on the merits, the trial court
rendered its decision in favor of private respondents, the dispositive portion of which provides
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and
against the defendants INSULAR BANK OF ASIA & AMERICA and ATTY. ADALIA FRANCISCO, to
jointly and severally pay the plaintiffs the amount of P370.475.00 plus interest thereon at the
rate of 12% per annum from the date of the filing of the complaint until the full amount is
paid; moral damages to plaintiff Jaime Ong in the sum of P50,000.00; exemplary damages of
P50,000.00; litigation expenses of P5,000.00; and attorney's fees of P50,000.00.
With respect to the cross-claim of the defendant IBAA against its co-defendant Atty. Adalia
Francisco, the latter is ordered to reimburse the former for the sums that the Bank shall pay
to the plaintiff on the forged checks including the interests paid thereon.
Further, the defendants are ordered to pay the costs.
Based upon the findings of handwriting experts from the National Bureau of Investigation (NBI),
the trial court held that Francisco had indeed forged the signature of Ong to make it appear that he
had indorsed the checks. Also, the court ruled that there were no loans extended, reasoning that it
was unbelievable that HCCC was experiencing financial difficulties so as to compel it to obtain the
loans from AFRDC in view of the fact that the GSIS had issued checks in favor of HCCC at about the
same time that the alleged advances were made. The trial court stated that it was plausible that
Francisco concealed the fact of issuance of the checks from private respondents in order to make it
appear as if she were accommodating private respondents, when in truth she was lending HCCC its
own money.
With regards to the Memorandum Agreement entered into between AFRDC and HCCC in Civil Case
No. Q-24628, the trial court held that the same did not make any mention of the forged checks
since private respondents were as of yet unaware of their existence, that fact having been
effectively concealed by Francisco, until private respondents acquired knowledge of Francisco's
misdeeds in 1979.
IBAA was held liable to private respondents for having honored the checks despite such obvious
irregularities as the lack of initials to validate the alterations made on the check, the absence of the
signature of a co-signatory in the corporate checks of HCCC and the deposit of the checks on a
second indorsement in the savings account of Francisco. However, the trial court allowed IBAA
recourse against Francisco, who was ordered to reimburse the IBAA for any sums it shall have to
pay to private respondents. 5
Both Francisco and IBAA appealed the trial court's decision, but the Court of Appeals dismissed
IBAA's appeal for its failure to file its brief within the 45-day extension granted by the appellate
court. IBAA's motion for reconsideration and petition for review on certiorari filed with this Court
were also similarly denied. On November 21, 1989, IBAA and HCCC entered into a Compromise
Agreement which was approved by the trial court, wherein HCCC acknowledged receipt of the
amount of P370,475.00 in full satisfaction of its claims against IBAA, without prejudice to the right
of the latter to pursue its claims against Francisco.
On June 29, 1992, the Court of Appeals affirmed the trial court's ruling, hence this petition for
review on certiorarifiled by petitioner, assigning the following errors to the appealed decision
1. The respondent Court of Appeals erred in concluding that private respondents did not owe
Petitioner the sum covered by the Promissory Notes Exh. 2-2-A-2-P (FRANCISCO). Such
conclusion was based mainly on conjectures, surmises and speculation contrary to the
unrebutted pleadings and evidence presented by petitioner.
2. The respondent Court of Appeals erred in holding that Petitioner falsified the signature of
private respondent ONG on the checks in question without any authority therefor which is
patently contradictory to the unrebutted pleading and evidence that petitioner was expressly
authorized by respondent HERBY thru ONG to collect all receivables of HERBY from GSIS to
pay the loans extended to them. (Exhibit 3).
3. That respondent Court of Appeals erred in holding that the seven checks in question were
not taken up in the liquidation and reconciliation of all outstanding account between AFRDC
16
and HERBY as acknowledged by the parties in Memorandum Agreement (Exh. 5) is a pure
conjecture, surmise and speculation contrary to the unrebutted evidence presented by
petitioners. It is an inference made which is manifestly mistaken.
4. The respondent Court of Appeals erred in affirming the decision of the lower court and
dismissing the appeal. 6
The pivotal issue in this case is whether or not Francisco forged the signature of Ong on the seven
checks. In this connection, we uphold the lower courts' finding that the subject matter of the
present case, specifically the seven checks, drawn by GSIS and AFRDC, dated between October to
November 1977, in the total amount of P370,475.00 and payable to HCCC, was not included in the
Memorandum Agreement executed by HCCC and AFRDC in Civil Case No. Q-24628. As observed by
the trial court, aside from there being absolutely no mention of the checks in the said agreement,
the amounts represented by said checks could not have been included in the Memorandum
Agreement executed in 1978 because private respondents only discovered Francisco's acts of
forgery in 1979. The lower courts found that Francisco was able to easily conceal from private
respondents even the fact of the issuance of the checks since she was a co-signatory thereof. 7 We
also note that Francisco had custody of the checks, as proven by the check vouchers bearing her
uncontested signature, 8 by which she, in effect, acknowledged having received the checks
intended for HCCC. This contradicts Francisco's claims that the checks were issued to Ong who
delivered them to Francisco already indorsed. 9
As regards the forgery, we concur with the lower courts', finding that Francisco forged the signature
of Ong on the checks to make it appear as if Ong had indorsed said checks and that, after indorsing
the checks for a second time by signing her name at the back of the checks, Francisco deposited
said checks in her savings account with IBAA. The forgery was satisfactorily established in the trial
court upon the strength of the findings of the NBI handwriting expert. 10 Other than petitioner's
self-serving denials, there is nothing in the records to rebut the NBI's findings. Well-entrenched is
the rule that findings of trial courts which are factual in nature, especially when affirmed by the
Court of Appeals, deserve to be respected and affirmed by the Supreme Court, provided it is
supported by substantial evidence on record, 11 as it is in the case at bench.
Petitioner claims that she was, in any event, authorized to sign Ong's name on the checks by virtue
of the Certification executed by Ong in her favor giving her the authority to collect all the
receivables of HCCC from the GSIS, including the questioned checks. 12 Petitioner's alternative
defense must similarly fail. The Negotiable Instruments Law provides that where any person is
under obligation to indorse in a representative capacity, he may indorse in such terms as to
negative personal liability. 13 An agent, when so signing, should indicate that he is merely signing in
behalf of the principal and must disclose the name of his principal; otherwise he shall be held
personally liable. 14 Even assuming that Francisco was authorized by HCCC to sign Ong's name,
still, Francisco did not indorse the instrument in accordance with law. Instead of signing Ong's
name, Francisco should have signed her own name and expressly indicated that she was signing as
an agent of HCCC. Thus, the Certification cannot be used by Francisco to validate her act of
forgery.
Every person who, contrary to law, wilfully or negligently causes damage to another, shall
indemnify the latter for the same. 15 Due to her forgery of Ong's signature which enabled her to
deposit the checks in her own account, Francisco deprived HCCC of the money due it from the GSIS
pursuant to the Land Development and Construction Contract. Thus, we affirm respondent court's
award of compensatory damages in the amount of P370,475.00, but with a modification as to the
interest rate which shall be six percent (6%) per annum, to be computed from the date of the filing
of the complaint since the amount of damages was alleged in the complaint; 16 however, the rate of
interest shall be twelve percent (12%) per annumfrom the time the judgment in this case becomes
final and executory until its satisfaction and the basis for the computation of this twelve percent
(12%) rate of interest shall be the amount of P370,475.00. This is in accordance with the doctrine
enunciated in Eastern Shipping Lines, Inc. vs. Court of Appeals, et al., 17 which was reiterated
in Philippine National Bank vs. Court of Appeals, 18 Philippine Airlines, Inc. vs. Court of
Appeals 19 and in Keng Hua Paper Products Co., Inc. vs.Court of Appeals, 20 which provides that
1. When an obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded.
In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article
1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed at the discretion of the court at the rate of six
percent (6%) per annum. No interest, however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall begin to
run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when
such certainty cannot be so reasonably established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base
for the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be twelve
percent (12%) per annum from such finality until its satisfaction, this interim period being deemed
to be by then an equivalent to a forbearance of credit.
We also sustain the award of exemplary damages in the amount of P50,000.00. Under Article 2229
of the Civil Code, exemplary damages are imposed by way of example or correction for the public
good, in addition to the moral, temperate, liquidated or compensatory damages. Considering
petitioner's fraudulent act, we hold that an award of P50,000.00 would be adequate, fair and
reasonable. The grant of exemplary damages justifies the award of attorney's fees in the amount of
P50,000.00, and the award of P5,000.00 for litigation
expenses. 21
The appellate court's award of P50,000.00 in moral damages is warranted. Under Article 2217 of
the Civil Code, moral damages may be granted upon proof of physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation
and similar injury. 22 Ong testitified that he suffered sleepless nights, embarrassment, humiliation
and anxiety upon discovering that the checks due his company were forged by petitioner and that
petitioner had filed baseless criminal complaints against him before the fiscal's office of Quezon City
which disrupted HCCC's business operations. 23
WHEREFORE, we AFFIRM the respondent court's decision promulgated on June 29, 1992, upholding
the February 16, 1988 decision of the trial court in favor of private respondents, with the
modification that the interest upon the actual damages awarded shall be at six percent (6%) per
annum, which interest rate shall be computed from the time of the filing of the complaint on
November 19, 1979. However, the interest rate shall be twelve percent (12%) per annum from the
time the judgment in this case becomes final and executory and until such amount is fully paid. The
basis for computation of the six percent and twelve percent rates of interest shall be the amount of
P370,475.00. No pronouncement as to costs.
SO ORDERED.
-----
[G.R. No. L-29432. August 6, 1975.]
JAI-ALAI CORPORATION OF THE PHILIPPINES, Petitioner, v. BANK OF THE PHILIPPINE
ISLAND, Respondent.
CASTRO, J.:
This is a petition by the Jai-Alai Corporation of the Philippines (hereinafter referred to as the
petitioner) for review of the decision of the Court of Appeals in C.A.-G.R. 34042-R dated June 25,
1968 in favor of the Bank of the Philippine Islands (hereinafter referred to as the respondent).
From April 2, 1959 to May 18, 1959, ten checks with a total face value of P8,030.58 were deposited
by the petitioner in its current account with the respondent bank. The particulars of these checks
are as follows:chanrob1es virtual 1aw library
1. Drawn by the Delta Engineering Service upon the Pacific Banking Corporation and payable to the
Inter-Island Gas Service Inc. or order:chanrob1es virtual 1aw library
Date Check Exhibit
Deposited Number Amount Number
17
4/2/59 B-352680 P500.00 18
4/20/59 A-156907 372.32 19
4/24/59 A-156924 397.82 20
5/4/59 B-364764 250.00 23
5/6/59 B-364775 250.00 24
2. Drawn by the Enrique Cortiz & Co. upon the Pacific Banking Corporation and payable to the
Inter-Island Gas Service, Inc. or bearer:chanrob1es virtual 1aw library
4/13/59 B-335063 P 2108.70 21
4/27/59 B-335072 P2210.94 22
3. Drawn by the Luzon Tinsmith & Company upon the China Banking Corporation and payable to
the Inter-Island Gas Service, Inc. or bearer:chanrob1es virtual 1aw library
5/18/59 VN430188 P940.8025cralaw:red
4. Drawn by the Roxas Manufacturing, Inc. upon the Philippine National Bank and payable to the
Inter-Island Gas Service, Inc. order:chanrob1es virtual 1aw library
5/14/59 1860160 P 500.00 26
5/18/59 1860660 P 500.00 27
All the foregoing checks, which were acquired by the petitioner from one Antonio J. Ramirez, a
sales agent of the Inter-Island Gas and a regular bettor at jai-alai games, were, upon deposit,
temporarily credited to the petitioners account in accordance with the clause printed on the deposit
slips issued by the respondent and which reads:jgc:chanrobles.com.ph
"Any credit allowed the depositor on the books of the Bank for checks or drafts hereby received for
deposit, is provisional only, until such time as the proceeds thereof, in current funds or solvent
credits, shall have been actually received by the Bank and the latter reserves to itself the right to
charge back the item to the account of its depositor, at any time before that event, regardless of
whether or not the item itself can be returned."cralaw virtua1aw library
About the latter part of July 1959, after Ramirez had resigned from the Inter-Island Gas and after
the checks had been submitted to inter-bank clearing, the Inter-Island Gas discovered that all the
indorsements made on the checks purportedly by its cashiers, Santiago Amplayo and Vicenta Mucor
(who were merely authorized to deposit checks issued payable to the said company) as well as the
rubber stamp impression thereon reading "Inter-Island Gas Service, Inc.," were forgeries. In due
time, the Inter-Island Gas advised the petitioner, the respondent, the drawers and the drawee-
banks of the said checks about the forgeries, and filed a criminal complaint against Ramirez with
the Office of the City Fiscal of Manila. 1
The respondents cashier, Ramon Sarthou, upon receipt of the latter of Inter-Island Gas dated
August 31, 1959, called up the petitioners cashier, Manuel Garcia, and advised the latter that in
view of the circumstances he would debit the value of the checks against the petitioners account as
soon as they were returned by the respective drawee-banks.
Meanwhile, the drawers of the checks, having been notified of the forgeries, demanded
reimbursement to their respective accounts from the drawee-banks, which in turn demanded from
the respondent, as collecting bank, the return of the amounts they had paid on account thereof.
When the drawee-banks returned the checks to the respondent, the latter paid their value which
the former in turn paid to the Inter-Island Gas. The respondent, for its part, debited the petitioners
current account and forwarded to the latter the checks containing the forged indorsements, which
the petitioner, however, refused to accept.
On October 8, 1959 the petitioner drew against its current account with the respondent a check for
P135,000 payable to the order of the Mariano Olondriz y Cia. in payment of certain shares of stock.
The check was, however, dishonored by the respondent as its records showed that as of October 8,
1959 the current account of the petitioner, after netting out the value of the checks P8,030.58)
with the forged indorsements, had a balance of only P128,257.65.

The petitioner then filed a complaint against the respondent with the Court of First Instance of
Manila, which was however dismissed by the trial court after due trial, and as well by the Court of
Appeals, on appeal.
Hence, the present recourse.
The issues posed by the petitioner in the instant petition may be briefly stated as
follows:chanrob1es virtual 1aw library
(a) Whether the respondent had the right to debit the petitioners current account in the amount
corresponding to the total value of the checks in question after more than three months had
elapsed from the date their value was credited to the petitioners account:(b) Whether the
respondent is estopped from claiming that the amount of P8,030.58, representing the total value of
the checks with the forged indorsements, had not been properly credited to the petitioners
account, since the same had already been paid by the drawee-banks and received in due course by
the respondent; and(c) On the assumption that the respondent had improperly debited the
petitioners current account, whether the latter is entitled to damages.
These three issues interlock and will be resolved jointly.
In our opinion, the respondent acted within legal bounds when it debited the petitioners account.
When the petitioner deposited the checks with the respondent, the nature of the relationship
created at that stage was one of agency, that is, the bank was to collect from the drawees of the
checks the corresponding proceeds. It is true that the respondent had already collected the
proceeds of the checks when it debited the petitioners account, so that following the rule in Gullas
v. Philippine National Bank 2 it might be argued that the relationship between the parties had
become that of creditor and debtor as to preclude the respondent from using the petitioners funds
to make payments not authorized by the latter. It is our view nonetheless that no creditor-debtor
relationship was created between the parties.
Section 23 of the Negotiable Instruments Law (Act 2031) states that 3
"When a signature is forged or made without the authority of the person whose signature it
purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge
therefor, or to enforce payment thereof against any party thereto, can be acquired through or
under such signature, unless the party against whom it is sought to enforce such right is precluded
from setting up the forgery or want of authority."cralaw virtua1aw library
Since under the foregoing provision, a forged signature in a negotiable instrument is wholly
inoperative and no right to discharge it or enforce its payment can be acquired through or under
the forged signature except against a party who cannot invoke the forgery, it stands to reason,
upon the facts of record, that the respondent, as a collecting bank which indorsed the checks to the
drawee-banks for clearing, should be liable to the latter for reimbursement, for, as found by the
court a quo and by the appellate court, the indorsements on the checks had been forged prior to
their delivery to the petitioner. In legal contemplation, therefore, the payments made by the
drawee-banks to the respondent on account of the said checks were ineffective; and, such being
the case, the relationship of creditor and debtor between the petitioner and the respondent had not
been validly effected, the checks not having been properly and legitimately converted into cash. 4
In Great Eastern Life Ins. Co. v. Hongkong & Shanghai Bank, 5 the Court ruled that it is the
obligation of the collecting bank to reimburse the drawee-bank the value of the checks
subsequently found to contain the forged indorsement of the payee. The reason is that the bank
with which the check was deposited has no right to pay the sum stated therein to the forger "or
anyone else upon a forged signature." "It was its duty to know," said the Court, "that [the payees]
endorsement was genuine before cashing the check." The petitioner must in turn shoulder the loss
of the amounts which the respondent; as its collecting agent, had to reimburse to the drawee-
banks.
We do not consider material for the purposes of the case at bar that more than three months had
elapsed since the proceeds of the checks in question were collected by the Respondent. The record
shows that the respondent had acted promptly after being informed that the indorsements on the
18
checks were forged. Moreover, having received the checks merely for collection and deposit, the
respondent cannot he expected to know or ascertain the genuineness of all prior indorsements on
the said checks. Indeed, having itself indorsed them to the respondent in accordance with the rules
and practices of commercial banks, of which the Court takes due cognizance, the petitioner is
deemed to have given the warranty prescribed in Section 66 of the Negotiable Instruments Law
that every single one of those checks "is genuine and in all respects what it purports to be.."
The petitioner was, moreover, grossly recreant in accepting the checks in question from Ramirez. It
could not have escaped the attention of the petitioner that the payee of all the checks was a
corporation the Inter-Island Gas Service, Inc. Yet, the petitioner cashed these checks to a mere
individual who was admittedly a habitue at its jai-alai games without making any inquiry as to his
authority to exchange checks belonging to the payee-corporation. In Insular Drug Co. v. National 6
the Court made the pronouncement that.
". . . The right of an agent to indorse commercial paper is a very responsible power and will not be
lightly inferred. A salesman with authority to collect money belonging to his principal does not have
the implied authority to indorse checks received in payment. Any person taking checks made
payable to a corporation, which can act only by agents, does so at his peril, and must abide by the
consequences if the agent who indorses the same is without authority." (underscoring supplied)
It must be noted further that three of the checks in question are crossed checks, namely, exhs. 21,
25 and 27, which may only be deposited, but not encashed; yet, the petitioner negligently accepted
them for cash. That two of the crossed checks, namely, exhs. 21 and 25, are bearer instruments
would not, in our view, exculpate the petitioner from liability with respect to them. The fact that
they are bearer checks and at the same time crossed checks should have aroused the petitioners
suspicion as to the title of Ramirez over them and his authority to cash them (apparently to
purchase jai-alai tickets from the petitioner), it appearing on their face that a corporate entity
the Inter Island Gas Service, Inc. was the payee thereof and Ramirez delivered the said checks
to the petitioner ostensibly on the strength of the payees cashiers indorsements.
At all events, under Section 67 of the Negotiable Instruments Law, "Where a person places his
indorsement on an instrument negotiable by delivery he incurs all the liability of an indorser," and
under Section 66 of the same statute a general indorser warrants that the instrument "is genuine
and in all respects what it purports to be." Considering that the petitioner indorsed the said checks
when it deposited them with the respondent, the petitioner as an indorser guaranteed the
genuineness of all prior indorsements thereon. The respondent which relied upon the petitioners
warranty should not be held liable for the resulting loss. This conclusion applied similarly to exh. 22
which is an uncrossed bearer instrument, for under Section 65 of the Negotiable Instrument Law.
"Every person negotiating an instrument by delivery . . . warrants (a) That the instrument is
genuine and in all respects what it purports to be." Under that same section this warranty "extends
in favor of no holder other than the immediate transferee," which, in the case at bar, would be
the Respondent.
The provision in the deposit slip issued by the respondent which stipulates that it "reserves to itself
the right to charge back the item to the account of its depositor," at any time before "current funds
or solvent credits shall have been actually received by the Bank," would not materially affect the
conclusion we have reached. That stipulation prescribes that there must be an actual receipt by the
bank of current funds or solvent credits; but as we have earlier indicated the transfer by the
drawee-banks of funds to the respondent on account of the checks in question was ineffectual
because made under the mistaken and valid assumption that the indorsements of the payee
thereon were genuine. Under article 2154 of the New Civil Code "If something is received when
there is no right to demand it and it was unduly delivered through mistake, the obligation to return
it arises." There was, therefore, in contemplation of law, no valid payment of money made by the
drawee-banks to the respondent on account of the questioned checks.
ACCORDINGLY, the judgment of the Court of Appeals is affirmed, at petitioners cost.
-----

G.R. No. L-40796 July 31, 1975
REPUBLIC BANK, plaintiff-appellee, vs. MAURICIA T. EBRADA, defendant-appellant.
MARTIN, J.:
Appeal on a question of law of the decision of the Court of First Instance of Manila, Branch XXIII in
Civil Case No. 69288, entitled "Republic Bank vs. Mauricia T. Ebrada."
On or about February 27, 1963 defendant Mauricia T. Ebrada, encashed Back Pay Check No.
508060 dated January 15, 1963 for P1,246.08 at the main office of the plaintiff Republic Bank at
Escolta, Manila. The check was issued by the Bureau of Treasury. 1 Plaintiff Bank was later advised
by the said bureau that the alleged indorsement on the reverse side of the aforesaid check by the
payee, "Martin Lorenzo" was a forgery 2 since the latter had allegedly died as of July 14,
1952. 3 Plaintiff Bank was then requested by the Bureau of Treasury to refund the amount of
P1,246.08. 4 To recover what it had refunded to the Bureau of Treasury, plaintiff Bank made verbal
and formal demands upon defendant Ebrada to account for the sum of P1,246.08, but said
defendant refused to do so. So plaintiff Bank sued defendant Ebrada before the City Court of
Manila.
On July 11, 1966, defendant Ebrada filed her answer denying the material allegations of the
complaint and as affirmative defenses alleged that she was a holder in due course of the check in
question, or at the very least, has acquired her rights from a holder in due course and therefore
entitled to the proceeds thereof. She also alleged that the plaintiff Bank has no cause of action
against her; that it is in estoppel, or so negligent as not to be entitled to recover anything from
her. 5
About the same day, July 11, 1966 defendant Ebrada filed a Third-Party complaint against Adelaida
Dominguez who, in turn, filed on September 14, 1966 a Fourth-Party complaint against Justina
Tinio.
On March 21, 1967, the City Court of Manila rendered judgment for the plaintiff Bank against
defendant Ebrada; for Third-Party plaintiff against Third-Party defendant, Adelaida Dominguez, and
for Fourth-Party plaintiff against Fourth-Party defendant, Justina Tinio.
From the judgment of the City Court, defendant Ebrada took an appeal to the Court of First
Instance of Manila where the parties submitted a partial stipulation of facts as follows:
COME NOW the undersigned counsel for the plaintiff, defendant, Third-Party defendant and
Fourth-Party plaintiff and unto this Honorable Court most respectfully submit the following:
PARTIAL STIPULATION OF FACTS
1. That they admit their respective capacities to sue and be sued;
2. That on January 15, 1963 the Treasury of the Philippines issued its Check No. BP-508060,
payable to the order of one MARTIN LORENZO, in the sum of P1,246.08, and drawn on the
Republic Bank, plaintiff herein, which check will be marked as Exhibit "A" for the plaintiff;
3. That the back side of aforementioned check bears the following signatures, in this order:
1) MARTIN LORENZO;
2) RAMON R. LORENZO;
3) DELIA DOMINGUEZ; and
4) MAURICIA T. EBRADA;
4. That the aforementioned check was delivered to the defendant MAURICIA T. EBRADA by the
Third-Party defendant and Fourth-Party plaintiff ADELAIDA DOMINGUEZ, for the purpose of
encashment;
5. That the signature of defendant MAURICIA T. EBRADA was affixed on said check on
February 27, 1963 when she encashed it with the plaintiff Bank;
6. That immediately after defendant MAURICIA T. EBRADA received the cash proceeds of said
check in the sum of P1,246.08 from the plaintiff Bank, she immediately turned over the said
amount to the third-party defendant and fourth-party plaintiff ADELAIDA DOMINGUEZ, who in
turn handed the said amount to the fourth-party defendant JUSTINA TINIO on the same date,
as evidenced by the receipt signed by her which will be marked as Exhibit "1-Dominguez"; and
19
7. That the parties hereto reserve the right to present evidence on any other fact not covered
by the foregoing stipulations,
Manila, Philippines, June 6, 1969.
Based on the foregoing stipulation of facts and the documentary evidence presented, the trial court
rendered a decision, the dispositive portion of which reads as follows:
WHEREFORE, the Court renders judgment ordering the defendant Mauricia T. Ebrada to pay
the plaintiff the amount of ONE THOUSAND TWO FORTY-SIX 08/100 (P1,246.08), with interest
at the legal rate from the filing of the complaint on June 16, 1966, until fully paid, plus the
costs in both instances against Mauricia T. Ebrada.
The right of Mauricia T. Ebrada to file whatever claim she may have against Adelaida
Dominguez in connection with this case is hereby reserved. The right of the estate of
Dominguez to file the fourth-party complaint against Justina Tinio is also reserved.
SO ORDERED.
In her appeal, defendant-appellant presses that the lower court erred:
IN ORDERING THE APPELLANT TO PAY THE APPELLEE THE FACE VALUE OF THE SUBJECT
CHECK AFTER FINDING THAT THE DRAWER ISSUED THE SUBJECT CHECK TO A PERSON
ALREADY DECEASED FOR 11- YEARS AND THAT THE APPELLANT DID NOT BENEFIT FROM
ENCASHING SAID CHECK.
From the stipulation of facts it is admitted that the check in question was delivered to defendant-
appellant by Adelaida Dominguez for the purpose of encashment and that her signature was affixed
on said check when she cashed it with the plaintiff Bank. Likewise it is admitted that defendant-
appellant was the last indorser of the said check. As such indorser, she was supposed to have
warranted that she has good title to said check; for under Section 65 of the Negotiable Instruments
Law: 6
Every person negotiating an instrument by delivery or by qualified indorsement, warrants:
(a) That the instrument is genuine and in all respects what it purports to be.
(b) That she has good title to it.
xxx xxx xxx
and under Section 65 of the same Act:
Every indorser who indorses without qualification warrants to all subsequent holders in due
course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding
sections;
(b) That the instrument is at the time of his indorsement valid and subsisting.
It turned out, however, that the signature of the original payee of the check, Martin Lorenzo was a
forgery because he was already dead 7 almost 11 years before the check in question was issued by
the Bureau of Treasury. Under action 23 of the Negotiable Instruments Law (Act 2031):
When a signature is forged or made without the authority of the person whose signature it
purports to be, it is wholly inoperative, and no right to retain the instruments, or to give a
discharge thereof against any party thereto, can be acquired through or under such signature
unless the party against whom it is sought to enforce such right is precluded from setting up
the forgery or want of authority.
It is clear from the provision that where the signature on a negotiable instrument if forged, the
negotiation of the check is without force or effect. But does this mean that the existence of one
forged signature therein will render void all the other negotiations of the check with respect to the
other parties whose signature are genuine?
In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where a check has several
indorsements on it, it was held that it is only the negotiation based on the forged or unauthorized
signature which is inoperative. Applying this principle to the case before Us, it can be safely
concluded that it is only the negotiation predicated on the forged indorsement that should be
declared inoperative. This means that the negotiation of the check in question from Martin Lorenzo,
the original payee, to Ramon R. Lorenzo, the second indorser, should be declared of no affect, but
the negotiation of the aforesaid check from Ramon R. Lorenzo to Adelaida Dominguez, the third
indorser, and from Adelaida Dominguez to the defendant-appellant who did not know of the she acted as an accommodation party in the check for which she is also liable under Section 29 of
forgery, should be considered valid and enforceable, barring any claim of forgery. the Negotiable Instruments Law (Act 2031), thus: .An accommodation party is one who has signed
the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for
What happens then, if, after the drawee bank has paid the amount of the check to the holder
the purpose of lending his name to some other person. Such a person is liable on the instrument to
thereof, it was discovered that the signature of the payee was forged? Can the drawee bank
a holder for value, notwithstanding such holder at the time of taking the instrument knew him to be
recover from the one who encashed the check?
only an accommodation party.
In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it was held that the drawee of a
IN VIEW OF THE FOREGOING, the judgment appealed from is hereby affirmed in toto with costs
check can recover from the holder the money paid to him on a forged instrument. It is not
against defendant-appellant.
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 SO ORDERED.
payee and previous indorsers are genuine, warranty not extending only to holders in due course.
-----
One who purchases a check or draft is bound to satisfy himself that the paper is genuine and that
by indorsing it or presenting it for payment or putting it into circulation before presentation he G.R. No. L-62943 July 14, 1986
impliedly asserts that he has performed his duty and the drawee who has paid the forged check,
METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner, vs. COURT OF
without actual negligence on his part, may recover the money paid from such negligent purchasers.
APPEALS (Now INTERMEDIATE APPELLATE COURT) and THE PHILIPPINE NATIONAL
In such cases the recovery is permitted because although the drawee was in a way negligent in
BANK,respondents.
failing to detect the forgery, yet if the encasher of the check had performed his duty, the forgery
would in all probability, have been detected and the fraud defeated. The reason for allowing the GUTIERREZ, JR., J.:
drawee bank to recover from the encasher is: This petition for review asks us to set aside the October 29, 1982 decision of the respondent Court
Every one with even the least experience in business knows that no business man would of Appeals, now Intermediate Appellate Court which reversed the decision of the Court of First
accept a check in exchange for money or goods unless he is satisfied that the check is Instance of Manila, Branch XL, and dismissed the plaintiff's complaint, the third party complaint, as
genuine. He accepts it only because he has proof that it is genuine, or because he has well as the defendant's counterclaim.
sufficient confidence in the honesty and financial responsibility of the person who vouches for The background facts which led to the filing of the instant petition are summarized in the decision
it. If he is deceived he has suffered a loss of his cash or goods through his own mistake. His of the respondent Court of Appeals:
own credulity or recklessness, or misplaced confidence was the sole cause of the loss. Why
should he be permitted to shift the loss due to his own fault in assuming the risk, upon the Metropolitan Waterworks and Sewerage System (hereinafter referred to as MWSS) is a
drawee, simply because of the accidental circumstance that the drawee afterwards failed to government owned and controlled corporation created under Republic Act No. 6234 as the
detect the forgery when the check was presented? 8 successor-in- interest of the defunct NWSA. The Philippine National Bank (PNB for short), on
the other hand, is the depository bank of MWSS and its predecessor-in-interest NWSA. Among
Similarly, in the case before Us, the defendant-appellant, upon receiving the check in question from the several accounts of NWSA with PNB is NWSA Account No. 6, otherwise known as Account
Adelaida Dominguez, was duty-bound to ascertain whether the check in question was genuine No. 381-777 and which is presently allocated No. 010-500281. The authorized signature for
before presenting it to plaintiff Bank for payment. Her failure to do so makes her liable for the loss said Account No. 6 were those of MWSS treasurer Jose Sanchez, its auditor Pedro Aguilar, and
and the plaintiff Bank may recover from her the money she received for the check. As reasoned out its acting General Manager Victor L. Recio. Their respective specimen signatures were
above, had she performed the duty of ascertaining the genuineness of the check, in all probability submitted by the MWSS to and on file with the PNB. By special arrangement with the PNB, the
the forgery would have been detected and the fraud defeated. MWSS used personalized checks in drawing from this account. These checks were printed for
In our jurisdiction We have a case of similar import. 9 The Great Eastern Life Insurance Company MWSS by its printer, F. Mesina Enterprises, located at 1775 Rizal Extension, Caloocan City.
drew its check for P2000.00 on the Hongkong and Shanghai Banking Corporation payable to the During the months of March, April and May 1969, twenty-three (23) checks were prepared,
order of Lazaro Melicor. A certain E. M. Maasin fraudulently obtained the check and forged the processed, issued and released by NWSA, all of which were paid and cleared by PNB and
signature of Melicor, as an indorser, and then personally indorsed and presented the check to the debited by PNB against NWSA Account No. 6, to wit:
Philippine National Bank where the amount of the check was placed to his (Maasin's) credit. On the
next day, the Philippine National Bank indorsed the cheek to the Hongkong and Shanghai Banking Check No. Date Payee Amount Date Paid
Corporation which paid it and charged the amount of the check to the insurance company. The By PNB
Court held that the Hongkong and Shanghai Banking Corporation was liable to the insurance 1. 59546 8-21-69 Deogracias P 3,187.79 4-2-69
company for the amount of the check and that the Philippine National Bank was in turn liable to the Estrella
Hongkong and Shanghai Banking Corporation. Said the Court: 2. 59548 3-31-69 Natividad 2,848.86 4-23 69
Rosario
Where a check is drawn payable to the order of one person and is presented to a bank by 3. 59547 3-31-69 Pangilinan 195.00 Unreleased
another and purports upon its face to have been duly indorsed by the payee of the check, it is Enterprises
the duty of the bank to know that the check was duly indorsed by the original payee, and 4. 59549 3-31-69 Natividad 3,239.88 4-23-69
where the bank pays the amount of the check to a third person, who has forged the signature Rosario
of the payee, the loss falls upon the bank who cashed the check, and its only remedy is 5. 59552 4-1-69 Villarama 987.59 5-6-69
against the person to whom it paid the money. & Sons
With the foregoing doctrine We are to concede that the plaintiff Bank should suffer the loss when it 6. 59554 4-1-69 Gascom 6,057.60 4-16 69
paid the amount of the check in question to defendant-appellant, but it has the remedy to recover Engineering
from the latter the amount it paid to her. Although the defendant-appellant to whom the plaintiff 7. 59558 4-2-69 The Evening 112.00 Unreleased
Bank paid the check was not proven to be the author of the supposed forgery, yet as last indorser News
of the check, she has warranted that she has good title to it 10 even if in fact she did not have it 8. 59544 3-27-69 Progressive 18,391.20 4-18 69
because the payee of the check was already dead 11 years before the check was issued. The fact Const.
that immediately after receiving title cash proceeds of the check in question in the amount of 9. 59564 4-2-69 Ind. Insp. 594.06 4-18 69
P1,246.08 from the plaintiff Bank, defendant-appellant immediately turned over said amount to Int. Inc.
Adelaida Dominguez (Third-Party defendant and the Fourth-Party plaintiff) who in turn handed the 10. 59568 4-7-69 Roberto 800.00 4-22-69
amount to Justina Tinio on the same date would not exempt her from liability because by doing so, Marsan
20
11. 59570 4-7-69 Paz Andres 200.00 4-22-69 PCIB to the defendant PNB, and paid, also in the months of March, April and May 1969. At the
12. 59574 4-8-69 Florentino 100,000.00 4-11-69 time of their presentation to PNB these checks bear the standard indorsement which reads 'all
Santos prior indorsement and/or lack of endorsement guaranteed.'
13. 59578 4-8-69 Mla. Daily 95.00 Unreleased
Subsequent investigation however, conducted by the NBI showed that Raul Dizon, Arturo
Bulletin
Sison and Antonio Mendoza were all fictitious persons. The respective balances in their current
14. 59580 4-8-69 Phil. Herald 100.00 5-9-69
account with the PBC and/or PCIB stood as follows: Raul Dizon P3,455.00 as of April 30, 1969;
15. 59582 4-8-69 Galauran 7,729.09 5-6-69
Antonio Mendoza P18,182.00 as of May 23, 1969; and Arturo Sison Pl,398.92 as of June 30,
& Pilar
1969.
16. 59581 4-8-69 Manila 110.00 5-12 69
Chronicle On June 11, 1969, NWSA addressed a letter to PNB requesting the immediate restoration to
17. 59588 4-8-69 Treago 21,583.00 4-11 69 its Account No. 6, of the total sum of P3,457,903.00 corresponding to the total amount of
Tunnel these twenty-three (23) checks claimed by NWSA to be forged and/or spurious checks. "In
18. 59587 4-8-69 Delfin 120,000.00 4-11-69 view of the refusal of PNB to credit back to Account No. 6 the said total sum of P3,457,903.00
Santiago MWSS filed the instant complaint on November 10, 1972 before the Court of First Instance of
19. 59589 4-10-69 Deogracias 1,257.49 4-16 69 Manila and docketed thereat as Civil Case No. 88950.
Estrella
In its answer, PNB contended among others, that the checks in question were regular on its
20. 59594 4-14-69 Philam Ac- 33.03 4-29 69
face in all respects, including the genuineness of the signatures of authorized NWSA signing
cident Inc.
officers and there was nothing on its face that could have aroused any suspicion as to its
21. 59577 4-8-69 Esla 9,429.78 4-29 69
genuineness and due execution and; that NWSA was guilty of negligence which was the
22. 59601 4-16-69 Justino 20,000.00 4-18-69
proximate cause of the loss.
Torres
23. 59595 4-14-69 Neris Phil. 4,274.00 5-20-69 PNB also filed a third party complaint against the negotiating banks PBC and PCIB on the
Inc. -------------------- ground that they failed to ascertain the Identity of the payees and their title to the checks
P 320,636.26 which were deposited in the respective new accounts of the payees with them.
During the same months of March, April and May 1969, twenty-three (23) checks bearing the xxx xxx xxx
same numbers as the aforementioned NWSA checks were likewise paid and cleared by PNB On February 6, 1976, the Court of First Instance of Manila rendered judgment in favor of the
and debited against NWSA Account No. 6, to wit: MWSS. The dispositive portion of the decision reads:
Check Date Payee Amount Date Paid WHEREFORE, on the COMPLAINT by a clear preponderance of evidence and in accordance with
No. Issued By PNB Section 23 of the Negotiable Instruments Law, the Court hereby renders judgment in favor of
1. 59546 3-6-69 Raul Dizon P 84,401.00 3-16-69 the plaintiff Metropolitan Waterworks and Sewerage System (MWSS) by ordering the
2. 59548 3-11-69 Raul Dizon 104,790.00 4-1-69 defendant Philippine National Bank (PNB) to restore the total sum of THREE MILLION FOUR
3. 59547 3-14-69 Arturo Sison 56,903.00 4-11-69 HUNDRED FIFTY SEVEN THOUSAND NINE HUNDRED THREE PESOS (P3,457,903.00) to
4. 59549 3-20-69 Arturo Sison 48,903.00 4-15-69 plaintiff's Account No. 6, otherwise known as Account No. 010-50030-3, with legal interest
5. 59552 3-24-69 Arturo Sison 63,845.00 4-16-69 thereon computed from the date of the filing of the complaint and until as restored in the said
6. 59544 3-26-69 Arturo Sison 98,450.00 4-17-69 Account No. 6.
7. 59558 3-28-69 Arturo Sison 114,840.00 4-21-69
8. 59544 3-16-69 Antonio 38,490.00 4-22-69 Mendoza On the THIRD PARTY COMPLAINT, the Court, for lack of evidence, hereby renders judgment in
9. 59564 3-31-69 Arturo Sison 180,900.00 4-23-69 favor of the third party defendants Philippine Bank of Commerce (PBC) and Philippine
10.59568 4-2-69 Arturo Sison 134,940.00 4- 5-69 Commercial and Industrial Bank (PCIB) by dismissing the Third Party Complaint.
11.59570 4-1-69 Arturo Sison 64,550.00 4-28-69 The counterclaims of the third party defendants are likewise dismissed for lack of evidence.
12.59574 4-2-69 Arturo Sison 148,610.00 4-29-69
13.59578 4-10-69 Antonio 93,950.00 4-29-69 No pronouncement as to costs.
Mendoza As earlier stated, the respondent court reversed the decision of the Court of First Instance of Manila
14.59580 4-8-69 Arturo Sison 160,000.00 5-2-69 and rendered judgment in favor of the respondent Philippine National Bank.
15.59582 4-10-69 Arturo Sison 155,400.00 5-5-69
16.59581 4-8-69 Antonio 176,580.00 5-6-69 A motion for reconsideration filed by the petitioner MWSS was denied by the respondent court in a
Mendoza resolution dated January 3, 1983.
17.59588 4-16-69 Arturo Sison 176,000.00 5-8-69 The petitioner now raises the following assignments of errors for the grant of this petition:
18.59587 4-16-69 Arturo Sison 300,000.00 5-12-69
19.59589 4-18-69 Arturo Sison 122,000.00 5-14-69 I. IN NOT HOLDING THAT AS THE SIGNATURES ON THE CHECKS WERE FORGED, THE
20.59594 4-18-69 Arturo Sison 280,000.00 5-15-69 DRAWEE BANK WAS LIABLE FOR THE LOSS UNDER SECTION 23 OF THE NEGOTIABLE
21.59577 4-14-69 Antonio 260,000.00 5-16-69 INSTRUMENTS LAW.
Mendoza II. IN FAILING TO CONSIDER THE PROXIMATE NEGLIGENCE OF PNB IN ACCEPTING THE
22.59601 4-18-69 Arturo Sison 400,000.00 5-19-69 SPURIOUS CHECKS DESPITE THE OBVIOUS IRREGULARITY OF TWO SETS OF CHECKS
23.59595 4-28-69 Arturo Sison 190,800.00 5-21-69 BEARING IdENTICAL NUMBER BEING ENCASHED WITHIN DAYS OF EACH OTHER.
---------------
III. IN NOT HOLDING THAT THE SIGNATURES OF THE DRAWEE MWSS BEING CLEARLY
P3,457,903.00
FORGED, AND THE CHECKS SPURIOUS, SAME ARE INOPERATIVE AS AGAINST THE ALLEGED
The foregoing checks were deposited by the payees Raul Dizon, Arturo Sison and Antonio DRAWEE.
Mendoza in their respective current accounts with the Philippine Commercial and Industrial
Bank (PCIB) and Philippine Bank of Commerce (PBC) in the months of March, April and May The appellate court applied Section 24 of the Negotiable Instruments Law which provides:
1969. Thru the Central Bank Clearing, these checks were presented for payment by PBC and
21
 Every negotiable instrument is deemed prima facie to have been issued for valuable
consideration and every person whose signature appears thereon to have become a party
thereto for value.
The petitioner submits that the above provision does not apply to the facts of the instant case
because the questioned checks were not those of the MWSS and neither were they drawn by its
authorized signatories. The petitioner states that granting that Section 24 of the Negotiable
Instruments Law is applicable, the same creates only a prima facie presumption which was
overcome by the following documents, to wit: (1) the NBI Report of November 2, 1970; (2) the NBI
Report of November 21, 1974; (3) the NBI Chemistry Report No. C-74891; (4) the Memorandum of
Mr. Juan Dino, 3rd Assistant Auditor of the respondent drawee bank addressed to the Chief Auditor
of the petitioner; (5) the admission of the respondent bank's counsel in open court that the
National Bureau of Investigation found the signature on the twenty-three (23) checks in question to
be forgeries; and (6) the admission of the respondent bank's witness, Mr. Faustino Mesina, Jr. that
the checks in question were not printed by his printing press. The petitioner contends that since the
signatures of the checks were forgeries, the respondent drawee bank must bear the loss under the
rulings of this Court.
A bank is bound to know the signatures of its customers; and if it pays a forged check it must
be considered as making the payment out of its obligation funds, and cannot ordinarily charge
the amount so paid to the account of the depositor whose name was forged.
xxx xxx xxx
The signatures to the checks being forged, under Section 23 of the Negotiable Instruments
Law they are not a charge against plaintiff nor are the checks of any value to the defendant.
It must therefore be held that the proximate cause of loss was due to the negligence of the
Bank of the Philippine Islands in honoring and cashing the two forged checks. (San Carlos
Milling Co. v. Bank of the P. I., 59 Phil. 59)
It is admitted that the Philippine National Bank cashed the check upon a forged signature, and
placed the money to the credit of Maasim, who was the forger. That the Philippine National
Bank then endorsed the chock and forwarded it to the Shanghai Bank by whom it was paid.
The Philippine National Bank had no license or authority to pay the money to Maasim or
anyone else upon a forged signature. It was its legal duty to know that Malicor's endorsement
was genuine before cashing the check. Its remedy is against Maasim to whom it paid the
money. (Great Eastern Life Ins. Co. v. Hongkong & Shanghai Bank, 43 Phil. 678).
We have carefully reviewed the documents cited by the petitioner. There is no express and
categorical finding in these documents that the twenty-three (23) questioned checks were indeed
signed by persons other than the authorized MWSS signatories. On the contrary, the findings of the
National Bureau of Investigation in its Report dated November 2, 1970 show that the MWSS fraud
was an "inside job" and that the petitioner's delay in the reconciliation of bank statements and the
laxity and loose records control in the printing of its personalized checks facilitated the fraud.
Likewise, the questioned Documents Report No. 159-1074 dated November 21, 1974 of the
National Bureau of Investigation does not declare or prove that the signatures appearing on the
questioned checks are forgeries. The report merely mentions the alleged differences in the type
face, checkwriting, and printing characteristics appearing in the standard or submitted models and
the questioned typewritings. The NBI Chemistry Report No. C-74-891 merely describes the inks and
pens used in writing the alleged forged signatures.
It is clear that these three (3) NBI Reports relied upon by the petitioner are inadequate to sustain
its allegations of forgery. These reports did not touch on the inherent qualities of the signatures
which are indispensable in the determination of the existence of forgery. There must be conclusive
findings that there is a variance in the inherent characteristics of the signatures and that they were
written by two or more different persons.
Forgery cannot be presumed (Siasat, et al. v. Intermediate Appellate Court, et al, 139 SCRA 238).
It must be established by clear, positive, and convincing evidence. This was not done in the present
case.
The cases of San Carlos Milling Co. Ltd. v. Bank of the Philippine Islands, et al. (59 Phil. 59)
and Great Eastern Life Ins., Co. v. Hongkong and Shanghai Bank (43 Phil. 678) relied upon by the
petitioner are inapplicable in this case because the forgeries in those cases were either clearly
established or admitted while in the instant case, the allegations of forgery were not clearly
established during trial.
22
Considering the absence of sufficient security in the printing of the checks coupled with the very
close similarities between the genuine signatures and the alleged forgeries, the twenty-three (23)
checks in question could have been presented to the petitioner's signatories without their knowing
that they were bogus checks. Indeed, the cashier of the petitioner whose signatures were allegedly
forged was unable to ten the difference between the allegedly forged signature and his own
genuine signature. On the other hand, the MWSS officials admitted that these checks could easily
be passed on as genuine.
The memorandum of Mr. A. T. Tolentino, no, Assistant Chief Accountant of the drawee Philippine
National Bank to Mr. E. Villatuya, Executive Vice-President of the petitioner dated June 9, 1969
cites an instance where even the concerned NWSA officials could not ten the differences between
the genuine checks and the alleged forged checks.
At about 12:00 o'clock on June 6, 1969, VP Maramag requested me to see him in his office at
the Cashier's Dept. where Messrs. Jose M. Sanchez, treasurer of NAWASA and Romeo Oliva of
the same office were present. Upon my arrival I observed the NAWASA officials questioning
the issue of the NAWASA checks appearing in their own list, xerox copy attached.
For verification purposes, therefore, the checks were taken from our file. To everybody there
present namely VIP Maramag, the two abovementioned NAWASA officials, AVP, Buhain, Asst.
Cashier Castelo, Asst. Cashier Tejada and Messrs. A. Lopez and L. Lechuga, both C/A
bookkeepers, no one was able to point out any difference on the signatures of the NAWASA
officials appearing on the checks compared to their official signatures on file. In fact 3 checks,
one of those under question, were presented to the NAWASA treasurer for verification but he
could not point out which was his genuine signature. After intent comparison, he pointed on
the questioned check as bearing his correct signature.
xxx xxx xxx
Moreover, the petitioner is barred from setting up the defense of forgery under Section 23 of the
Negotiable Instruments Law which provides that:
SEC. 23. FORGED SIGNATURE; EFFECT OF.- When the signature is forged or made without
authority of the person whose signature it purports to be, it is wholly inoperative, and no right
to retain the instrument, or to give a discharge therefor, or to enforce payment thereof
against any party thereto can be acquired through or under such signature unless the party
against whom it is sought to enforce such right is precluded from setting up the forgery or
want of authority.
because it was guilty of negligence not only before the questioned checks were negotiated but even
after the same had already been negotiated. (See Republic v. Equitable Banking Corporation, 10
SCRA 8) The records show that at the time the twenty-three (23) checks were prepared,
negotiated, and encashed, the petitioner was using its own personalized checks, instead of the
official PNB Commercial blank checks. In the exercise of this special privilege, however, the
petitioner failed to provide the needed security measures. That there was gross negligence in the
printing of its personalized checks is shown by the following uncontroverted facts, to wit:
(1) The petitioner failed to give its printer, Mesina Enterprises, specific instructions relative to the
safekeeping and disposition of excess forms, check vouchers, and safety papers;
(2) The petitioner failed to retrieve from its printer all spoiled check forms;
(3) The petitioner failed to provide any control regarding the paper used in the printing of said
checks;
(4) The petitioner failed to furnish the respondent drawee bank with samples of typewriting, cheek
writing, and print used by its printer in the printing of its checks and of the inks and pens used in
signing the same; and
(5) The petitioner failed to send a representative to the printing office during the printing of said
checks.
This gross negligence of the petitioner is very evident from the sworn statement dated June 19,
1969 of Faustino Mesina, Jr., the owner of the printing press which printed the petitioner's
personalized checks:
xxx xxx xxx
7. Q: Do you have any business transaction with the National Waterworks and Sewerage
Authority (NAWASA)?
 A: Yes, sir. I have a contract with the NAWASA in printing NAWASA Forms such as NAWASA
Check
xxx xxx xxx
15. Q: Were you given any ingtruction by the NAWASA in connection with the printing of these
check vouchers?
A: There is none, sir. No instruction whatsoever was given to me.
16. Q: Were you not advised as to what kind of paper would be used in the check vouchers?
A: Only as per sample, sir.
xxx xxx xxx
20. Q: Where did you buy this Hammermill Safety check paper?
A: From Tan Chiong, a paper dealer with store located at Juan Luna, Binondo, Manila. (In front
of the Metropolitan Bank).
xxx xxx xxx
24. Q: Were all these check vouchers printed by you submitted to NAWASA?
A: Not all, sir. Because we have to make reservations or allowances for spoilage.
25. Q: Out of these vouchers printed by you, how many were spoiled and how many were the
excess printed check vouchers?
A: Approximately four hundred (400) sheets, sir. I cannot determine the proportion of the
excess and spoiled because the final act of perforating these check vouchers has not yet been
done and spoilage can only be determined after this final act of printing.
26. Q: What did you do with these excess check vouchers?
A: I keep it under lock and key in my firing cabinet.
xxx xxx xxx
28. Q: Were you not instructed by the NAWASA authorities to bum these excess check
vouchers?
A: No, sir. I was not instructed.
29. Q: What do you intend to do with these excess printed check vouchers?
A: I intend to use them for future orders from the
xxx xxx xxx
32. Q: In the process of printing the check vouchers ordered by the NAWASA, how many
sheets were actually spoiled?
A: I cannot approximate, sir. But there are spoilage in the process of printing and perforating.
33. Q: What did you do with these spoilages?
A: Spoiled printed materials are usually thrown out, in the garbage can.
34. Q: Was there any representative of the NAWASA to supervise the printing or watch the
printing of these check vouchers?
A: None, sir.
xxx xxx xxx
39. Q: During the period of printing after the days work, what measures do you undertake to
safeguard the mold and other paraphernalia used in the printing of these particular orders of
NAWASA?
A: Inasmuch as I have an employee who sleeps in the printing shop and at the same time do
the guarding, we just leave the mold attached to the machine and the other finished or
unfinished work check vouchers are left in the rack so that the work could be continued the
following day.
The National Bureau of Investigation Report dated November 2, 1970 is even more explicit. Thus
xxx xxx xxx
23
60. We observed also that there is some laxity and loose control in the printing of NAWASA
cheeks. We gathered from MESINA ENTERPRISES, the printing firm that undertook the
printing of the check vouchers of NAWASA that NAWASA had no representative at the printing
press during the process of the printing and no particular security measure instructions
adopted to safeguard the interest of the government in connection with printing of this
accountable form.
Another factor which facilitated the fraudulent encashment of the twenty-three (23) checks in
question was the failure of the petitioner to reconcile the bank statements with its own records.
It is accepted banking procedure for the depository bank to furnish its depositors bank statements
and debt and credit memos through the mail. The records show that the petitioner requested the
respondent drawee bank to discontinue the practice of mailing the bank statements, but instead to
deliver the same to a certain Mr. Emiliano Zaporteza. For reasons known only to Mr. Zaporteza
however, he was unreasonably delayed in taking prompt deliveries of the said bank statements and
credit and debit memos. As a consequence, Mr. Zaporteza failed to reconcile the bank statements
with the petitioner's records. If Mr. Zaporteza had not been remiss in his duty of taking the bank
statements and reconciling them with the petitioner's records, the fraudulent encashments of the
first checks should have been discovered, and further frauds prevented. This negligence was,
therefore, the proximate cause of the failure to discover the fraud. Thus,
When a person opens a checking account with a bank, he is given blank checks which he may
fill out and use whenever he wishes. Each time he issues a check, he should also fill out the
check stub to which the check is usually attached. This stub, if properly kept, will contain the
number of the check, the date of its issue, the name of the payee and the amount thereof.
The drawer would therefore have a complete record of the checks he issues. It is the custom
of banks to send to its depositors a monthly statement of the status of their accounts,
together with all the cancelled checks which have been cashed by their respective holders. If
the depositor has filled out his check stubs properly, a comparison between them and the
cancelled checks will reveal any forged check not taken from his checkbook. It is the duty of a
depositor to carefully examine the bank's statement, his cancelled checks, his check stubs and
other pertinent records within a reasonable time, and to report any errors without
unreasonable delay. If his negligence should cause the bank to honor a forged check or
prevent it from recovering the amount it may have already paid on such check, he cannot
later complain should the bank refuse to recredit his account with the amount of such check.
(First Nat. Bank of Richmond v. Richmond Electric Co., 106 Va. 347, 56 SE 152, 7 LRA, NS
744 [1907]. See also Leather Manufacturers' Bank v. Morgan, 117 US 96, 6 S. Ct. 657 [1886];
Deer Island Fish and Oyster Co. v. First Nat. Bank of Biloxi, 166 Miss. 162, 146 So. 116
[1933]). Campos and Campos, Notes and Selected Cases on Negotiable Instruments Law,
1971, pp. 267-268).
This failure of the petitioner to reconcile the bank statements with its cancelled checks was noted
by the National Bureau of Investigation in its report dated November 2, 1970:
58. One factor which facilitate this fraud was the delay in the reconciliation of bank (PNB)
statements with the NAWASA bank accounts. x x x. Had the NAWASA representative come to
the PNB early for the statements and had the bank been advised promptly of the reported
bogus check, the negotiation of practically all of the remaining checks on May, 1969, totalling
P2,224,736.00 could have been prevented.
The records likewise show that the petitioner failed to provide appropriate security measures over
its own records thereby laying confidential records open to unauthorized persons. The petitioner's
own Fact Finding Committee, in its report submitted to their General manager underscored this
laxity of records control. It observed that the "office of Mr. Ongtengco (Cashier No. VI of the
Treasury Department at the NAWASA) is quite open to any person known to him or his staff
members and that the check writer is merely on top of his table."
When confronted with this report at the Anti-Fraud Action Section of the National Bureau of
Investigation. Mr. Ongtengco could only state that:
A. Generally my order is not to allow anybody to enter my office. Only authorized persons are
allowed to enter my office. There are some cases, however, where some persons enter my
office because they are following up their checks. Maybe, these persons may have been
authorized by Mr. Pantig. Most of the people entering my office are changing checks as
allowed by the Resolution of the Board of Directors of the NAWASA and the Treasurer. The
 check writer was never placed on my table. There is a place for the check write which is also
under lock and key.
Q. Is Mr. Pantig authorized to allow unauthorized persons to enter your office?
A. No, sir.
Q. Why are you tolerating Mr. Pantig admitting unauthorized persons in your office?
A. I do not want to embarrass Mr. Pantig. Most of the people following up checks are
employees of the NAWASA.
Q. Was the authority given by the Board of Directors and the approval by the Treasurer for
employees, and other persons to encash their checks carry with it their authority to enter your
office?
A. No, sir.
xxx xxx xxx
Q. From the answers that you have given to us we observed that actually there is laxity and
poor control on your part with regards to the preparations of check payments inasmuch as you
allow unauthorized persons to follow up their vouchers inside your office which may leakout
confidential informations or your books of account. After being apprised of all the
shortcomings in your office, as head of the Cashiers' Office of the Treasury Department what
remedial measures do you intend to undertake?
A. Time and again the Treasurer has been calling our attention not to allow interested persons
to hand carry their voucher checks and we are trying our best and if I can do it to follow the
instructions to the letter, I will do it but unfortunately the persons who are allowed to enter
my office are my co-employees and persons who have connections with our higher ups and I
can not possibly antagonize them. Rest assured that even though that everybody will get hurt,
I win do my best not to allow unauthorized persons to enter my office.
xxx xxx xxx
Q. Is it not possible inasmuch as your office is in charge of the posting of check payments in
your books that leakage of payments to the banks came from your office?
A. I am not aware of it but it only takes us a couple of minutes to process the checks. And
there are cases wherein every information about the checks may be obtained from the
Accounting Department, Auditing Department, or the Office of the General Manager.
Relying on the foregoing statement of Mr. Ongtengco, the National Bureau of Investigation
concluded in its Report dated November 2, 1970 that the fraudulent encashment of the twenty-
three (23)cheeks in question was an "inside job". Thus-
We have all the reasons to believe that this fraudulent act was an inside job or one pulled with
inside connivance at NAWASA. As pointed earlier in this report, the serial numbers of these
checks in question conform with the numbers in current use of NAWASA, aside from the fact
that these fraudulent checks were found to be of the same kind and design as that of
NAWASA's own checks. While knowledge as to such facts may be obtained through the
possession of a NAWASA check of current issue, an outsider without information from the
inside can not possibly pinpoint which of NAWASA's various accounts has sufficient balance to
cover all these fraudulent checks. None of these checks, it should be noted, was dishonored
for insufficiency of funds. . .
Even if the twenty-three (23) checks in question are considered forgeries, considering the
petitioner's gross negligence, it is barred from setting up the defense of forgery under Section 23 of
the Negotiable Instruments Law.
Nonetheless, the petitioner claims that it was the negligence of the respondent Philippine National
Bank that was the proximate cause of the loss. The petitioner relies on our ruling in Philippine
National Bank v. Court of Appeals(25 SCRA 693) that.
Thus, by not returning the cheek to the PCIB, by thereby indicating that the PNB had found
nothing wrong with the check and would honor the same, and by actually paying its amount to
the PCIB, the PNB induced the latter, not only to believe that the check was genuine and good
in every respect, but, also, to pay its amount to Augusto Lim. In other words, the PNB was the
primary or proximate cause of the loss, and, hence, may not recover from the PCIB.
24
The argument has no merit. The records show that the respondent drawee bank, had taken the
necessary measures in the detection of forged checks and the prevention of their fraudulent
encashment. In fact, long before the encashment of the twenty-three (23) checks in question, the
respondent Bank had issued constant reminders to all Current Account Bookkeepers informing them
of the activities of forgery syndicates. The Memorandum of the Assistant Vice-President and Chief
Accountant of the Philippine National Bank dated February 17, 1966 reads in part:
SUBJECT: ACTIVITIES OF FORGERY SYNDICATE
From reliable information we have gathered that personalized checks of current account
depositors are now the target of the forgery syndicate. To protect the interest of the bank, you
are hereby enjoined to be more careful in examining said checks especially those coming from
the clearing, mails and window transactions. As a reminder please be guided with the
following:
1. Signatures of drawers should be properly scrutinized and compared with those we have on
file.
2. The serial numbers of the checks should be compared with the serial numbers registered
with the Cashier's Dept.
3. The texture of the paper used and the printing of the checks should be compared with the
sample we have on file with the Cashier's Dept.
4. Checks bearing several indorsements should be given a special attention.
5. Alteration in amount both in figures and words should be carefully examined even if signed
by the drawer.
6. Checks issued in substantial amounts particularly by depositors who do not usually issue
checks in big amounts should be brought to the attention of the drawer by telephone or any
fastest means of communication for purposes of confirmation.
and your attention is also invited to keep abreast of previous circulars and memo instructions
issued to bookkeepers.
We cannot fault the respondent drawee Bank for not having detected the fraudulent encashment of
the checks because the printing of the petitioner's personalized checks was not done under the
supervision and control of the Bank. There is no evidence on record indicating that because of this
private printing the petitioner furnished the respondent Bank with samples of checks, pens, and
inks or took other precautionary measures with the PNB to safeguard its interests.
Under the circumstances, therefore, the petitioner was in a better position to detect and prevent
the fraudulent encashment of its checks.
WHEREFORE, the petition for review on certiorari is hereby DISMISSED for lack of merit. The
decision of the respondent Court of Appeals dated October 29, 1982 is AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
-----
G.R. No. 74917 January 20, 1988
BANCO DE ORO SAVINGS AND MORTGAGE BANK, petitioner, vs. EQUITABLE BANKING
CORPORATION, PHILIPPINE CLEARING HOUSE CORPORATION, AND REGIONAL TRIAL
COURT OF QUEZON CITY, BRANCH XCII (92), respondents.
GANCAYCO, J.:
This is a petition for review on certiorari of a decision of the Regional Trial Court of Quezon City
promulgated on March 24, 1986 in Civil Case No. Q-46517 entitled Banco de Oro Savings and
Mortgage Bank versus Equitable Banking Corporation and the Philippine Clearing House Corporation
after a review of the Decision of the Board of Directors of the Philippine Clearing House Corporation
(PCHC) in the case of Equitable Banking Corporation (EBC) vs. Banco de Oro Savings and Mortgage
(BCO), ARBICOM Case No. 84033.
The undisputed facts are as follows:
It appears that some time in March, April, May and August 1983, plaintiff through its Visa Card
Department, drew six crossed Manager's check (Exhibits "A" to "F", and herein referred to as
Checks) having an aggregate amount of Forty Five Thousand Nine Hundred and Eighty Two &
 23/100 (P45,982.23) Pesos and payable to certain member establishments of Visa Card.
Subsequently, the Checks were deposited with the defendant to the credit of its depositor, a
certain Aida Trencio.
Following normal procedures, and after stamping at the back of the Checks the usual
endorsements. All prior and/or lack of endorsement guaranteed the defendant sent the checks
for clearing through the Philippine Clearing House Corporation (PCHC). Accordingly, plaintiff
paid the Checks; its clearing account was debited for the value of the Checks and defendant's
clearing account was credited for the same amount,
Thereafter, plaintiff discovered that the endorsements appearing at the back of the Checks
and purporting to be that of the payees were forged and/or unauthorized or otherwise belong
to persons other than the payees.
Pursuant to the PCHC Clearing Rules and Regulations, plaintiff presented the Checks directly to
the defendant for the purpose of claiming reimbursement from the latter. However, defendant
refused to accept such direct presentation and to reimburse the plaintiff for the value of the
Checks; hence, this case.
In its Complaint, plaintiff prays for judgment to require the defendant to pay the plaintiff the
sum of P45,982.23 with interest at the rate of 12% per annum from the date of the complaint
plus attorney's fees in the amount of P10,000.00 as well as the cost of the suit.
In accordance with Section 38 of the Clearing House Rules and Regulations, the dispute was
presented for Arbitration; and Atty. Ceasar Querubin was designated as the Arbitrator.
After an exhaustive investigation and hearing the Arbiter rendered a decision in favor of the
plaintiff and against the defendant ordering the PCHC to debit the clearing account of the
defendant, and to credit the clearing account of the plaintiff of the amount of P45,982.23 with
interest at the rate of 12% per annum from date of the complaint and Attorney's fee in the
amount of P5,000.00. No pronouncement as to cost was made. 1
In a motion for reconsideration filed by the petitioner, the Board of Directors of the PCHC affirmed
the decision of the said Arbiter in this wise:
In view of all the foregoing, the decision of the Arbiter is confirmed; and the Philippine
Clearing House Corporation is hereby ordered to debit the clearing account of the defendant
and credit the clearing account of plaintiff the amount of Forty Five Thousand Nine Hundred
Eighty Two & 23/100 (P45,982.23) Pesos with interest at the rate of 12% per annum from
date of the complaint, and the Attorney's fee in the amount of Five Thousand (P5,000.00)
Pesos.
Thus, a petition for review was filed with the Regional Trial Court of Quezon City, Branch XCII,
wherein in due course a decision was rendered affirming in toto the decision of the PCHC.
Hence this petition.
The petition is focused on the following issues:
1. Did the PCHC have any jurisdiction to give due course to and adjudicate Arbicom Case No.
84033?
2. Were the subject checks non-negotiable and if not, does it fall under the ambit of the power of
the PCHC?
3. Is the Negotiable Instrument Law, Act No. 2031 applicable in deciding controversies of this
nature by the PCHC?
4. What law should govern in resolving controversies of this nature?
5. Was the petitioner bank negligent and thus responsible for any undue payment?
Petitioner maintains that the PCHC is not clothed with jurisdiction because the Clearing House Rules
and Regulations of PCHC cover and apply only to checks that are genuinely negotiable. Emphasis is
laid on the primary purpose of the PCHC in the Articles of Incorporation, which states:
To provide, maintain and render an effective, convenient, efficient, economical and relevant
exchange and facilitate service limited to check processing and sorting by way of assisting
member banks, entities in clearing checks and other clearing items as defined in existing and
in future Central Bank of the Philippines circulars, memoranda, circular letters, rules and
regulations and policies in pursuance to the provisions of Section 107 of R.A. 265. ...
25
and Section 107 of R.A. 265 which provides:
xxx xxx xxx
The deposit reserves maintained by the banks in the Central Bank, in accordance with the
provisions of Section 1000 shall serve as a basis for the clearing of checks, and the settlement
of interbank balances ...
Petitioner argues that by law and common sense, the term check should be interpreted as one that
fits the articles of incorporation of the PCHC, the Central Bank and the Clearing House Rules stating
that it is a negotiable instrument citing the definition of a "check" as basically a "bill of exchange"
under Section 185 of the NIL and that it should be payable to "order" or to "bearer" under Section
126 of game law. Petitioner alleges that with the cancellation of the printed words "or bearer from
the face of the check, it becomes non-negotiable so the PCHC has no jurisdiction over the case.
The Regional Trial Court took exception to this stand and conclusion put forth by the herein
petitioner as it held:
Petitioner's theory cannot be maintained. As will be noted, the PCHC makes no distinction as
to the character or nature of the checks subject of its jurisdiction. The pertinent provisions
quoted in petitioners memorandum simply refer to check(s). Where the law does not
distinguish, we shall not distinguish.
In the case of Reyes vs. Chuanico (CA-G.R. No. 20813 R, Feb. 5, 1962) the Appellate Court
categorically stated that there are four kinds of checks in this jurisdiction; the regular check;
the cashier's check; the traveller's check; and the crossed check. The Court, further
elucidated, that while the Negotiable Instruments Law does not contain any provision on
crossed checks, it is coon practice in commercial and banking operations to issue checks of
this character, obviously in accordance with Article 541 of the Code of Commerce. Attention is
likewise called to Section 185 of the Negotiable Instruments Law:
Sec. 185. Check defined. A check is a bill of exchange drawn on a bank payable on
demand. Except as herein otherwise provided, the provisions of this act applicable to a
bill of exchange payable on demand apply to a check
and the provisions of Section 61 (supra) that the drawer may insert in the instrument an
express stipulation negating or limiting his own liability to the holder. Consequently, it appears
that the use of the term "check" in the Articles of Incorporation of PCHC is to be perceived as
not limited to negotiable checks only, but to checks as is generally known in use in commercial
or business transactions.
Anent Petitioner's liability on said instruments, this court is in full accord with the ruling of the
PCHC Board of Directors that:
In presenting the Checks for clearing and for payment, the defendant made an express
guarantee on the validity of "all prior endorsements." Thus, stamped at the back of the
checks are the defendant's clear warranty; ALL PRIOR ENDORSEMENTS AND/OR LACK OF
ENDORSEMENTS GUARANTEED. With. out such warranty, plaintiff would not have paid on
the checks.
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the
warranty has proven to be false and inaccurate, the defendant is liable for any damage
arising out of the falsity of its representation.
The principle of estoppel, effectively prevents the defendant from denying liability for any
damage sustained by the plaintiff which, relying upon an action or declaration of the
defendant, paid on the Checks. The same principle of estoppel effectively prevents the
defendant from denying the existence of the Checks. (Pp. 1011 Decision; pp. 4344,
Rollo)
We agree.
As provided in the aforecited articles of incorporation of PCHC its operation extend to "clearing
checks and other clearing items." No doubt transactions on non-negotiable checks are within the
ambit of its jurisdiction.
In a previous case, this Court had occasion to rule: "Ubi lex non distinguish nec nos distinguere
debemos." 2 It was enunciated in Loc Cham v. Ocampo, 77 Phil. 636 (1946):
 The rule, founded on logic is a corollary of the principle that general words and phrases in a
statute should ordinarily be accorded their natural and general significance. In other words,
there should be no distinction in the application of a statute where none is indicated.
There should be no distinction in the application of a statute where none is indicated for courts are
not authorized to distinguish where the law makes no distinction. They should instead administer
the law not as they think it ought to be but as they find it and without regard to consequences. 3
The term check as used in the said Articles of Incorporation of PCHC can only connote checks in
general use in commercial and business activities. It cannot be conceived to be limited to
negotiable checks only.
Checks are used between banks and bankers and their customers, and are designed to facilitate
banking operations. It is of the essence to be payable on demand, because the contract between
the banker and the customer is that the money is needed on demand. 4
The participation of the two banks, petitioner and private respondent, in the clearing operations of
PCHC is a manifestation of their submission to its jurisdiction. Sec. 3 and 36.6 of the PCHC-CHRR
clearing rules and regulations provide:
SEC. 3. AGREEMENT TO THESE RULES. It is the general agreement and understanding that
any participant in the Philippine Clearing House Corporation, MICR clearing operations by the
mere fact of their participation, thereby manifests its agreement to these Rules and
Regulations and its subsequent amendments."
Sec 36.6. (ARBITRATION) The fact that a bank participates in the clearing operations of the
PCHC shall be deemed its written and subscribed consent to the binding effect of this
arbitration agreement as if it had done so in accordance with section 4 of the Republic Act No.
876, otherwise known as the Arbitration Law.
Further Section 2 of the Arbitration Law mandates:
Two or more persons or parties may submit to the arbitration of one or more arbitrators any
controversy existing between them at the time of the submission and which may be the
subject of an action, or the parties of any contract may in such contract agree to settle by
arbitration a controversy thereafter arising between them. Such submission or contract shall
be valid and irrevocable, save upon grounds as exist at law for the revocation of any contract.
Such submission or contract may include question arising out of valuations, appraisals or other
controversies which may be collateral, incidental, precedent or subsequent to any issue
between the parties. ...
Sec. 21 of the same rules, says:
Items which have been the subject of material alteration or items bearing forged endorsement
when such endorsement is necessary for negotiation shall be returned by direct presentation
or demand to the Presenting Bank and not through the regular clearing house facilities within
the period prescribed by law for the filing of a legal action by the returning bank/branch,
institution or entity sending the same. (Emphasis supplied)
Viewing these provisions the conclusion is clear that the PCHC Rules and Regulations should not be
interpreted to be applicable only to checks which are negotiable instruments but also to non-
negotiable instruments and that the PCHC has jurisdiction over this case even as the checks subject
of this litigation are admittedly non-negotiable.
Moreover, petitioner is estopped from raising the defense of non-negotiability of the checks in
question. It stamped its guarantee on the back of the checks and subsequently presented these
checks for clearing and it was on the basis of these endorsements by the petitioner that the
proceeds were credited in its clearing account.
The petitioner by its own acts and representation can not now deny liability because it assumed the
liabilities of an endorser by stamping its guarantee at the back of the checks.
The petitioner having stamped its guarantee of "all prior endorsements and/or lack of
endorsements" (Exh. A-2 to F-2) is now estopped from claiming that the checks under
consideration are not negotiable instruments. The checks were accepted for deposit by the
petitioner stamping thereon its guarantee, in order that it can clear the said checks with the
respondent bank. By such deliberate and positive attitude of the petitioner it has for all legal intents
and purposes treated the said cheeks as negotiable instruments and accordingly assumed the
warranty of the endorser when it stamped its guarantee of prior endorsements at the back of the
26
checks. It led the said respondent to believe that it was acting as endorser of the checks and on the
strength of this guarantee said respondent cleared the checks in question and credited the account
of the petitioner. Petitioner is now barred from taking an opposite posture by claiming that the
disputed checks are not negotiable instrument.
This Court enunciated in Philippine National Bank vs. Court of Appeals 5 a point relevant to the
issue when it stated the doctrine of estoppel is based upon the grounds of public policy, fair
dealing, good faith and justice and its purpose is to forbid one to speak against his own act,
representations or commitments to the injury of one to whom they were directed and who
reasonably relied thereon.
A commercial bank cannot escape the liability of an endorser of a check and which may turn out to
be a forged endorsement. Whenever any bank treats the signature at the back of the checks as
endorsements and thus logically guarantees the same as such there can be no doubt said bank has
considered the checks as negotiable.
Apropos the matter of forgery in endorsements, this Court has succinctly emphasized that the
collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of presenting the check for payment
to the drawee is an assertion that the party making the presentment has done its duty to ascertain
the genuineness of the endorsements. This is laid down in the case of PNB vs. National City
Bank. 6 In another case, this court held that if the drawee-bank discovers that the signature of the
payee was forged after it has paid the amount of the check to the holder thereof, it can recover the
amount paid from the collecting bank. 7
A truism stated by this Court is that "The doctrine of estoppel precludes a party from repudiating
an obligation voluntarily assumed after having accepted benefits therefrom. To countenance such
repudiation would be contrary to equity and put premium on fraud or misrepresentation". 8
We made clear in Our decision in Philippine National Bank vs. The National City Bank of NY & Motor
Service Co. that:
Where a check is accepted or certified by the bank on which it is drawn, the bank is estopped
to deny the genuineness of the drawers signature and his capacity to issue the instrument.
If a drawee bank pays a forged check which was previously accepted or certified by the said
bank, it can not recover from a holder who did not participate in the forgery and did not have
actual notice thereof.
The payment of a check does not include or imply its acceptance in the sense that this word is
used in Section 62 of the Negotiable Instruments Act. 9
The point that comes uppermost is whether the drawee bank was negligent in failing to discover the
alteration or the forgery. Very akin to the case at bar is one which involves a suit filed by the
drawer of checks against the collecting bank and this came about in Farmers State Bank 10 where it
was held:
A cause of action against the (collecting bank) in favor of the appellee (the drawer) accrued as
a result of the bank breaching its implied warranty of the genuineness of the indorsements of
the name of the payee by bringing about the presentation of the checks (to the drawee bank)
and collecting the amounts thereof, the right to enforce that cause of action was not destroyed
by the circumstance that another cause of action for the recovery of the amounts paid on the
checks would have accrued in favor of the appellee against another or to others than the bank
if when the checks were paid they have been indorsed by the payee. (United States vs.
National Exchange Bank, 214 US, 302, 29 S CT665, 53 L. Ed 1006, 16 Am. Cas. 11 84;
Onondaga County Savings Bank vs. United States (E.C.A.) 64 F 703)
Section 66 of the Negotiable Instruments ordains that:
Every indorser who indorsee without qualification, warrants to all subsequent holders in due
course' (a) that the instrument is genuine and in all respects what it purports to be; (b) that
he has good title to it; (c) that all prior parties have capacity to contract; and (d) that the
instrument is at the time of his indorsement valid and subsisting. 11
It has been enunciated in an American case particularly in American Exchange National Bank vs.
Yorkville Bank12 that: "the drawer owes no duty of diligence to the collecting bank (one who had
accepted an altered check and had paid over the proceeds to the depositor) except of seasonably
discovering the alteration by a comparison of its returned checks and check stubs or other
equivalent record, and to inform the drawee thereof." In this case it was further held that:
 The real and underlying reasons why negligence of the drawer constitutes no defense to the
collecting bank are that there is no privity between the drawer and the collecting bank (Corn
Exchange Bank vs. Nassau Bank, 204 N.Y.S. 80) and the drawer owe to that bank no duty of
vigilance (New York Produce Exchange Bank vs. Twelfth Ward Bank, 204 N.Y.S. 54) and no act
of the collecting bank is induced by any act or representation or admission of the drawer
(Seaboard National Bank vs. Bank of America (supra) and it follows that negligence on the
part of the drawer cannot create any liability from it to the collecting bank, and the drawer
thus is neither a necessary nor a proper party to an action by the drawee bank against such
bank. It is quite true that depositors in banks are under the obligation of examining their
passbooks and returned vouchers as a protection against the payment by the depository bank
against forged checks, and negligence in the performance of that obligation may relieve that
bank of liability for the repayment of amounts paid out on forged checks, which but for such
negligence it would be bound to repay. A leading case on that subject is Morgan vs. United
States Mortgage and Trust Col. 208 N.Y. 218, 101 N.E. 871 Amn. Cas. 1914D, 462, L.R.A.
1915D, 74.
Thus We hold that while the drawer generally owes no duty of diligence to the collecting bank, the
law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it for the
purpose of determining their genuineness and regularity. The collecting bank being primarily
engaged in banking holds itself out to the public as the expert and the law holds it to a high
standard of conduct.
And although the subject checks are non-negotiable the responsibility of petitioner as indorser
thereof remains.
To countenance a repudiation by the petitioner of its obligation would be contrary to equity and
would deal a negative blow to the whole banking system of this country.
The court reproduces with approval the following disquisition of the PCHC in its decision
II. Payments To Persons Other
Than The Payees Are Not Valid
And Give Rise To An Obligation
To Return Amounts Received
Nothing is more clear than that neither the defendant's depositor nor the defendant is entitled
to receive payment payable for the Checks. As the checks are not payable to defendant's
depositor, payments to persons other than payees named therein, their successor-in-interest
or any person authorized to receive payment are not valid. Article 1240, New Civil Code of the
Philippines unequivocably provides that:
"Art. 1240. Payment shall be made to the person in whose favor the obligation has been
constituted, or his successo-in-interest, or any person authorized to receive it. "
Considering that neither the defendant's depositor nor the defendant is entitled to receive
payments for the Checks, payments to any of them give rise to an obligation to return the
amounts received. Section 2154 of the New Civil Code mandates that:
Article 2154. If something is received when there is no right to demand it, and it was
unduly delivered through mistake, the obligation to return it arises.
It is contended that plaintiff should be held responsible for issuing the Checks notwithstanding
that the underlying transactions were fictitious This contention has no basis in our
jurisprudence.
The nullity of the underlying transactions does not diminish, but in fact strengthens, plaintiffs
right to recover from the defendant. Such nullity clearly emphasizes the obligation of the
payees to return the proceeds of the Checks. If a failure of consideration is sufficient to
warrant a finding that a payee is not entitled to payment or must return payment already
made, with more reason the defendant, who is neither the payee nor the person authorized by
the payee, should be compelled to surrender the proceeds of the Checks received by it.
Defendant does not have any title to the Checks; neither can it claim any derivative title to
them.
III. Having Violated Its Warranty
On Validity Of All Endorsements,
27
Collecting Bank Cannot Deny
liability To Those Who Relied
On Its Warranty
In presenting the Checks for clearing and for payment, the defendant made an express
guarantee on the validity of "all prior endorsements." Thus, stamped at the bank of the checks
are the defendant's clear warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK OF
ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would not have paid on the
checks.
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the
warranty has proven to be false and inaccurate, the defendant is liable for any damage arising
out of the falsity of its representation.
The principle of estoppel effectively prevents the defendant from denying liability for any
damages sustained by the plaintiff which, relying upon an action or declaration of the
defendant, paid on the Checks. The same principle of estoppel effectively prevents the
defendant from denying the existence of the Checks.
Whether the Checks have been issued for valuable considerations or not is of no serious
moment to this case. These Checks have been made the subject of contracts of endorsement
wherein the defendant made expressed warranties to induce payment by the drawer of the
Checks; and the defendant cannot now refuse liability for breach of warranty as a
consequence of such forged endorsements. The defendant has falsely warranted in favor of
plaintiff the validity of all endorsements and the genuineness of the cheeks in all respects what
they purport to be.
The damage that will result if judgment is not rendered for the plaintiff is irreparable. The
collecting bank has privity with the depositor who is the principal culprit in this case. The
defendant knows the depositor; her address and her history, Depositor is defendant's client. It
has taken a risk on its depositor when it allowed her to collect on the crossed-checks.
Having accepted the crossed checks from persons other than the payees, the defendant is
guilty of negligence; the risk of wrongful payment has to be assumed by the defendant.
On the matter of the award of the interest and attorney's fees, the Board of Directors finds no
reason to reverse the decision of the Arbiter. The defendant's failure to reimburse the plaintiff
has constrained the plaintiff to regular the services of counsel in order to protect its interest
notwithstanding that plaintiffs claim is plainly valid just and demandable. In addition,
defendant's clear obligation is to reimburse plaintiff upon direct presentation of the checks;
and it is undenied that up to this time the defendant has failed to make such reimbursement.
WHEREFORE, the petition is DISMISSED for lack of merit without pronouncement as to costs. The
decision of the respondent court of 24 March 1986 and its order of 3 June 1986 are hereby declared
to be immediately executory.
SO ORDERED.
-----
G.R. No. 92244 February 9, 1993
NATIVIDAD GEMPESAW, petitioner, vs. THE HONORABLE COURT OF APPEALS and
PHILIPPINE BANK OF COMMUNICATIONS, respondents.
CAMPOS, JR., J.:
From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447), petitioner, Natividad
Gempesaw, appealed to this Court in a Petition for Review, on the issue of the right of the drawer
to recover from the drawee bank who pays a check with a forged indorsement of the payee,
debiting the same against the drawer's account.
The records show that on January 23, 1985, petitioner filed a Complaint against the private
respondent Philippine Bank of Communications (respondent drawee Bank) for recovery of the
money value of eighty-two (82) checks charged against the petitioner's account with the
respondent drawee Bank on the ground that the payees' indorsements were forgeries. The Regional
Trial Court, Branch CXXVIII of Caloocan City, which tried the case, rendered a decision on
November 17, 1987 dismissing the complaint as well as the respondent drawee Bank's
counterclaim. On appeal, the Court of Appeals in a decision rendered on February 22, 1990,
affirmed the decision of the RTC on two grounds, namely (1) that the plaintiff's (petitioner herein)
gross negligence in issuing the checks was the proximate cause of the loss and (2) assuming that
the bank was also negligent, the loss must nevertheless be borne by the party whose negligence
was the proximate cause of the loss. On March 5, 1990, the petitioner filed this petition under Rule
45 of the Rules of Court setting forth the following as the alleged errors of the respondent Court: 1
I Practically, all the checks issued and honored by the respondent drawee bank were crossed
THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE NEGLIGENCE OF THE
DRAWER IS THE PROXIMATE CAUSE OF THE RESULTING INJURY TO THE DRAWEE BANK, AND
THE DRAWER IS PRECLUDED FROM SETTING UP THE FORGERY OR WANT OF AUTHORITY.
II
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT FINDING AND RULING THAT IT
IS THE GROSS AND INEXCUSABLE NEGLIGENCE AND FRAUDULENT ACTS OF THE OFFICIALS
AND EMPLOYEES OF THE RESPONDENT BANK IN FORGING THE SIGNATURE OF THE PAYEES
AND THE WRONG AND/OR ILLEGAL PAYMENTS MADE TO PERSONS, OTHER THAN TO THE
INTENDED PAYEES SPECIFIED IN THE CHECKS, IS THE DIRECT AND PROXIMATE CAUSE OF
THE DAMAGE TO PETITIONER WHOSE SAVING (SIC) ACCOUNT WAS DEBITED.
III
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT ORDERING THE RESPONDENT
BANK TO RESTORE OR RE-CREDIT THE CHECKING ACCOUNT OF THE PETITIONER IN THE
CALOOCAN CITY BRANCH BY THE VALUE OF THE EIGHTY-TWO (82) CHECKS WHICH IS IN
THE AMOUNT OF P1,208,606.89 WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery stores located at
Rizal Avenue Extension and at Second Avenue, Caloocan City. Among these groceries are D.G.
Shopper's Mart and D.G. Whole Sale Mart. Petitioner maintains a checking account numbered 13-
00038-1 with the Caloocan City Branch of the respondent drawee Bank. To facilitate payment of
debts to her suppliers, petitioner draws checks against her checking account with the respondent
bank as drawee. Her customary practice of issuing checks in payment of her suppliers was as
follows: the checks were prepared and filled up as to all material particulars by her trusted
bookkeeper, Alicia Galang, an employee for more than eight (8) years. After the bookkeeper
prepared the checks, the completed checks were submitted to the petitioner for her signature,
together with the corresponding invoice receipts which indicate the correct obligations due and
payable to her suppliers. Petitioner signed each and every check without bothering to verify the
accuracy of the checks against the corresponding invoices because she reposed full and implicit
trust and confidence on her bookkeeper. The issuance and delivery of the checks to the payees
named therein were left to the bookkeeper. Petitioner admitted that she did not make any
verification as to whether or not the checks were delivered to their respective payees. Although the
respondent drawee Bank notified her of all checks presented to and paid by the bank, petitioner did
not verify he correctness of the returned checks, much less check if the payees actually received
the checks in payment for the supplies she received. In the course of her business operations
covering a period of two years, petitioner issued, following her usual practice stated above, a total
of eighty-two (82) checks in favor of several suppliers. These checks were all presented by the
indorsees as holders thereof to, and honored by, the respondent drawee Bank. Respondent drawee
Bank correspondingly debited the amounts thereof against petitioner's checking account numbered
30-00038-1. Most of the aforementioned checks were for amounts in excess of her actual
obligations to the various payees as shown in their corresponding invoices. To mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of P11,895.23 in favor of
Kawsek Inc. (Exh. A-60), appellant's actual obligation to said payee was only P895.33 (Exh. A-
83); (2) in Check No. 652282 issued on September 18, 1984 in favor of Senson Enterprises in
the amount of P11,041.20 (Exh. A-67) appellant's actual obligation to said payee was only
P1,041.20 (Exh. 7); (3) in Check No. 589092 dated April 7, 1984 for the amount of
P11,672.47 in favor of Marchem (Exh. A-61) appellant's obligation was only P1,672.47 (Exh.
B); (4) in Check No. 620450 dated May 10, 1984 in favor of Knotberry for P11,677.10 (Exh.
A-31) her actual obligation was only P677.10 (Exhs. C and C-1); (5) in Check No. 651862
dated August 9, 1984 in favor of Malinta Exchange Mart for P11,107.16 (Exh. A-62), her
obligation was only P1,107.16 (Exh. D-2); (6) in Check No. 651863 dated August 11, 1984 in
favor of Grocer's International Food Corp. in the amount of P11,335.60 (Exh. A-66), her
obligation was only P1,335.60 (Exh. E and E-1); (7) in Check No. 589019 dated March 17,
28
1984 in favor of Sophy Products in the amount of P11,648.00 (Exh. A-78), her obligation was
only P648.00 (Exh. G); (8) in Check No. 589028 dated March 10, 1984 for the amount of
P11,520.00 in favor of the Yakult Philippines (Exh. A-73), the latter's invoice was only P520.00
(Exh. H-2); (9) in Check No. 62033 dated May 23, 1984 in the amount of P11,504.00 in favor
of Monde Denmark Biscuit (Exh. A-34), her obligation was only P504.00 (Exhs. I-1 and I-2). 2
checks. 3 Aside from the daily notice given to the petitioner by the respondent drawee Bank, the
latter also furnished her with a monthly statement of her transactions, attaching thereto all the
cancelled checks she had issued and which were debited against her current account. It was only
after the lapse of more two (2) years that petitioner found out about the fraudulent manipulations
of her bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees were brought to Ernest L. Boon,
Chief Accountant of respondent drawee Bank at the Buendia branch, who, without authority
therefor, accepted them all for deposit at the Buendia branch to the credit and/or in the accounts of
Alfredo Y. Romero and Benito Lam. Ernest L. Boon was a very close friend of Alfredo Y. Romero.
Sixty-three (63) out of the eighty-two (82) checks were deposited in Savings Account No. 00844-5
of Alfredo Y. Romero at the respondent drawee Bank's Buendia branch, and four (4) checks in his
Savings Account No. 32-81-9 at its Ongpin branch. The rest of the checks were deposited in
Account No. 0443-4, under the name of Benito Lam at the Elcao branch of the respondent drawee
Bank.
About thirty (30) of the payees whose names were specifically written on the checks testified that
they did not receive nor even see the subject checks and that the indorsements appearing at the
back of the checks were not theirs.
The team of auditors from the main office of the respondent drawee Bank which conducted periodic
inspection of the branches' operations failed to discover, check or stop the unauthorized acts of
Ernest L. Boon. Under the rules of the respondent drawee Bank, only a Branch Manager and no
other official of the respondent drawee bank, may accept a second indorsement on a check for
deposit. In the case at bar, all the deposit slips of the eighty-two (82) checks in question were
initialed and/or approved for deposit by Ernest L. Boon. The Branch Managers of the Ongpin and
Elcao branches accepted the deposits made in the Buendia branch and credited the accounts of
Alfredo Y. Romero and Benito Lam in their respective branches.
On November 7, 1984, petitioner made a written demand on respondent drawee Bank to credit her
account with the money value of the eighty-two (82) checks totalling P1,208.606.89 for having
been wrongfully charged against her account. Respondent drawee Bank refused to grant
petitioner's demand. On January 23, 1985, petitioner filed the complaint with the Regional Trial
Court.
This is not a suit by the party whose signature was forged on a check drawn against the drawee
bank. The payees are not parties to the case. Rather, it is the drawer, whose signature is genuine,
who instituted this action to recover from the drawee bank the money value of eighty-two (82)
checks paid out by the drawee bank to holders of those checks where the indorsements of the
payees were forged. How and by whom the forgeries were committed are not established on the
record, but the respective payees admitted that they did not receive those checks and therefore
never indorsed the same. The applicable law is the Negotiable Instruments Law 4(heretofore
referred to as the NIL). Section 23 of the NIL provides:
When a signature is forged or made without the authority of the person whose signature
it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give
a discharge therefor, or to enforce payment thereof against any party thereto, can be
acquired through or under such signature, unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery or want of authority.
Under the aforecited provision, forgery is a real or absolute defense by the party whose
signature is forged. A party whose signature to an instrument was forged was never a party
and never gave his consent to the contract which gave rise to the instrument. Since his
signature does not appear in the instrument, he cannot be held liable thereon by anyone, not
even by a holder in due course. Thus, if a person's signature is forged as a maker of a
promissory note, he cannot be made to pay because he never made the promise to pay. Or
where a person's signature as a drawer of a check is forged, the drawee bank cannot charge
the amount thereof against the drawer's account because he never gave the bank the order to
pay. And said section does not refer only to the forged signature of the maker of a promissory
 note and of the drawer of a check. It covers also a forged indorsement, i.e., the forged will then be just a question of time until the fraud is discovered. This is specially true when the
signature of the payee or indorsee of a note or check. Since under said provision a forged agent perpetrates a series of forgeries as in the case at bar.
signature is "wholly inoperative", no one can gain title to the instrument through such forged
The negligence of a depositor which will prevent recovery of an unauthorized payment is based on
indorsement. Such an indorsement prevents any subsequent party from acquiring any right as
failure of the depositor to act as a prudent businessman would under the circumstances. In the
against any party whose name appears prior to the forgery. Although rights may exist
case at bar, the petitioner relied implicitly upon the honesty and loyalty of her bookkeeper, and did
between and among parties subsequent to the forged indorsement, not one of them can
not even verify the accuracy of amounts of the checks she signed against the invoices attached
acquire rights against parties prior to the forgery. Such forged indorsement cuts off the rights
thereto. Furthermore, although she regularly received her bank statements, she apparently did not
of all subsequent parties as against parties prior to the forgery. However, the law makes an
carefully examine the same nor the check stubs and the returned checks, and did not compare
exception to these rules where a party is precluded from setting up forgery as a defense.
them with the same invoices. Otherwise, she could have easily discovered the discrepancies
As a matter of practical significance, problems arising from forged indorsements of checks may between the checks and the documents serving as bases for the checks. With such discovery, the
generally be broken into two types of cases: (1) where forgery was accomplished by a person not subsequent forgeries would not have been accomplished. It was not until two years after the
associated with the drawer for example a mail robbery; and (2) where the indorsement was bookkeeper commenced her fraudulent scheme that petitioner discovered that eighty-two (82)
forged by an agent of the drawer. This difference in situations would determine the effect of the checks were wrongfully charged to her account, at which she notified the respondent drawee bank.
drawer's negligence with respect to forged indorsements. While there is no duty resting on the
It is highly improbable that in a period of two years, not one of Petitioner's suppliers complained of
depositor to look for forged indorsements on his cancelled checks in contrast to a duty imposed
non-payment. Assuming that even one single complaint had been made, petitioner would have
upon him to look for forgeries of his own name, a depositor is under a duty to set up an accounting
been duty-bound, as far as the respondent drawee Bank was concerned, to make an adequate
system and a business procedure as are reasonably calculated to prevent or render difficult the
investigation on the matter. Had this been done, the discrepancies would have been discovered,
forgery of indorsements, particularly by the depositor's own employees. And if the drawer
sooner or later. Petitioner's failure to make such adequate inquiry constituted negligence which
(depositor) learns that a check drawn by him has been paid under a forged indorsement, the
resulted in the bank's honoring of the subsequent checks with forged indorsements. On the other
drawer is under duty promptly to report such fact to the drawee bank. 5 For his negligence or failure
hand, since the record mentions nothing about such a complaint, the possibility exists that the
either to discover or to report promptly the fact of such forgery to the drawee, the drawer loses his
checks in question covered inexistent sales. But even in such a case, considering the length of a
right against the drawee who has debited his account under a forged indorsement. 6 In other words,
period of two (2) years, it is hard to believe that petitioner did not know or realize that she was
he is precluded from using forgery as a basis for his claim for re-crediting of his account.
paying more than she should for the supplies she was actually getting. A depositor may not sit idly
In the case at bar, petitioner admitted that the checks were filled up and completed by her trusted by, after knowledge has come to her that her funds seem to be disappearing or that there may be a
employee, Alicia Galang, and were given to her for her signature. Her signing the checks made the leak in her business, and refrain from taking the steps that a careful and prudent businessman
negotiable instrument complete. Prior to signing the checks, there was no valid contract yet. would take in such circumstances and if taken, would result in stopping the continuance of the
fraudulent scheme. If she fails to take steps, the facts may establish her negligence, and in that
Every contract on a negotiable instrument is incomplete and revocable until delivery of the
event, she would be estopped from recovering from the bank. 9
instrument to the payee for the purpose of giving effect thereto. 7 The first delivery of the
instrument, complete in form, to the payee who takes it as a holder, is called issuance of the One thing is clear from the records that the petitioner failed to examine her records with
instrument. 8 Without the initial delivery of the instrument from the drawer of the check to the reasonable diligence whether before she signed the checks or after receiving her bank statements.
payee, there can be no valid and binding contract and no liability on the instrument. Had the petitioner examined her records more carefully, particularly the invoice receipts, cancelled
checks, check book stubs, and had she compared the sums written as amounts payable in the
Petitioner completed the checks by signing them as drawer and thereafter authorized her employee
eighty-two (82) checks with the pertinent sales invoices, she would have easily discovered that in
Alicia Galang to deliver the eighty-two (82) checks to their respective payees. Instead of issuing the
some checks, the amounts did not tally with those appearing in the sales invoices. Had she noticed
checks to the payees as named in the checks, Alicia Galang delivered them to the Chief Accountant
these discrepancies, she should not have signed those checks, and should have conducted an
of the Buendia branch of the respondent drawee Bank, a certain Ernest L. Boon. It was established
inquiry as to the reason for the irregular entries. Likewise had petitioner been more vigilant in
that the signatures of the payees as first indorsers were forged. The record fails to show the
going over her current account by taking careful note of the daily reports made by respondent
identity of the party who made the forged signatures. The checks were then indorsed for the
drawee Bank in her issued checks, or at least made random scrutiny of cancelled checks returned
second time with the names of Alfredo Y. Romero and Benito Lam, and were deposited in the
by respondent drawee Bank at the close of each month, she could have easily discovered the fraud
latter's accounts as earlier noted. The second indorsements were all genuine signatures of the
being perpetrated by Alicia Galang, and could have reported the matter to the respondent drawee
alleged holders. All the eighty-two (82) checks bearing the forged indorsements of the payees and
Bank. The respondent drawee Bank then could have taken immediate steps to prevent further
the genuine second indorsements of Alfredo Y. Romero and Benito Lam were accepted for deposit
commission of such fraud. Thus, petitioner's negligence was the proximate cause of her loss. And
at the Buendia branch of respondent drawee Bank to the credit of their respective savings accounts
since it was her negligence which caused the respondent drawee Bank to honor the forged checks
in the Buendia, Ongpin and Elcao branches of the same bank. The total amount of P1,208,606.89,
or prevented it from recovering the amount it had already paid on the checks, petitioner cannot
represented by eighty-two (82) checks, were credited and paid out by respondent drawee Bank to
now complain should the bank refuse to recredit her account with the amount of such
Alfredo Y. Romero and Benito Lam, and debited against petitioner's checking account No. 13-
checks. 10 Under Section 23 of the NIL, she is now precluded from using the forgery to prevent the
00038-1, Caloocan branch.
bank's debiting of her account.
As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Bank 11 is
charge the drawer's account for the amount of said check. An exception to this rule is where the
not applicable to the case at bar because in said case, the check was fraudulently taken and the
drawer is guilty of such negligence which causes the bank to honor such a check or checks. If a
signature of the payee was forged not by an agent or employee of the drawer. The drawer was not
check is stolen from the payee, it is quite obvious that the drawer cannot possibly discover the
found to be negligent in the handling of its business affairs and the theft of the check by a total
forged indorsement by mere examination of his cancelled check. This accounts for the rule that
stranger was not attributable to negligence of the drawer; neither was the forging of the payee's
although a depositor owes a duty to his drawee bank to examine his cancelled checks for forgery of
indorsement due to the drawer's negligence. Since the drawer was not negligent, the drawee was
his own signature, he has no similar duty as to forged indorsements. A different situation arises
duty-bound to restore to the drawer's account the amount theretofore paid under the check with a
where the indorsement was forged by an employee or agent of the drawer, or done with the active
forged payee's indorsement because the drawee did not pay as ordered by the drawer.
participation of the latter. Most of the cases involving forgery by an agent or employee deal with
the payee's indorsement. The drawer and the payee often time shave business relations of long Petitioner argues that respondent drawee Bank should not have honored the checks because they
standing. The continued occurrence of business transactions of the same nature provides the were crossed checks. Issuing a crossed check imposes no legal obligation on the drawee not to
opportunity for the agent/employee to commit the fraud after having developed familiarity with the honor such a check. It is more of a warning to the holder that the check cannot be presented to the
signatures of the parties. However, sooner or later, some leak will show on the drawer's books. It drawee bank for payment in cash. Instead, the check can only be deposited with the payee's bank
which in turn must present it for payment against the drawee bank in the course of normal banking
29
transactions between banks. The crossed check cannot be presented for payment but it can only be
deposited and the drawee bank may only pay to another bank in the payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank from having checks with
more than one indorsement. The banking rule banning acceptance of checks for deposit or cash
payment with more than one indorsement unless cleared by some bank officials does not invalidate
the instrument; neither does it invalidate the negotiation or transfer of the said check. In effect,
this rule destroys the negotiability of bills/checks by limiting their negotiation by indorsement of
only the payee. Under the NIL, the only kind of indorsement which stops the further negotiation of
an instrument is a restrictive indorsement which prohibits the further negotiation thereof.
Sec. 36. When indorsement restrictive. An indorsement is restrictive which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written in
express words at the back of the instrument, so that any subsequent party may be forewarned that
ceases to be negotiable. However, the restrictive indorsee acquires the right to receive payment
and bring any action thereon as any indorser, but he can no longer transfer his rights as such
indorsee where the form of the indorsement does not authorize him to do so. 12
Although the holder of a check cannot compel a drawee bank to honor it because there is no privity
between them, as far as the drawer-depositor is concerned, such bank may not legally refuse to
honor a negotiable bill of exchange or a check drawn against it with more than one indorsement if
there is nothing irregular with the bill or check and the drawer has sufficient funds. The drawee
cannot be compelled to accept or pay the check by the drawer or any holder because as a drawee,
he incurs no liability on the check unless he accepts it. But the drawee will make itself liable to a
suit for damages at the instance of the drawer for wrongful dishonor of the bill or check.
Thus, it is clear that under the NIL, petitioner is precluded from raising the defense of forgery by
reason of her gross negligence. But under Section 196 of the NIL, any case not provided for in the
Act shall be governed by the provisions of existing legislation. Under the laws of quasi-delict, she
cannot point to the negligence of the respondent drawee Bank in the selection and supervision of
its employees as being the cause of the loss because negligence is the proximate cause thereof and
under Article 2179 of the Civil Code, she may not be awarded damages. However, under Article
1170 of the same Code the respondent drawee Bank may be held liable for damages. The article
provides
Those who in the performance of their obligations are guilty of fraud, negligence or delay, and
those who in any manner contravene the tenor thereof, are liable for damages.
There is no question that there is a contractual relation between petitioner as depositor (obligee)
and the respondent drawee bank as the obligor. In the performance of its obligation, the drawee
bank is bound by its internal banking rules and regulations which form part of any contract it enters
into with any of its depositors. When it violated its internal rules that second endorsements are not
to be accepted without the approval of its branch managers and it did accept the same upon the
mere approval of Boon, a chief accountant, it contravened the tenor of its obligation at the very
least, if it were not actually guilty of fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not discover the irregularity with
respect to the acceptance of checks with second indorsement for deposit even without the approval
of the branch manager despite periodic inspection conducted by a team of auditors from the main
office constitutes negligence on the part of the bank in carrying out its obligations to its depositors.
Article 1173 provides
The fault or negligence of the obligor consists in the omission of that diligence which is
required by the nature of the obligation and corresponds with the circumstance of the persons,
of the time and of the place. . . .
We hold that banking business is so impressed with public interest where the trust and confidence
of the public in general is of paramount importance such that the appropriate standard of diligence
must be a high degree of diligence, if not the utmost diligence. Surely, respondent drawee Bank
cannot claim it exercised such a degree of diligence that is required of it. There is no way We can
allow it now to escape liability for such negligence. Its liability as obligor is not merely vicarious but
primary wherein the defense of exercise of due diligence in the selection and supervision of its
employees is of no moment.
30
Premises considered, respondent drawee Bank is adjudged liable to share the loss with the
petitioner on a fifty-fifty ratio in accordance with Article 172 which provides:
Responsibility arising from negligence in the performance of every kind of obligation is also
demandable, but such liability may be regulated by the courts according to the circumstances.
With the foregoing provisions of the Civil Code being relied upon, it is being made clear that the
decision to hold the drawee bank liable is based on law and substantial justice and not on mere
equity. And although the case was brought before the court not on breach of contractual
obligations, the courts are not precluded from applying to the circumstances of the case the laws
pertinent thereto. Thus, the fact that petitioner's negligence was found to be the proximate cause
of her loss does not preclude her from recovering damages. The reason why the decision dealt on a
discussion on proximate cause is due to the error pointed out by petitioner as allegedly committed
by the respondent court. And in breaches of contract under Article 1173, due diligence on the part
of the defendant is not a defense.
PREMISES CONSIDERED, the case is hereby ordered REMANDED to the trial court for the reception
of evidence to determine the exact amount of loss suffered by the petitioner, considering that she
partly benefited from the issuance of the questioned checks since the obligation for which she
issued them were apparently extinguished, such that only the excess amount over and above the
total of these actual obligations must be considered as loss of which one half must be paid by
respondent drawee bank to herein petitioner.
SO ORDERED.
-----
G.R. No. 107382/G.R. No. 107612 January 31, 1996
ASSOCIATED BANK, petitioner, vs. HON. COURT OF APPEALS, PROVINCE OF TARLAC and
PHILIPPINE NATIONAL BANK, respondents.
xxxxxxxxxxxxxxxxxxxxx
G.R. No. 107612 January 31, 1996
PHILIPPINE NATIONAL BANK, petitioner, vs. HONORABLE COURT OF APPEALS, PROVINCE
OF TARLAC, and ASSOCIATED BANK, respondents.
ROMERO, J.:
Where thirty checks bearing forged endorsements are paid, who bears the loss, the drawer, the
drawee bank or the collecting bank?
This is the main issue in these consolidated petitions for review assailing the decision of the Court
of Appeals in "Province of Tarlac v. Philippine National Bank v. Associated Bank v. Fausto
Pangilinan, et. al." (CA-G.R. No. CV No. 17962). 1
The facts of the case are as follows:
The Province of Tarlac maintains a current account with the Philippine National Bank (PNB) Tarlac
Branch where the provincial funds are deposited. Checks issued by the Province are signed by the
Provincial Treasurer and countersigned by the Provincial Auditor or the Secretary of the
Sangguniang Bayan.
A portion of the funds of the province is allocated to the Concepcion Emergency Hospital. 2 The
allotment checks for said government hospital are drawn to the order of "Concepcion Emergency
Hospital, Concepcion, Tarlac" or "The Chief, Concepcion Emergency Hospital, Concepcion, Tarlac."
The checks are released by the Office of the Provincial Treasurer and received for the hospital by its
administrative officer and cashier.
In January 1981, the books of account of the Provincial Treasurer were post-audited by the
Provincial Auditor. It was then discovered that the hospital did not receive several allotment checks
drawn by the Province.
On February 19, 1981, the Provincial Treasurer requested the manager of the PNB to return all of
its cleared checks which were issued from 1977 to 1980 in order to verify the regularity of their
encashment. After the checks were examined, the Provincial Treasurer learned that 30 checks
amounting to P203,300.00 were encashed by one Fausto Pangilinan, with the Associated Bank
acting as collecting bank.
It turned out that Fausto Pangilinan, who was the administrative officer and cashier of payee Associated Bank, on the other hand, argues that the order of liability should be totally reversed,
hospital until his retirement on February 28, 1978, collected the questioned checks from the office with the drawee bank (PNB) solely and ultimately bearing the loss.
of the Provincial Treasurer. He claimed to be assisting or helping the hospital follow up the release
Respondent court allegedly erred in applying Section 23 of the Philippine Clearing House Rules
of the checks and had official receipts. 3Pangilinan sought to encash the first check 4 with
instead of Central Bank Circular No. 580, which, being an administrative regulation issued pursuant
Associated Bank. However, the manager of Associated Bank refused and suggested that Pangilinan
to law, has the force and effect of law. 15 The PCHC Rules are merely contractual stipulations
deposit the check in his personal savings account with the same bank. Pangilinan was able to
among and between member-banks. As such, they cannot prevail over the aforesaid CB Circular.
withdraw the money when the check was cleared and paid by the drawee bank, PNB.
It likewise contends that PNB, the drawee bank, is estopped from asserting the defense of
After forging the signature of Dr. Adena Canlas who was chief of the payee hospital, Pangilinan
guarantee of prior indorsements against Associated Bank, the collecting bank. In stamping the
followed the same procedure for the second check, in the amount of P5,000.00 and dated April 20,
guarantee (for all prior indorsements), it merely followed a mandatory requirement for clearing and
1978, 5 as well as for twenty-eight other checks of various amounts and on various dates. The last
had no choice but to place the stamp of guarantee; otherwise, there would be no clearing. The
check negotiated by Pangilinan was for f8,000.00 and dated February 10, 1981. 6 All the checks
bank will be in a "no-win" situation and will always bear the loss as against the drawee bank. 16
bore the stamp of Associated Bank which reads "All prior endorsements guaranteed ASSOCIATED
BANK." Associated Bank also claims that since PNB already cleared and paid the value of the forged checks
in question, it is now estopped from asserting the defense that Associated Bank guaranteed prior
Jesus David, the manager of Associated Bank testified that Pangilinan made it appear that the
indorsements. The drawee bank allegedly has the primary duty to verify the genuineness of payee's
checks were paid to him for certain projects with the hospital. 7 He did not find as irregular the fact
indorsement before paying the check. 17
that the checks were not payable to Pangilinan but to the Concepcion Emergency Hospital. While he
admitted that his wife and Pangilinan's wife are first cousins, the manager denied having given While both banks are innocent of the forgery, Associated Bank claims that PNB was at fault and
Pangilinan preferential treatment on this account. 8 should solely bear the loss because it cleared and paid the forged checks.
On February 26, 1981, the Provincial Treasurer wrote the manager of the PNB seeking the xxx xxx xxx
restoration of the various amounts debited from the current account of the Province. 9 The case at bench concerns checks payable to the order of Concepcion Emergency Hospital or its
In turn, the PNB manager demanded reimbursement from the Associated Bank on May 15, 1981. 10 Chief. They were properly issued and bear the genuine signatures of the drawer, the Province of
Tarlac. The infirmity in the questioned checks lies in the payee's (Concepcion Emergency Hospital)
As both banks resisted payment, the Province of Tarlac brought suit against PNB which, in turn,
indorsements which are forgeries. At the time of their indorsement, the checks were order
impleaded Associated Bank as third-party defendant. The latter then filed a fourth-party complaint
instruments.
against Adena Canlas and Fausto Pangilinan. 11
Checks having forged indorsements should be differentiated from forged checks or checks bearing
After trial on the merits, the lower court rendered its decision on March 21, 1988, disposing as
the forged signature of the drawer.
follows:
Section 23 of the Negotiable Instruments Law (NIL) provides:
WHEREFORE, in view of the foregoing, judgment is hereby rendered:
Sec. 23. FORGED SIGNATURE, EFFECT OF. When a signature is forged or made without
1. On the basic complaint, in favor of plaintiff Province of Tarlac and against defendant
authority of the person whose signature it purports to be, it is wholly inoperative, and no right
Philippine National Bank (PNB), ordering the latter to pay to the former, the sum of Two
to retain the instrument, or to give a discharge therefor, or to enforce payment thereof
Hundred Three Thousand Three Hundred (P203,300.00) Pesos with legal interest thereon from
against any party thereto, can be acquired through or under such signature unless the party
March 20, 1981 until fully paid;
against whom it is sought to enforce such right is precluded from setting up the forgery or
2. On the third-party complaint, in favor of defendant/third-party plaintiff Philippine National want of authority.
Bank (PNB) and against third-party defendant/fourth-party plaintiff Associated Bank ordering
A forged signature, whether it be that of the drawer or the payee, is wholly inoperative and no one
the latter to reimburse to the former the amount of Two Hundred Three Thousand Three
can gain title to the instrument through it. A person whose signature to an instrument was forged
Hundred (P203,300.00) Pesos with legal interests thereon from March 20, 1981 until fully
was never a party and never consented to the contract which allegedly gave rise to such
paid;.
instrument. 18 Section 23 does not avoid the instrument but only the forged signature. 19 Thus, a
3. On the fourth-party complaint, the same is hereby ordered dismissed for lack of cause of forged indorsement does not operate as the payee's indorsement.
action as against fourth-party defendant Adena Canlas and lack of jurisdiction over the person
The exception to the general rule in Section 23 is where "a party against whom it is sought to
of fourth-party defendant Fausto Pangilinan as against the latter.
enforce a right is precluded from setting up the forgery or want of authority." Parties who warrant
4. On the counterclaims on the complaint, third-party complaint and fourth-party complaint, or admit the genuineness of the signature in question and those who, by their acts, silence or
the same are hereby ordered dismissed for lack of merit. negligence are estopped from setting up the defense of forgery, are precluded from using this
12 defense. Indorsers, persons negotiating by delivery and acceptors are warrantors of the
SO ORDERED.
genuineness of the signatures on the instrument. 20
13
PNB and Associated Bank appealed to the Court of Appeals. Respondent court affirmed the trial
In bearer instruments, the signature of the payee or holder is unnecessary to pass title to the
court's decision in toto on September 30, 1992.
instrument. Hence, when the indorsement is a forgery, only the person whose signature is forged
Hence these consolidated petitions which seek a reversal of respondent appellate court's decision. can raise the defense of forgery against a holder in due course. 21
PNB assigned two errors. First, the bank contends that respondent court erred in exempting the The checks involved in this case are order instruments, hence, the following discussion is made
Province of Tarlac from liability when, in fact, the latter was negligent because it delivered and with reference to the effects of a forged indorsement on an instrument payable to order.
released the questioned checks to Fausto Pangilinan who was then already retired as the hospital's
Where the instrument is payable to order at the time of the forgery, such as the checks in this
cashier and administrative officer. PNB also maintains its innocence and alleges that as between
case, the signature of its rightful holder (here, the payee hospital) is essential to transfer title to
two innocent persons, the one whose act was the cause of the loss, in this case the Province of
the same instrument. When the holder's indorsement is forged, all parties prior to the forgery may
Tarlac, bears the loss.
raise the real defense of forgery against all parties subsequent thereto. 22
Next, PNB asserts that it was error for the court to order it to pay the province and then seek
An indorser of an order instrument warrants "that the instrument is genuine and in all respects
reimbursement from Associated Bank. According to petitioner bank, respondent appellate Court
what it purports to be; that he has a good title to it; that all prior parties had capacity to contract;
should have directed Associated Bank to pay the adjudged liability directly to the Province of Tarlac
to avoid circuity. 14
31
 23
and that the instrument is at the time of his indorsement valid and subsisting." He cannot
interpose the defense that signatures prior to him are forged.
A collecting bank where a check is deposited and which indorses the check upon presentment with
the drawee bank, is such an indorser. So even if the indorsement on the check deposited by the
banks's client is forged, the collecting bank is bound by his warranties as an indorser and cannot
set up the defense of forgery as against the drawee bank.
The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay the
check to the order of the payee. The drawer's instructions are reflected on the face and by the
terms of the check. Payment under a forged indorsement is not to the drawer's order. When the
drawee bank pays a person other than the payee, it does not comply with the terms of the check
and violates its duty to charge its customer's (the drawer) account only for properly payable items.
Since the drawee bank did not pay a holder or other person entitled to receive payment, it has no
right to reimbursement from the drawer. 24 The general rule then is that the drawee bank may not
debit the drawer's account and is not entitled to indemnification from the drawer. 25 The risk of loss
must perforce fall on the drawee bank.
However, if the drawee bank can prove a failure by the customer/drawer to exercise ordinary care
that substantially contributed to the making of the forged signature, the drawer is precluded from
asserting the forgery.
If at the same time the drawee bank was also negligent to the point of substantially contributing to
the loss, then such loss from the forgery can be apportioned between the negligent drawer and the
negligent bank. 26
In cases involving a forged check, where the drawer's signature is forged, the drawer can recover
from the drawee bank. No drawee bank has a right to pay a forged check. If it does, it shall have to
recredit the amount of the check to the account of the drawer. The liability chain ends with the
drawee bank whose responsibility it is to know the drawer's signature since the latter is its
customer. 27
In cases involving checks with forged indorsements, such as the present petition, the chain of
liability does not end with the drawee bank. The drawee bank may not debit the account of the
drawer but may generally pass liability back through the collection chain to the party who took from
the forger and, of course, to the forger himself, if available. 28 In other words, the drawee bank
canseek reimbursement or a return of the amount it paid from the presentor bank or
person. 29 Theoretically, the latter can demand reimbursement from the person who indorsed the
check to it and so on. The loss falls on the party who took the check from the forger, or on the
forger himself.
In this case, the checks were indorsed by the collecting bank (Associated Bank) to the drawee bank
(PNB). The former will necessarily be liable to the latter for the checks bearing forged
indorsements. If the forgery is that of the payee's or holder's indorsement, the collecting bank is
held liable, without prejudice to the latter proceeding against the forger.
Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the
drawee bank. The former must necessarily return the money paid by the latter because it was paid
wrongfully. 30
More importantly, by reason of the statutory warranty of a general indorser in section 66 of the
Negotiable Instruments Law, a collecting bank which indorses a check bearing a forged
indorsement and presents it to the drawee bank guarantees all prior indorsements, including the
forged indorsement. It warrants that the instrument is genuine, and that it is valid and subsisting at
the time of his indorsement. Because the indorsement is a forgery, the collecting bank commits a
breach of this warranty and will be accountable to the drawee bank. This liability scheme operates
without regard to fault on the part of the collecting/presenting bank. Even if the latter bank was not
negligent, it would still be liable to the drawee bank because of its indorsement.
The Court has consistently ruled that "the collecting bank or last endorser generally suffers the loss
because it has the duty to ascertain the genuineness of all prior endorsements considering that the
act of presenting the check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the endorsements." 31
The drawee bank is not similarly situated as the collecting bank because the former makes no
warranty as to the genuineness. of any indorsement. 32 The drawee bank's duty is but to verify the
genuineness of the drawer's signature and not of the indorsement because the drawer is its client.
32
Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the
check. The bank knows him, his address and history because he is a client. It has taken a risk on
his deposit. The bank is also in a better position to detect forgery, fraud or irregularity in the
indorsement.
Hence, the drawee bank can recover the amount paid on the check bearing a forged indorsement
from the collecting bank. However, a drawee bank has the duty to promptly inform the presentor of
the forgery upon discovery. If the drawee bank delays in informing the presentor of the forgery,
thereby depriving said presentor of the right to recover from the forger, the former is deemed
negligent and can no longer recover from the presentor. 33
Applying these rules to the case at bench, PNB, the drawee bank, cannot debit the current account
of the Province of Tarlac because it paid checks which bore forged indorsements. However, if the
Province of Tarlac as drawer was negligent to the point of substantially contributing to the loss,
then the drawee bank PNB can charge its account. If both drawee bank-PNB and drawer-Province of
Tarlac were negligent, the loss should be properly apportioned between them.
The loss incurred by drawee bank-PNB can be passed on to the collecting bank-Associated Bank
which presented and indorsed the checks to it. Associated Bank can, in turn, hold the forger, Fausto
Pangilinan, liable.
If PNB negligently delayed in informing Associated Bank of the forgery, thus depriving the latter of
the opportunity to recover from the forger, it forfeits its right to reimbursement and will be made to
bear the loss.
After careful examination of the records, the Court finds that the Province of Tarlac was equally
negligent and should, therefore, share the burden of loss from the checks bearing a forged
indorsement.
The Province of Tarlac permitted Fausto Pangilinan to collect the checks when the latter, having
already retired from government service, was no longer connected with the hospital. With the
exception of the first check (dated January 17, 1978), all the checks were issued and released after
Pangilinan's retirement on February 28, 1978. After nearly three years, the Treasurer's office was
still releasing the checks to the retired cashier. In addition, some of the aid allotment checks were
released to Pangilinan and the others to Elizabeth Juco, the new cashier. The fact that there were
now two persons collecting the checks for the hospital is an unmistakable sign of an irregularity
which should have alerted employees in the Treasurer's office of the fraud being committed. There
is also evidence indicating that the provincial employees were aware of Pangilinan's retirement and
consequent dissociation from the hospital. Jose Meru, the Provincial Treasurer, testified:.
ATTY. MORGA:
Q Now, is it true that for a given month there were two releases of checks, one went to Mr.
Pangilinan and one went to Miss Juco?
JOSE MERU:
A Yes, sir.
Q Will you please tell us how at the time (sic) when the authorized representative of
Concepcion Emergency Hospital is and was supposed to be Miss Juco?
A Well, as far as my investigation show (sic) the assistant cashier told me that Pangilinan
represented himself as also authorized to help in the release of these checks and we were
apparently misled because they accepted the representation of Pangilinan that he was helping
them in the release of the checks and besides according to them they were, Pangilinan, like
the rest, was able to present an official receipt to acknowledge these receipts and according to
them since this is a government check and believed that it will eventually go to the hospital
following the standard procedure of negotiating government checks, they released the checks
to Pangilinan aside from Miss Juco.34
The failure of the Province of Tarlac to exercise due care contributed to a significant degree to the
loss tantamount to negligence. Hence, the Province of Tarlac should be liable for part of the total
amount paid on the questioned checks.
The drawee bank PNB also breached its duty to pay only according to the terms of the check.
Hence, it cannot escape liability and should also bear part of the loss.
As earlier stated, PNB can recover from the collecting bank.
In the case of Associated Bank v. CA, 35 six crossed checks with forged indorsements were
deposited in the forger's account with the collecting bank and were later paid by four different
drawee banks. The Court found the collecting bank (Associated) to be negligent and held:
The Bank should have first verified his right to endorse the crossed checks, of which he was
not the payee, and to deposit the proceeds of the checks to his own account. The Bank was by
reason of the nature of the checks put upon notice that they were issued for deposit only to
the private respondent's account. . . .
The situation in the case at bench is analogous to the above case, for it was not the payee who
deposited the checks with the collecting bank. Here, the checks were all payable to Concepcion
Emergency Hospital but it was Fausto Pangilinan who deposited the checks in his personal savings
account.
Although Associated Bank claims that the guarantee stamped on the checks (All prior and/or lack of
endorsements guaranteed) is merely a requirement forced upon it by clearing house rules, it cannot
but remain liable. The stamp guaranteeing prior indorsements is not an empty rubric which a bank
must fulfill for the sake of convenience. A bank is not required to accept all the checks negotiated
to it. It is within the bank's discretion to receive a check for no banking institution would
consciously or deliberately accept a check bearing a forged indorsement. When a check is deposited
with the collecting bank, it takes a risk on its depositor. It is only logical that this bank be held
accountable for checks deposited by its customers.
A delay in informing the collecting bank (Associated Bank) of the forgery, which deprives it of the
opportunity to go after the forger, signifies negligence on the part of the drawee bank (PNB) and
will preclude it from claiming reimbursement.
It is here that Associated Bank's assignment of error concerning C.B. Circular No. 580 and Section
23 of the Philippine Clearing House Corporation Rules comes to fore. Under Section 4(c) of CB
Circular No. 580, items bearing a forged endorsement shall be returned within twenty-Sour (24)
hours after discovery of the forgery but in no event beyond the period fixed or provided by law for
filing of a legal action by the returning bank. Section 23 of the PCHC Rules deleted the requirement
that items bearing a forged endorsement should be returned within twenty-four hours. Associated
Bank now argues that the aforementioned Central Bank Circular is applicable. Since PNB did not
return the questioned checks within twenty-four hours, but several days later, Associated Bank
alleges that PNB should be considered negligent and not entitled to reimbursement of the amount it
paid on the checks.
The Court deems it unnecessary to discuss Associated Bank's assertions that CB Circular No. 580 is
an administrative regulation issued pursuant to law and as such, must prevail over the PCHC rule.
The Central Bank circular was in force for all banks until June 1980 when the Philippine Clearing
House Corporation (PCHC) was set up and commenced operations. Banks in Metro Manila were
covered by the PCHC while banks located elsewhere still had to go through Central Bank Clearing.
In any event, the twenty-four-hour return rule was adopted by the PCHC until it was changed in
1982. The contending banks herein, which are both branches in Tarlac province, are therefore not
covered by PCHC Rules but by CB Circular No. 580. Clearly then, the CB circular was applicable
when the forgery of the checks was discovered in 1981.
The rule mandates that the checks be returned within twenty-four hours after discovery of the
forgery but in no event beyond the period fixed by law for filing a legal action. The rationale of the
rule is to give the collecting bank (which indorsed the check) adequate opportunity to proceed
against the forger. If prompt notice is not given, the collecting bank maybe prejudiced and lose the
opportunity to go after its depositor.
The Court finds that even if PNB did not return the questioned checks to Associated Bank within
twenty-four hours, as mandated by the rule, PNB did not commit negligent delay. Under the
circumstances, PNB gave prompt notice to Associated Bank and the latter bank was not prejudiced
in going after Fausto Pangilinan. After the Province of Tarlac informed PNB of the forgeries, PNB
necessarily had to inspect the checks and conduct its own investigation. Thereafter, it requested
the Provincial Treasurer's office on March 31, 1981 to return the checks for verification. The
Province of Tarlac returned the checks only on April 22, 1981. Two days later, Associated Bank
received the checks from PNB. 36
Associated Bank was also furnished a copy of the Province's letter of demand to PNB dated March
20, 1981, thus giving it notice of the forgeries. At this time, however, Pangilinan's account with
Associated had only P24.63 in it.37 Had Associated Bank decided to debit Pangilinan's account, it
could not have recovered the amounts paid on the questioned checks. In addition, while Associated
33
Bank filed a fourth-party complaint against Fausto Pangilinan, it did not present evidence against
Pangilinan and even presented him as its rebuttal witness. 38Hence, Associated Bank was not
prejudiced by PNB's failure to comply with the twenty-four-hour return rule.
Next, Associated Bank contends that PNB is estopped from requiring reimbursement because the
latter paid and cleared the checks. The Court finds this contention unmeritorious. Even if PNB
cleared and paid the checks, it can still recover from Associated Bank. This is true even if the
payee's Chief Officer who was supposed to have indorsed the checks is also a customer of the
drawee bank. 39 PNB's duty was to verify the genuineness of the drawer's signature and not the
genuineness of payee's indorsement. Associated Bank, as the collecting bank, is the entity with the
duty to verify the genuineness of the payee's indorsement.
PNB also avers that respondent court erred in adjudging circuitous liability by directing PNB to
return to the Province of Tarlac the amount of the checks and then directing Associated Bank to
reimburse PNB. The Court finds nothing wrong with the mode of the award. The drawer, Province of
Tarlac, is a clientor customer of the PNB, not of Associated Bank. There is no privity of contract
between the drawer and the collecting bank.
The trial court made PNB and Associated Bank liable with legal interest from March 20, 1981, the
date of extrajudicial demand made by the Province of Tarlac on PNB. The payments to be made in
this case stem from the deposits of the Province of Tarlac in its current account with the PNB. Bank
deposits are considered under the law as loans. 40 Central Bank Circular No. 416 prescribes a
twelve percent (12%) interest per annum for loans, forebearance of money, goods or credits in the
absence of express stipulation. Normally, current accounts are likewise interest-bearing, by express
contract, thus excluding them from the coverage of CB Circular No. 416. In this case, however, the
actual interest rate, if any, for the current account opened by the Province of Tarlac with PNB was
not given in evidence. Hence, the Court deems it wise to affirm the trial court's use of the legal
interest rate, or six percent (6%) per annum. The interest rate shall be computed from the date of
default, or the date of judicial or extrajudicial demand. 41 The trial court did not err in granting legal
interest from March 20, 1981, the date of extrajudicial demand.
The Court finds as reasonable, the proportionate sharing of fifty percent - fifty percent (50%-50%).
Due to the negligence of the Province of Tarlac in releasing the checks to an unauthorized person
(Fausto Pangilinan), in allowing the retired hospital cashier to receive the checks for the payee
hospital for a period close to three years and in not properly ascertaining why the retired hospital
cashier was collecting checks for the payee hospital in addition to the hospital's real cashier,
respondent Province contributed to the loss amounting to P203,300.00 and shall be liable to the
PNB for fifty (50%) percent thereof. In effect, the Province of Tarlac can only recover fifty percent
(50%) of P203,300.00 from PNB.
The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00.
It is liable on its warranties as indorser of the checks which were deposited by Fausto Pangilinan,
having guaranteed the genuineness of all prior indorsements, including that of the chief of the
payee hospital, Dr. Adena Canlas. Associated Bank was also remiss in its duty to ascertain the
genuineness of the payee's indorsement.
IN VIEW OF THE FOREGOING, the petition for review filed by the Philippine National Bank (G.R. No.
107612) is hereby PARTIALLY GRANTED. The petition for review filed by the Associated Bank (G.R.
No. 107382) is hereby DENIED. The decision of the trial court is MODIFIED. The Philippine National
Bank shall pay fifty percent (50%) of P203,300.00 to the Province of Tarlac, with legal interest from
March 20, 1981 until the payment thereof. Associated Bank shall pay fifty percent (50%) of
P203,300.00 to the Philippine National Bank, likewise, with legal interest from March 20, 1981 until
payment is made.
SO ORDERED.
-----
G.R. No. L-55079 November 19, 1982
METROPOLITAN BANK and TRUST COMPANY, petitioner, vs. THE FIRST NATIONAL CITY
BANK and THE COURT OF APPEALS, respondents.
MELENCIO-HERRERA, J.:
This is a Petition for Review on certiorari of the Decision of the Court of Appeals in CA-G.R. No.
57129-R entitled, First National City Bank vs. Metropolitan Bank and Trust Company, which
affirmed in toto the Decision of the Court of First Instance of Manila, Branch VIII, in Civil Case No.
61488, ordering petitioner herein, Metropolitan Bank, to reimburse respondent First National City
Bank the amount of P50,000.00, with legal rate of interest from June 25, 1965, and to pay
attorney's fees of P5,000.00 and costs.
The controversy arose from the following facts:
On August 25, 1964, Check No. 7166 dated July 8, 1964 for P50,000.00, payable to CASH, drawn
by Joaquin Cunanan & Company on First National City Bank (FNCB for brevity) was deposited with
Metropolitan Bank and Trust Company (Metro Bank for short) by a certain Salvador Sales. Earlier
that day, Sales had opened a current account with Metro Bank depositing P500.00 in cash. 1 Metro
Bank immediately sent the cash check to the Clearing House of the Central Bank with the following
words stamped at the back of the check:
Metropolitan Bank and Trust Company Cleared (illegible) office All prior endorsements and/or
Lack of endorsements Guaranteed. 2
The check was cleared the same day. Private respondent paid petitioner through clearing the
amount of P50,000.00, and Sales was credited with the said amount in his deposit with Metro Bank.
On August 26, 1964, Sales made his first withdrawal of P480.00 from his current account. On
August 28, 1964, he withdrew P32,100.00. Then on August 31, 1964, he withdrew the balance of
P17,920.00 and closed his account with Metro Bank.
On September 3, 1964, or nine (9) days later, FNCB returned cancelled Check No. 7166 to drawer
Joaquin Cunanan & Company, together with the monthly statement of the company's account with
FNCB. That same day, the company notified FNCB that the check had been altered. The actual
amount of P50.00 was raised to P50,000.00, and over the name of the payee, Manila Polo Club,
was superimposed the word CASH.
FNCB notified Metro Bank of the alteration by telephone, confirming it the same day with a letter,
which was received by Metro Bank on the following day, September 4, 1964.
On September 10, 1964, FNCB wrote Metro Bank asking for reimbursement of the amount of
P50,000.00. The latter did not oblige, so that FNCB reiterated its request on September 29, 1964.
Metro Bank was adamant in its refusal.
On June 29, 1965, FNCB filed in the Court of First Instance of Manila, Branch VIII, Civil Case No.
61488 against Metro Bank for recovery of the amount of P50,000.00.
On January 27, 1975, the Trial Court rendered its Decision ordering Metro Bank to reimburse FNCB
the amount of P50,000.00 with legal rate of interest from June 25, 1965 until fully paid, to pay
attorney's fees of P5,000.00, and costs.
Petitioner appealed said Decision to the Court of Appeals (CA-G.R. No. 57129-R). On August 29,
1980, respondent Appellate Court 3 affirmed in toto the judgment of the Trial Court.
Petitioner came to this instance on appeal by Certiorari, alleging:
I FNCB contends that the stamp reading,
The Respondent Court of Appeals erred in completely ignoring and disregarding the 24-hour
clearing house rule provided for under Central Bank Circular No. 9, as amended, although:
1. The 24-hour regulation of the Central Bank in clearing house operations is valid and banks
are subject to and are bound by the same; and
2. The 24-hour clearing house rule applies to the present case of the petitioner and the private
respondent.
II
The Respondent Court of Appeals erred in relying heavily on its decision in Gallaites, et al. vs.
RCA, etc., promulgated on October 23, 1950 for the same is not controlling and is not
applicable to the present case.
III
The Respondent Court of Appeals erred in disregarding and in not applying the doctrines in the
cases of Republic of the Philippines vs. Equitable Banking Corporation (10 SCRA 8) and
Hongkong & Shanghai Banking Corporation vs. People's Bank and Trust Company (35 SCRA
140) for the same are controlling and apply four square to the present case.
IV
34
The Respondent Court of Appeals erred in not finding the private respondent guilty of
operative negligence which is the proximate cause of the loss.
The material facts of the case are not disputed. The issue for resolution is, which bank is liable for
the payment of the altered check, the drawee bank (FNCB) or the collecting bank (Metro Bank)?
The transaction occurred during the effectivity of Central Bank Circular No. 9 (February 17, 1949)
as amended by Circular No. 138 (January 30, 1962), and Circular No. 169 (March 30, 1964).
Section 4 of said Circular, as amended, states:
Section 4. Clearing Procedures.
(c) Procedures for Returned Items
Items which should be returned for any reason whatsoever shall be delivered to and received
through the clearing Office in the special red envelopes and shall be considered and accounted
as debits to the banks to which the items are returned. Nothing in this section shall prevent
the returned items from being settled by reinbursement to the bank, institution or entity
returning the items. All items cleared on a particular clearing shall be returned not later than
3:30 P.M. on the following business day.
xxx xxx xxx
The facts of this case fall within said Circular. Under the procedure prescribed, the drawee bank
receiving the check for clearing from the Central Bank Clearing House must return the check to the
collecting bank within the 24-hour period if the check is defective for any reason.
Metro Bank invokes this 24-hour regulation of the Central Bank as its defense. FNCB on the other
hand, relies on the guarantee of all previous indorsements made by Metro Bank which guarantee
had allegedly misled FNCB into believing that the check in question was regular and the payee's
indorsements genuine; as well as on "the general rule of law founded on equity and justice that a
drawee or payor bank which in good faith pays the amount of materially altered check to the holder
thereof is entitled to recover its payment from the said holder, even if he be an innocent holder. 4
The validity of the 24-hour clearing house regulation has been upheld by this Court in Republic vs.
Equitable Banking Corporation, 10 SCRA 8 (1964). As held therein, since both parties are part of
our banking system, and both are subject to the regulations of the Central Bank, they are bound by
the 24-hour clearing house rule of the Central Bank.
In this case, the check was not returned to Metro Bank in accordance with the 24-hour clearing
house period, but was cleared by FNCB. Failure of FNCB, therefore, to call the attention of Metro
Bank to the alteration of the check in question until after the lapse of nine days, negates whatever
right it might have had against Metro Bank in the light of the said Central Bank Circular. Its remedy
lies not against Metro Bank, but against the party responsible for the changing the name of the
payee 5 and the amount on the face of the check.
Metropolitan Bank and Trust Company Cleared (illegible) office All prior endorsements and/or
Lack of endorsements Guaranteed. 6
made by Metro Bank is an unqualified representation that the endorsement on the check was that
of the true payee, and that the amount thereon was the correct amount. In that connection, this
Court in the Hongkong & Shanghai Bank case, supra, ruled:
.. But Plaintiff Bank insists that Defendant Bank is liable on its indorsement during clearing
house operations. The indorsement, itself, is very clear when it begins with words 'For
clearance, clearing office **** In other words, such an indorsement must be read together
with the 24-hour regulation on clearing House Operations of the Central Bank. Once that 24-
hour period is over, the liability on such an indorsement has ceased. This being so, Plaintiff
Bank has not made out a case for relief. 7
Consistent with this ruling, Metro Bank can not be held liable for the payment of the altered check.
Moreover, FNCB did not deny the allegation of Metro Bank that before it allowed the withdrawal of
the balance of P17,920.00 by Salvador Sales, Metro Bank withheld payment and first verified,
through its Assistant Cashier Federico Uy, the regularity and genuineness of the check deposit from
Marcelo Mirasol, Department Officer of FNCB, because its (Metro Bank) attention was called by the
fast movement of the account. Only upon being assured that the same is not unusual' did Metro
Bank allow the withdrawal of the balance.
Reliance by respondent Court of Appeals, on its own ruling in Gallaites vs. RCA, CA-G.R. No. 3805,
October 23, 1950, by stating:
... The laxity of appellant in its dealing with customers, particularly in cases where the Identity
of the person is new to them (as in the case at bar) and in the obvious carelessness of the
appellant in handling checks which can easily be forged or altered boil down to one conclusion-
negligence in the first order. This negligence enabled a swindler to succeed in fraudulently
encashing the chock in question thereby defrauding drawee bank (appellee) in the amount
thereof.
is misplaced not only because the factual milieu is not four square with this case but more so
because it cannot prevail over the doctrine laid down by this Court in the Hongkong & Shanghai
Bank case which is more in point and, hence, controlling:
WHEREFORE, the challenged Decision of respondent Court of Appeals of August 29, 1980 is hereby
set aside, and Civil Case No. 61488 is hereby dismissed.
Costs against private respondent The First National City Bank.
SO ORDERED.
-----
[G.R. No. 42725. April 22, 1991.]
REPUBLIC BANK, Petitioner, v. COURT OF APPEALS and FIRST NATIONAL CITY
BANK,Respondents.
GRIO-AQUINO, J.:
On January 25, 1966, San Miguel Corporation (SMC for short), drew a dividend Check No. 108854
for P240, Philippine currency, on its account in the respondent First National City Bank ("FNCB" for
brevity) in favor of J. Roberto C. Delgado, a stockholder. After the check had been delivered to
Delgado, the amount on its face was fraudulently and without authority of the drawer, SMC, altered
by increasing it from P240 to P9,240. The check was indorsed and deposited on March 14, 1966 by
Delgado in his account with the petitioner Republic Bank (hereafter "Republic").
Republic accepted the check for deposit without ascertaining its genuineness and regularity. Later,
Republic endorsed the check to FNCB by stamping on the back of the check "all prior and/or lack of
indorsement guaranteed" and presented it to FNCB for payment through the Central Bank Clearing
House. Believing the check was genuine, and relying on the guaranty and endorsement of Republic
appearing on the back of the check, FNCB paid P9,240 to Republic through the Central Bank
Clearing House on March 15, 1966.
On April 19, 1966, SMC notified FNCB of the material alteration in the amount of the check in
question. FNCB lost no time in recrediting P9,240 to SMC. On May 19, 1966, FNCB informed
Republic in writing of the alteration and the forgery of the endorsement of J. Roberto C. Delgado.
By then, Delgado had already withdrawn his account from Republic.
On August 15, 1966, FNCB demanded that Republic refund the P9,240 on the basis of the latters
endorsement and guaranty. Republic refused, claiming there was delay in giving it notice of the
alteration; that it was not guilty of negligence; that it was the drawers (SMCs) fault in drawing the
check in such a way as to permit the insertion of numerals increasing the amount; that FNCB, as
drawee, was absolved of any liability to the drawer (SMC), thus, FNCB had no right of recourse
against Republic.
On April 8, 1968, the trial court rendered judgment ordering Republic to pay P9,240 to FNCB with
6% interest per annum from February 27, 1967 until fully paid, plus P2,000 for attorneys fees and
costs of the suit. The Court of Appeals affirmed that decision, but modified the award of attorneys
fees by reducing it to P1,000 without pronouncement as to costs (CA-G.R. No. 41691-R, December
22, 1975).chanrobles virtual lawlibrary
In this petition for review, the lone issue is whether Republic, as the collecting bank, is protected,
by the 24-hour clearing house rule, found in CB Circular No. 9, as amended, from liability to refund
the amount paid by FNCB, as drawee of the SMC dividend check.
35
The petition for review is meritorious and must be granted.
The 24-hour clearing house rule embodied in Section 4(c) of Central Bank Circular No. 9, as
amended, provides:jgc:chanrobles.com.ph
"Items which should be returned for any reason whatsoever shall be returned directly to the bank,
institution or entity from which the item was received. For this purpose, the Receipt for Returned
Checks (Cash Form No. 9) should be used. The original and duplicate copies of said Receipt shall be
given to the Bank, institution or entity which returned the items and the triplicate copy should be
retained by the bank, institution or entity whose demand is being returned. At the following
clearing, the original of the Receipt for Returned Checks shall be presented through the Clearing
Office as a demand against the bank, institution or entity whose item has been returned. Nothing in
this section shall prevent the returned items from being settled by direct reimbursement to the
bank, institution or entity returning the items. All items cleared at 11:00 oclock A.M. shall be
returned not later than 2:00 oclock P.M. on the same day and all items cleared at 3:00 oclock P.M.
shall be returned not later than 8:30 A.M. of the following business day except for items cleared on
Saturday which may be returned not later than 8:30 A.M. of the following day."cralaw virtua1aw
library
The 24-hour clearing house rule is a valid rule applicable to commercial banks (Republic v.
Equitable Banking Corporation, 10 SCRA 8 [1964]; Metropolitan Bank & Trust Co. v. First National
City Bank, 118 SCRA 537).
It is true that when an endorsement is forged, the collecting bank or last endorser, as a general
rule, bears the loss (Banco de Oro Savings & Mortgage Bank v. Equitable Banking Corp., 167 SCRA
188). But the unqualified endorsement of the collecting bank on the check should be read together
with the 24-hour regulation on clearing house operation (Metropolitan Bank & Trust Co. v. First
National City Bank, supra). Thus, when the drawee bank fails to return a forged or altered check to
the collecting bank within the 24-hour clearing period, the collecting bank is absolved from liability.
The following decisions of this Court are also relevant and persuasive:chanrob1es virtual 1aw
library
In Hongkong & Shanghai Banking Corp. v. Peoples Bank & Trust Co. (35 SCRA 140), a check for
P14,608.05 was drawn by the Philippine Long Distance Telephone Company on the Hongkong &
Shanghai Banking Corporation payable to the same bank. It was mailed to the payee but fell into
the hands of a certain Florentino Changco who erased the name of the payee, typed his own name,
and thereafter deposited the altered check in his account in the Peoples Bank & Trust Co. which
presented it to the drawee bank with the following indorsement:chanroblesbrary
"For clearance, clearing office. All prior endorsements and or lack of endorsements guaranteed.
Peoples Bank and Trust Company."cralaw virtua1aw library
The check was cleared by the drawee bank (Hongkong & Shanghai Bank), whereupon the Peoples
Bank credited Changco with the amount of the check. Changco thereafter withdrew the contents of
his bank account. A month later, when the check was returned to PLDT, the alteration was
discovered. The Hongkong & Shanghai Bank sued to recover from the Peoples Bank the sum of
P14,608.05. The complaint was dismissed. Affirming the decision of the trial court, this Court
held:jgc:chanrobles.com.ph
"The entire case of plaintiff is based on the indorsement that has been heretofore copied namely,
a guarantee of all prior indorsement, made by Peoples Bank and since such an indorsement carries
with it a concomitant guarantee of genuineness, the Peoples Bank is liable to the Hongkong
Shanghai Bank for alteration made in the name of payee. On the other hand, the Peoples Bank
relies on the 24-hour regulation of the Central Bank that requires after a clearing, that all cleared
items must be returned not later than 3:00 P.M. of the following business day. And since the
Hongkong Shanghai Bank only advised the Peoples Bank as to the alteration on April 12, 1965 or
27 days after clearing, the Peoples Bank claims that it is now too late to do so. This regulation of
the Central Bank as to 24 hours is challenged by Plaintiff Bank as being merely part of an ingenious
device to facilitate banking transactions. Be that what it may as both Plaintiff as well as
Defendant Banks are part of our banking system and both are subject to regulations of the Central
Bank they are both bound by such regulations. . . . But Plaintiff Bank insists that Defendant Bank
is liable on its indorsement during clearing house operations. The indorsement, itself, is very clear
when it begins with the words `For clearance, clearing office . . . In other words, such an
indorsement must be read together with the 24-hour regulation on clearing House Operations of
the Central Bank. Once that 24-hour period is over, the liability on such an indorsement has
ceased. This being so, Plaintiff Bank has not made out a case for relief."cralaw virtua1aw library
"x x x
"Moreover, in one of the very cases relied upon by plaintiff, as appellant, mention is made of a
principle on which defendant Bank could have acted without incurring the liability now sought to be
imposed by plaintiff. Thus: It is a settled rule that a person who presents for payment checks such
as are here involved guarantees the genuineness of the check, and the drawee bank need concern
itself with nothing but the genuineness of the signature, and the state of the account with it of the
drawee. (Interstate Trust Co. v. United States National Bank, 185 Pac. 260 [1919]). If at all, then,
whatever remedy the plaintiff has would lie not against defendant Bank but as against the party
responsible for changing the name of the payee. Its failure to call the attention of defendant Bank
as to such alteration until after the lapse of 27 days would, in the light of the above Central Bank
circular, negate whatever right it might have had against defendant Bank. . . ." (35 SCRA 140, 142-
143; 145-146.)
In Metropolitan Bank & Trust Co. v. First National City Bank, Et. Al. (118 SCRA 537, 542) a check
for P50, drawn by Joaquin Cunanan and Company on its account at FNCB and payable to Manila
Polo Club, was altered by changing the amount to P50,000 and the payee was changed to "Cash."
It was deposited by a certain Salvador Sales in his current account in the Metropolitan Bank which
sent it to the clearing house. The check was cleared the same day by FNCB which paid the amount
of P50,000 to Metro Bank. Sales immediately withdrew the whole amount and closed his account.
Nine (9) days later, the alteration was discovered and FNCB sought to recover from Metro Bank
what it had paid. The trial court and the Court of Appeals rendered judgment for FNCB but this
Court reversed it. We ruled:jgc:chanrobles.com.ph
"The validity of the 24-hour clearing house regulation has been upheld by this Court in Republic v.
Equitable Banking Corporation, 10 SCRA 8 (1964). As held therein, since both parties are part of
our banking system, and both are subject to the regulations of the Central Bank, they are bound by
the 24-hour clearing house rule of the Central Bank.chanrobles.com.ph : virtual lrary
"In this case, the check was not returned to Metro Bank in accordance with the 24-hour clearing
house period, but was cleared by FNCB. Failure of FNCB, therefore, to call the attention of Metro
Bank to the alteration of the check in question until after the lapse of nine days, negates whatever
right it might have had against Metro Bank in the light of the said Central Bank Circular. Its remedy
lies not against Metro Bank, but against the party responsible for changing the name of the payee
(Hongkong & Shanghai Banking Corp. v. Peoples Bank & Trust Co., 35 SCRA 140) and the amount
on the face of the check." (p. 542.)
Every bank that issues checks for the use of its customers should know whether or not the drawers
signature thereon is genuine, whether there are sufficient funds in the drawers account to cover
checks issued, and it should be able to detect alterations, erasures, superimpositions or
intercalations thereon, for these instruments are prepared, printed and issued by itself, it has
control of the drawers account, and it is supposed to be familiar with the drawers signature. It
should possess appropriate detecting devices for uncovering forgeries and/or alterations on these
instruments. Unless an alteration is attributable to the fault or negligence of the drawer himself,
such as when he leaves spaces on the check which would allow the fraudulent insertion of
additional numerals in the amount appearing thereon, the remedy of the drawee bank that
negligently clears a forged and/or altered check for payment is against the party responsible for the
forgery or alteration (Hongkong & Shanghai Banking Corp. v. Peoples Bank & Trust Co., 35 SCRA
140), otherwise, it bears the loss. It may not charge the amount so paid to the account of the
drawer, if the latter was free from blame, nor recover it from the collecting bank if the latter made
payment after proper clearance from the drawee. As this Court pointed out in Philippine National
Bank v. Quimpo, Et Al., 158 SCRA 582, 584:jgc:chanrobles.com.ph
"There is nothing inequitable in such a rule for if in the regular course of business the check comes
to the drawee bank which, having the opportunity to ascertain its character, pronounces it to be
valid and pays it, it is not only a question of payment under mistake, but payment in neglect of
duty which the commercial law places upon it, and the result of its negligence must rest upon
36
it."cralaw virtua1aw library
The Court of Appeals erred in laying upon Republic, instead of on FNCB the drawee bank, the
burden of loss for the payment of the altered SMC check, the fraudulent character of which FNCB
failed to detect and warn Republic about, within the 24-hour clearing house rule. The Court of
Appeals departed from the ruling of this Court in an earlier PNB case, that:jgc:chanrobles.com.ph
"Where a loss, which must be borne by one of two parties alike innocent of forgery, can be traced
to the neglect or fault of either, it is reasonable that it would be borne by him, even if innocent of
any intentional fraud, through whose means it has succeeded. (Phil. National Bank v. National City
Bank of New York, 63 Phil. 711, 733.)"
WHEREFORE, the petition for review is granted. The decision of the Court of Appeals is hereby
reversed and set aside, and another is entered absolving the petitioner Republic Bank from liability
to refund to the First National City Bank the sum of P9,240, which the latter paid on the check in
question. No costs.
SO ORDERED.
-----
G.R. No. 121413 January 29, 2001
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK OF ASIA
AND AMERICA),petitioner, vs. COURT OF APPEALS and FORD PHILIPPINES, INC. and
CITIBANK, N.A., respondents.
G.R. No. 121479 January 29, 2001
FORD PHILIPPINES, INC., petitioner-plaintiff, vs. COURT OF APPEALS and CITIBANK, N.A.
and PHILIPPINE COMMERCIAL INTERNATIONAL BANK,respondents.
G.R. No. 128604 January 29, 2001
FORD PHILIPPINES, INC., petitioner, vs. CITIBANK, N.A., PHILIPPINE COMMERCIAL
INTERNATIONAL BANK and COURT OF APPEALS, respondents.
QUISUMBING, J.:
These consolidated petitions involve several fraudulently negotiated checks.
The original actions a quo were instituted by Ford Philippines to recover from the drawee bank,
CITIBANK, N.A. (Citibank) and collecting bank, Philippine Commercial International Bank (PCIBank)
[formerly Insular Bank of Asia and America], the value of several checks payable to the
Commissioner of Internal Revenue, which were embezzled allegedly by an organized
syndicate.1wphi1.nt
G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995 Decision 1 of the
Court of Appeals in CA-G.R. CV No. 25017, entitled "Ford Philippines, Inc. vs. Citibank, N.A. and
Insular Bank of Asia and America (now Philipppine Commercial International Bank), and the August
8, 1995 Resolution,2 ordering the collecting bank, Philippine Commercial International Bank, to pay
the amount of Citibank Check No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996 Decision 3 of the Court
of Appeals and its March 5, 1997 Resolution4 in CA-G.R. No. 28430 entitled "Ford Philippines, Inc.
vs. Citibank, N.A. and Philippine Commercial International Bank," affirming in toto the judgment of
the trial court holding the defendant drawee bank, Citibank, N.A., solely liable to pay the amount of
P12,163,298.10 as damages for the misapplied proceeds of the plaintiff's Citibanl Check Numbers
SN-10597 and 16508.
I. G.R. Nos. 121413 and 121479
The stipulated facts submitted by the parties as accepted by the Court of Appeals are as follows:
"On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No. SN-04867 in
the amount of P4,746,114.41, in favor of the Commissioner of Internal Revenue as payment
of plaintiff;s percentage or manufacturer's sales taxes for the third quarter of 1977.
The aforesaid check was deposited with the degendant IBAA (now PCIBank) and was
subsequently cleared at the Central Bank. Upon presentment with the defendant Citibank, the
proceeds of the check was paid to IBAA as collecting or depository bank.
The proceeds of the same Citibank check of the plaintiff was never paid to or received by the
payee thereof, the Commissioner of Internal Revenue.
As a consequence, upon demand of the Bureau and/or Commissioner of Internal Revenue, the
plaintiff was compelled to make a second payment to the Bureau of Internal Revenue of its
percentage/manufacturers' sales taxes for the third quarter of 1977 and that said second
payment of plaintiff in the amount of P4,746,114.41 was duly received by the Bureau of
Internal Revenue.
It is further admitted by defendant Citibank that during the time of the transactions in
question, plaintiff had been maintaining a checking account with defendant Citibank; that
Citibank Check No. SN-04867 which was drawn and issued by the plaintiff in favor of the
Commissioner of Internal Revenue was a crossed check in that, on its face were two parallel
lines and written in between said lines was the phrase "Payee's Account Only"; and that
defendant Citibank paid the full face value of the check in the amount of P4,746,114.41 to the
defendant IBAA.
It has been duly established that for the payment of plaintiff's percentage tax for the last
quarter of 1977, the Bureau of Internal Revenue issued Revenue Tax Receipt No. 18747002,
dated October 20, 1977, designating therein in Muntinlupa, Metro Manila, as the authorized
agent bank of Metrobanl, Alabang branch to receive the tax payment of the plaintiff.
On December 19, 1977, plaintiff's Citibank Check No. SN-04867, together with the Revenue
Tax Receipt No. 18747002, was deposited with defendant IBAA, through its Ermita Branch.
The latter accepted the check and sent it to the Central Clearing House for clearing on the
samd day, with the indorsement at the back "all prior indorsements and/or lack of
indorsements guaranteed." Thereafter, defendant IBAA presented the check for payment to
defendant Citibank on same date, December 19, 1977, and the latter paid the face value of
the check in the amount of P4,746,114.41. Consequently, the amount of P4,746,114.41 was
debited in plaintiff's account with the defendant Citibank and the check was returned to the
plaintiff.
Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in the amount of
P4,746,114.41 was not paid to the Commissioner of Internal Revenue. Hence, in separate
letters dated October 26, 1979, addressed to the defendants, the plaintiff notified the latter
that in case it will be re-assessed by the BIR for the payment of the taxes covered by the said
checks, then plaintiff shall hold the defendants liable for reimbursement of the face value of
the same. Both defendants denied liability and refused to pay.
In a letter dated February 28, 1980 by the Acting Commissioner of Internal Revenue
addressed to the plaintiff - supposed to be Exhibit "D", the latter was officially informed,
among others, that its check in the amount of P4, 746,114.41 was not paid to the government
or its authorized agent and instead encashed by unauthorized persons, hence, plaintiff has to
pay the said amount within fifteen days from receipt of the letter. Upon advice of the plaintiff's
lawyers, plaintiff on March 11, 1982, paid to the Bureau of Internal Revenue, the amount of
P4,746,114.41, representing payment of plaintiff's percentage tax for the third quarter of
1977.
As a consequence of defendant's refusal to reimburse plaintiff of the payment it had made for
the second time to the BIR of its percentage taxes, plaintiff filed on January 20, 1983 its
original complaint before this Court.
On December 24, 1985, defendant IBAA was merged with the Philippine Commercial
International Bank (PCI Bank) with the latter as the surviving entity.
Defendant Citibank maintains that; the payment it made of plaintiff's Citibank Check No. SN-
04867 in the amount of P4,746,114.41 "was in due course"; it merely relied on the clearing
stamp of the depository/collecting bank, the defendant IBAA that "all prior indorsements
and/or lack of indorsements guaranteed"; and the proximate cause of plaintiff's injury is the
gross negligence of defendant IBAA in indorsing the plaintiff's Citibank check in question.
It is admitted that on December 19, 1977 when the proceeds of plaintiff's Citibank Check No.
SN-048867 was paid to defendant IBAA as collecting bank, plaintiff was maintaining a
checking account with defendant Citibank."5
37
Although it was not among the stipulated facts, an investigation by the National Bureau of
Investigation (NBI) revealed that Citibank Check No. SN-04867 was recalled by Godofredo Rivera,
the General Ledger Accountant of Ford. He purportedly needed to hold back the check because
there was an error in the computation of the tax due to the Bureau of Internal Revenue (BIR). With
Rivera's instruction, PCIBank replaced the check with two of its own Manager's Checks (MCs).
Alleged members of a syndicate later deposited the two MCs with the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint before the trial court impleading Pacific
Banking Corporation (PBC) and Godofredo Rivera, as third party defendants. But the court
dismissed the complaint against PBC for lack of cause of action. The course likewise dismissed the
third-party complaint against Godofredo Rivera because he could not be served with summons as
the NBI declared him as a "fugitive from justice".
On June 15, 1989, the trial court rendered its decision, as follows:
"Premises considered, judgment is hereby rendered as follows:
"1. Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and severally, to pay
the plaintiff the amount of P4,746,114.41 representing the face value of plaintiff's Citibank
Check No. SN-04867, with interest thereon at the legal rate starting January 20, 1983, the
date when the original complaint was filed until the amount is fully paid, plus costs;
"2. On defendant Citibank's cross-claim: ordering the cross-defendant IBAA (now PCI Bank) to
reimburse defendant Citibank for whatever amount the latter has paid or may pay to the
plaintiff in accordance with next preceding paragraph;
"3. The counterclaims asserted by the defendants against the plaintiff, as well as that asserted
by the cross-defendant against the cross-claimant are dismissed, for lack of merits; and
"4. With costs against the defendants.
SO ORDERED."6
Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated their
respective petitions for review on certiorari to the Courts of Appeals. On March 27, 1995, the
appellate court issued its judgment as follows:
"WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision with
modifications.
The court hereby renderes judgment:
1. Dismissing the complaint in Civil Case No. 49287 insofar as defendant Citibank N.A. is
concerned;
2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff the amount of
P4,746,114.41 representing the face value of plaintiff's Citibank Check No. SN-04867, with
interest thereon at the legal rate starting January 20, 1983, the date when the original
complaint was filed until the amount is fully paid;
3. Dismissing the counterclaims asserted by the defendants against the plaintiff as well as that
asserted by the cross-defendant against the cross-claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED."7
PCI Bank moved to reconsider the above-quoted decision of the Court of Appeals, while Ford filed a
"Motion for Partial Reconsideration." Both motions were denied for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari under Rule
45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of the Twelfth
Division of the Court of Appeals contending that it merely acted on the instruction of Ford and such
casue of action had already prescribed.
PCIBank sets forth the following issues for consideration:
I. Did the respondent court err when, after finding that the petitioner acted on the check
drawn by respondent Ford on the said respondent's instructions, it nevertheless found the
petitioner liable to the said respondent for the full amount of the said check.
II. Did the respondent court err when it did not find prescription in favor of the petitioner. 8
In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning the same
decision and resolution of the Court of Appeals, and praying for the reinstatement in toto of the
decision of the trial court which found both PCIBank and Citibank jointly and severally liable for the
loss.
In G.R. No. 121479, appellant Ford presents the following propositions for consideration:
I. Respondent Citibank is liable to petitioner Ford considering that:
1. As drawee bank, respondent Citibank owes to petitioner Ford, as the drawer of the
subject check and a depositor of respondent Citibank, an absolute and contractual duty
to pay the proceeds of the subject check only to the payee thereof, the Commissioner of
Internal Revenue.
2. Respondent Citibank failed to observe its duty as banker with respect to the subject
check, which was crossed and payable to "Payee's Account Only."
3. Respondent Citibank raises an issue for the first time on appeal; thus the same should
not be considered by the Honorable Court.
4. As correctly held by the trial court, there is no evidence of gross negligence on the
part of petitioner Ford.9
II. PCI Bank is liable to petitioner Ford considering that:
1. There were no instructions from petitioner Ford to deliver the proceeds of the subject
check to a person other than the payee named therein, the Commissioner of the Bureau
of Internal Revenue; thus, PCIBank's only obligation is to deliver the proceeds to the
Commissioner of the Bureau of Internal Revenue.10
2. PCIBank which affixed its indorsement on the subject check ("All prior indorsement
and/or lack of indorsement guaranteed"), is liable as collecting bank. 11
3. PCIBank is barred from raising issues of fact in the instant proceedings.12
4. Petitioner Ford's cause of action had not prescribed.13
II. G.R. No. 128604
The same sysndicate apparently embezzled the proceeds of checks intended, this time, to settle
Ford's percentage taxes appertaining to the second quarter of 1978 and the first quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of P5,851,706.37
representing the percentage tax due for the second quarter of 1978 payable to the Commissioner
of Internal Revenue. A BIR Revenue Tax Receipt No. 28645385 was issued for the said purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of
P6,311,591.73, representing the payment of percentage tax for the first quarter of 1979 and
payable to the Commissioner of Internal Revenue. Again a BIR Revenue Tax Receipt No. A-1697160
was issued for the said purpose.
Both checks were "crossed checks" and contain two diagonal lines on its upper corner between,
which were written the words "payable to the payee's account only."
The checks never reached the payee, CIR. Thus, in a letter dated February 28, 1980, the BIR,
Region 4-B, demanded for the said tax payments the corresponding periods above-mentioned.
As far as the BIR is concernced, the said two BIR Revenue Tax Receipts were considered "fake and
spurious". This anomaly was confirmed by the NBI upon the initiative of the BIR. The findings
forced Ford to pay the BIR a new, while an action was filed against Citibank and PCIBank for the
recovery of the amount of Citibank Check Numbers SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tried the case, made its findings on the modus
operandi of the syndicate, as follows:
"A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its General Ledger
Accountant. As such, he prepared the plaintiff's check marked Ex. 'A' [Citibank Check No. Sn-
10597] for payment to the BIR. Instead, however, fo delivering the same of the payee, he
passed on the check to a co-conspirator named Remberto Castro who was a pro-manager of
the San Andres Branch of PCIB.* In connivance with one Winston Dulay, Castro himself
38
subsequently opened a Checking Account in the name of a fictitious person denominated as
'Reynaldo reyes' in the Meralco Branch of PCIBank where Dulay works as Assistant Manager.
After an initial deposit of P100.00 to validate the account, Castro deposited a worthless Bank
of America Check in exactly the same amount as the first FORD check (Exh. "A",
P5,851,706.37) while this worthless check was coursed through PCIB's main office enroute to
the Central Bank for clearing, replaced this worthless check with FORD's Exhibit 'A' and
accordingly tampered the accompanying documents to cover the replacement. As a result,
Exhibit 'A' was cleared by defendant CITIBANK, and the fictitious deposit account of 'Reynaldo
Reyes' was credited at the PCIB Meralco Branch with the total amount of the FORD check
Exhibit 'A'. The same method was again utilized by the syndicate in profiting from Exh. 'B'
[Citibank Check No. SN-16508] which was subsequently pilfered by Alexis Marindo, Rivera's
Assistant at FORD.
From this 'Reynaldo Reyes' account, Castro drew various checks distributing the sahres of the
other participating conspirators namely (1) CRISANTO BERNABE, the mastermind who
formulated the method for the embezzlement; (2) RODOLFO R. DE LEON a customs broker
who negotiated the initial contact between Bernabe, FORD's Godofredo Rivera and PCIB's
Remberto Castro; (3) JUAN VASTILLO who assisted de Leon in the initial arrangements; (4)
GODOFREDO RIVERA, FORD's accountant who passed on the first check (Exhibit "A") to
Castro; (5) REMERTO CASTRO, PCIB's pro-manager at San Andres who performed the
switching of checks in the clearing process and opened the fictitious Reynaldo Reyes account
at the PCIB Meralco Branch; (6) WINSTON DULAY, PCIB's Assistant Manager at its Meralco
Branch, who assisted Castro in switching the checks in the clearing process and facilitated the
opening of the fictitious Reynaldo Reyes' bank account; (7) ALEXIS MARINDO, Rivera's
Assistant at FORD, who gave the second check (Exh. "B") to Castro; (8) ELEUTERIO JIMENEZ,
BIR Collection Agent who provided the fake and spurious revenue tax receipts to make it
appear that the BIR had received FORD's tax payments.
Several other persons and entities were utilized by the syndicate as conduits in the
disbursements of the proceeds of the two checks, but like the aforementioned participants in
the conspiracy, have not been impleaded in the present case. The manner by which the said
funds were distributed among them are traceable from the record of checks drawn against the
original "Reynaldo Reyes" account and indubitably identify the parties who illegally benefited
therefrom and readily indicate in what amounts they did so." 14
On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank, Citibank, liable
for the value of the two checks while adsolving PCIBank from any liability, disposing as follows:
"WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to reimburse
plaintiff FORD the total amount of P12,163,298.10 prayed for in its complaint, with 6%
interest thereon from date of first written demand until full payment, plus P300,000.00
attorney's fees and expenses litigation, and to pay the defendant, PCIB (on its counterclaim to
crossclaim) the sum of P300,000.00 as attorney's fees and costs of litigation, and pay the
costs.
SO ORDERED."15
Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the decision of the
trial court. Hence, this petition.
Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of Appeals
decision and its resolution dated March 5, 1997, with respect to the dismissal of the complaint
against PCIBank and holding Citibank solely responsible for the proceeds of Citibank Check
Numbers SN-10597 and 16508 for P5,851,706.73 and P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing the complaint against defendant PCIBank
considering that:
I. Defendant PCIBank was clearly negligent when it failed to exercise the diligence required to
be exercised by it as a banking insitution.
II. Defendant PCIBank clearly failed to observe the diligence required in the selection and
supervision of its officers and employees.
III. Defendant PCIBank was, due to its negligence, clearly liable for the loss or damage
resulting to the plaintiff Ford as a consequence of the substitution of the check consistent with
Section 5 of Central Bank Circular No. 580 series of 1977.
 IV. Assuming arguedo that defedant PCIBank did not accept, endorse or negotiate in due
course the subject checks, it is liable, under Article 2154 of the Civil Code, to return the
money which it admits having received, and which was credited to it its Central bank
account.16
The main issue presented for our consideration by these petitions could be simplified as follows:
Has petitioner Ford the right to recover from the collecting bank (PCIBank) and the drawee bank
(Citibank) the value of the checks intended as payment to the Commissioner of Internal Revenue?
Or has Ford's cause of action already prescribed?
Note that in these cases, the checks were drawn against the drawee bank, but the title of the
person negotiating the same was allegedly defective because the instrument was obtained by fraud
and unlawful means, and the proceeds of the checks were not remitted to the payee. It was
established that instead of paying the checks to the CIR, for the settlement of the approprite
quarterly percentage taxes of Ford, the checks were diverted and encashed for the eventual
distribution among the mmbers of the syndicate. As to the unlawful negotiation of the check the
applicable law is Section 55 of the Negotiable Instruments Law (NIL), which provides:
"When title defective -- The title of a person who negotiates an instrument is defective within
the meaning of this Act when he obtained the instrument, or any signature thereto, by fraud,
duress, or fore and fear, or other unlawful means, or for an illegal consideration, or when he
negotiates it in breach of faith or under such circumstances as amount to a fraud."
Pursuant to this provision, it is vital to show that the negotiation is made by the perpetator in
breach of faith amounting to fraud. The person negotiating the checks must have gone beyond the
authority given by his principal. If the principal could prove that there was no negligence in the
performance of his duties, he may set up the personal defense to escape liability and recover from
other parties who. Though their own negligence, alowed the commission of the crime.
In this case, we note that the direct perpetrators of the offense, namely the embezzlers belonging
to a syndicate, are now fugitives from justice. They have, even if temporarily, escaped liability for
the embezzlement of millions of pesos. We are thus left only with the task of determining who of
the present parties before us must bear the burden of loss of these millions. It all boils down to
thequestion of liability based on the degree of negligence among the parties concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty of the "imputed contributory
negligence" that would defeat its claim for reimbursement, bearing ing mind that its employees,
Godofredo Rivera and Alexis Marindo, were among the members of the syndicate.
Citibank points out that Ford allowed its very own employee, Godofredo Rivera, to negotiate the
checks to his co-conspirators, instead of delivering them to the designated authorized collecting
bank (Metrobank-Alabang) of the payee, CIR. Citibank bewails the fact that Ford was remiss in the
supervision and control of its own employees, inasmuch as it only discovered the syndicate's
activities through the information given by the payee of the checks after an unreasonable period of
time.
PCIBank also blames Ford of negligence when it allegedly authorized Godofredo Rivera to divert the
proceeds of Citibank Check No. SN-04867, instead of using it to pay the BIR. As to the subsequent
run-around of unds of Citibank Check Nos. SN-10597 and 16508, PCIBank claims that the
proximate cause of the damge to Ford lies in its own officers and employees who carried out the
fradulent schemes and the transactions. These circumstances were not checked by other officers of
the company including its comptroller or internal auditor. PCIBank contends that the inaction of
Ford despite the enormity of the amount involved was a sheer negligence and stated that, as
between two innocent persons, one of whom must suffer the consequences of a breach of trust, the
one who made it possible, by his act of negligence, must bear the loss.
For its part, Ford denies any negligence in the performance of its duties. It avers that there was no
evidence presented before the trial court showing lack of diligence on the part of Ford. And, citing
the case of Gempesaw vs. Court of Appeals,17 Ford argues that even if there was a finding therein
that the drawer was negligent, the drawee bank was still ordered to pay damages.
Furthermore, Ford contends the Godofredo rivera was not authorized to make any representation in
its behalf, specifically, to divert the proceeds of the checks. It adds that Citibank raised the issue of
imputed negligence against Ford for the first time on appeal. Thus, it should not be considered by
this Court.
On this point, jurisprudence regarding the imputed negligence of employer in a master-servant
relationship is instructive. Since a master may be held for his servant's wrongful act, the law
39
imputes to the master the act of the servant, and if that act is negligent or wrongful and
proximately results in injury to a third person, the negligence or wrongful conduct is the negligence
or wrongful conduct of the master, for which he is liable. 18 The general rule is that if the master is
injured by the negligence of a third person and by the concuring contributory negligence of his own
servant or agent, the latter's negligence is imputed to his superior and will defeat the superior's
action against the third person, asuming, of course that the contributory negligence was
the proximate cause of the injury of which complaint is made.19
Accordingly, we need to determine whether or not the action of Godofredo Rivera, Ford's General
Ledger Accountant, and/or Alexis Marindo, his assistant, was the proximate cause of the loss or
damage. AS defined, proximate cause is that which, in the natural and continuous sequence,
unbroken by any efficient, intervening cause produces the injury and without the result would not
have occurred.20
It appears that although the employees of Ford initiated the transactions attributable to an
organized syndicate, in our view, their actions were not the proximate cause of encashing the
checks payable to the CIR. The degree of Ford's negligence, if any, could not be characterized as
the proximate cause of the injury to the parties.
The Board of Directors of Ford, we note, did not confirm the request of Godofredo Rivera to recall
Citibank Check No. SN-04867. Rivera's instruction to replace the said check with PCIBank's
Manager's Check was not in theordinary course of business which could have prompted PCIBank to
validate the same.
As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was established that these
checks were made payable to the CIR. Both were crossed checks. These checks were apparently
turned around by Ford's emploees, who were acting on their own personal capacity.
Given these circumstances, the mere fact that the forgery was committed by a drawer-payor's
confidential employee or agent, who by virtue of his position had unusual facilities for perpertrating
the fraud and imposing the forged paper upon the bank, does notentitle the bank toshift the loss to
the drawer-payor, in the absence of some circumstance raising estoppel against the drawer. 21 This
rule likewise applies to the checks fraudulently negotiated or diverted by the confidential employees
who hold them in their possession.
With respect to the negligence of PCIBank in the payment of the three checks involved, separately,
the trial courts found variations between the negotiation of Citibank Check No. SN-04867 and the
misapplication of total proceeds of Checks SN-10597 and 16508. Therefore, we have to scrutinize,
separately, PCIBank's share of negligence when the syndicate achieved its ultimate agenda of
stealing the proceeds of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It was coursed
through the ordinary banking transaction, sent to Central Clearing with the indorsement at the back
"all prior indorsements and/or lack of indorsements guaranteed," and was presented to Citibank for
payment. Thereafter PCIBank, instead of remitting the proceeds to the CIR, prepared two of its
Manager's checks and enabled the syndicate to encash the same.
On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The neglect
of PCIBank employees to verify whether his letter requesting for the replacement of the Citibank
Check No. SN-04867 was duly authorized, showed lack of care and prudence required in the
circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect the payment of taxpayers in
behalf of the BIR. As an agent of BIR, PCIBank is duty bound to consult its principal regarding the
unwarranted instructions given by the payor or its agent. As aptly stated by the trial court, to wit:
"xxx. Since the questioned crossed check was deposited with IBAA [now PCIBank], which
claimed to be a depository/collecting bank of BIR, it has the responsibility to make sure that
the check in question is deposited in Payee's account only.
xxx xxx xxx
As agent of the BIR (the payee of the check), defendant IBAA should receive instructions only
from its principal BIR and not from any other person especially so when that person is not
known to the defendant. It is very imprudent on the part of the defendant IBAA to just rely on
the alleged telephone call of the one Godofredo Rivera and in his signature considering that
the plaintiff is not a client of the defendant IBAA."
It is a well-settled rule that the relationship between the payee or holder of commercial paper and
the bank to which it is sent for collection is, in the absence of an argreement to the contrary, that
of principal and agent.22 A bank which receives such paper for collection is the agent of the payee
or holder.23
Even considering arguendo, that the diversion of the amount of a check payable to the collecting
bank in behalf of the designated payee may be allowed, still such diversion must be properly
authorized by the payor. Otherwise stated, the diversion can be justified only by proof of authority
from the drawer, or that the drawer has clothed his agent with apparent authority to receive the
proceeds of such check.
Citibank further argues that PCI Bank's clearing stamp appearing at the back of the questioned
checks stating that ALL PRIOR INDORSEMENTS AND/OR LACK OF INDORSEMENTS GURANTEED
should render PCIBank liable because it made it pass through the clearing house and therefore
Citibank had no other option but to pay it. Thus, Citibank had no other option but to pay it. Thus,
Citibank assets that the proximate cause of Ford's injury is the gross negligence of PCIBank. Since
the questione dcrossed check was deposited with PCIBank, which claimed to be a
depository/collecting bank of the BIR, it had the responsibility to make sure that the check in
questions is deposited in Payee's account only.
Indeed, the crossing of the check with the phrase "Payee's Account Only," is a warning that the
check should be deposited only in the account of the CIR. Thus, it is the duty of the collecting bank
PCIBank to ascertain that the check be deposited in payee's account only. Therefore, it is the
collecting bank (PCIBank) which is bound to scruninize the check and to know its depositors before
it could make the clearing indorsement "all prior indorsements and/or lack of indorsement
guaranteed".
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation, 24 we ruled:
"Anent petitioner's liability on said instruments, this court is in full accord with the ruling of the
PCHC's Board of Directors that:
'In presenting the checks for clearing and for payment, the defendant made an express
guarantee on the validity of "all prior endorsements." Thus, stamped at the back of the checks
are the defedant's clear warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK OF
ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would not have paid on the
checks.'
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the
warranty has proven to be false and inaccurate, the defendant is liable for any damage arising
out of the falsity of its representation."25
Lastly, banking business requires that the one who first cashes and negotiates the check must take
some percautions to learn whether or not it is genuine. And if the one cashing the check through
indifference or othe circumstance assists the forger in committing the fraud, he should not be
permitted to retain the proceeds of the check from the drawee whose sole fault was that it did not
discover the forgery or the defect in the title of the person negotiating the instrument before paying
the check. For this reason, a bank which cashes a check drawn upon another bank, without
requiring proof as to the identity of persons presenting it, or making inquiries with regard to them,
cannot hold the proceeds against the drawee when the proceeds of the checks were afterwards
diverted to the hands of a third party. In such cases the drawee bank has a right to believe that the
cashing bank (or the collecting bank) had, by the usual proper investigation, satisfied itself of the
authenticity of the negotiation of the checks. Thus, one who encashed a check which had been
forged or diverted and in turn received payment thereon from the drawee, is guilty of negligence
which proximately contributed to the success of the fraud practiced on the drawee bank. The latter
may recover from the holder the money paid on the check. 26
Having established that the collecting bank's negligence is the proximate cause of the loss, we
conclude that PCIBank is liable in the amount corresponding to the proceeds of Citibank Check No.
SN-04867.
G.R. No. 128604
The trial court and the Court of Appeals found that PCIBank had no official act in the ordinary
course of business that would attribute to it the case of the embezzlement of Citibank Check
Numbers SN-10597 and 16508, because PCIBank did not actually receive nor hold the two Ford
checks at all. The trial court held, thus:
40
"Neither is there any proof that defendant PCIBank contributed any official or conscious
participation in the process of the embezzlement. This Court is convinced that the switching
operation (involving the checks while in transit for "clearing") were the clandestine or hidden
actuations performed by the members of the syndicate in their own personl, covert and
private capacity and done without the knowledge of the defendant PCIBank" 27
In this case, there was no evidence presented confirming the conscious particiapation of PCIBank in
the embezzlement. As a general rule, however, a banking corporation is liable for the wrongful or
tortuous acts and declarations of its officers or agents within the course and scope of their
employment.28 A bank will be held liable for the negligence of its officers or agents when acting
within the course and scope of their employment. It may be liable for the tortuous acts of its
officers even as regards that species of tort of which malice is an essential element. In this case,
we find a situation where the PCIBank appears also to be the victim of the scheme hatched by a
syndicate in which its own management employees had particiapted.
The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received Citibank Check
Numbers SN-10597 and 16508. He passed the checks to a co-conspirator, an Assistant Manager of
PCIBank's Meralco Branch, who helped Castro open a Checking account of a fictitious person named
"Reynaldo Reyes." Castro deposited a worthless Bank of America Check in exactly the same amount
of Ford checks. The syndicate tampered with the checks and succeeded in replacing the worthless
checks and the eventual encashment of Citibank Check Nos. SN 10597 and 16508. The PCIBank
Ptro-manager, Castro, and his co-conspirator Assistant Manager apparently performed their
activities using facilities in their official capacity or authority but for their personal and private gain
or benefit.
A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by
the frauds these officers or agents were enabled to perpetrate in the apparent course of their
employment; nor will t be permitted to shirk its responsibility for such frauds, even though no
benefit may accrue to the bank therefrom. For the general rule is that a bank is liable for the
fraudulent acts or representations of an officer or agent acting within the course and apparent
scope of his employment or authority.29 And if an officer or employee of a bank, in his official
capacity, receives money to satisfy an evidence of indebetedness lodged with his bank for
collection, the bank is liable for his misappropriation of such sum. 30
Moreover, as correctly pointed out by Ford, Section 5 31 of Central Bank Circular No. 580, Series of
1977 provides that any theft affecting items in transit for clearing, shall be for the account of
sending bank, which in this case is PCIBank.
But in this case, responsibility for negligence does not lie on PCIBank's shoulders alone.
The evidence on record shows that Citibank as drawee bank was likewise negligent in the
performance of its duties. Citibank failed to establish that its payment of Ford's checjs were made
in due course and legally in order. In its defense, Citibank claims the genuineness and due
execution of said checks, considering that Citibank (1) has no knowledge of any informity in the
issuance of the checks in question (2) coupled by the fact that said checks were sufficiently funded
and (3) the endorsement of the Payee or lack thereof was guaranteed by PCI Bank (formerly IBAA),
thus, it has the obligation to honor and pay the same.
For its part, Ford contends that Citibank as the drawee bank owes to Ford an absolute and
contractual duty to pay the proceeds of the subject check only to the payee thereof, the CIR. Citing
Section 6232 of the Negotiable Instruments Law, Ford argues that by accepting the instrument, the
acceptro which is Citibank engages that it will pay according to the tenor of its acceptance, and that
it will pay only to the payee, (the CIR), considering the fact that here the check was crossed with
annotation "Payees Account Only."
As ruled by the Court of Appeals, Citibank must likewise answer for the damages incurred by Ford
on Citibank Checks Numbers SN 10597 and 16508, because of the contractual relationship existing
between the two. Citibank, as the drawee bank breached its contractual obligation with Ford and
such degree of culpability contributed to the damage caused to the latter. On this score, we agree
with the respondent court's ruling.
Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before paying the
amount of the proceeds thereof to the collecting bank of the BIR. One thing is clear from the
record: the clearing stamps at the back of Citibank Check Nos. SN 10597 and 16508 do not bear
any initials. Citibank failed to notice and verify the absence of the clearing stamps. Had this been
duly examined, the switching of the worthless checks to Citibank Check Nos. 10597 and 16508
would have been discovered in time. For this reason, Citibank had indeed failed to perform what
was incumbent upon it, which is to ensure that the amount of the checks should be paid only to its
designated payee. The fact that the drawee bank did not discover the irregularity seasonably, in
our view, consitutes negligence in carrying out the bank's duty to its depositors. The point is that as
a business affected with public interest and because of the nature of its functions, the bank is under
obligation to treat the accounts of its depositors with meticulous care, always having in mind the
fiduciary nature of their relationship.33
Thus, invoking the doctrine of comparative negligence, we are of the view that both PCIBank and
Citibank failed in their respective obligations and both were negligent in the selection and
supervision of their employees resulting in the encashment of Citibank Check Nos. SN 10597 AND
16508. Thus, we are constrained to hold them equally liable for the loss of the proceeds of said
checks issued by Ford in favor of the CIR.
Time and again, we have stressed that banking business is so impressed with public interest where
the trust and confidence of the public in general is of paramount umportance such that the
appropriate standard of diligence must be very high, if not the highest, degree of diligence.34 A
bank's liability as obligor is not merely vicarious but primary, wherein the defense of exercise of
due diligence in the selection and supervision of its employees is of no moment. 35
Banks handle daily transactions involving millions of pesos.36 By the very nature of their work the
degree of responsibility, care and trustworthiness expected of their employees and officials is far
greater than those of ordinary clerks and employees.37 Banks are expected to exercise the highest
degree of diligence in the selection and supervision of their employees. 38
On the issue of prescription, PCIBank claims that the action of Ford had prescribed because of its
inability to seek judicial relief seasonably, considering that the alleged negligent act took place prior
to December 19, 1977 but the relief was sought only in 1983, or seven years thereafter.
The statute of limitations begins to run when the bank gives the depositor notice of the payment,
which is ordinarily when the check is returned to the alleged drawer as a voucher with a statement
of his account,39 and an action upon a check is ordinarily governed by the statutory period
applicable to instruments in writing.40
Our laws on the matter provide that the action upon a written contract must be brought within ten
year from the time the right of action accrues.41 hence, the reckoning time for the prescriptive
period begins when the instrument was issued and the corresponding check was returned by the
bank to its depositor (normally a month thereafter). Applying the same rule, the cause of action for
the recovery of the proceeds of Citibank Check No. SN 04867 would normally be a month after
December 19, 1977, when Citibank paid the face value of the check in the amount of
P4,746,114.41. Since the original complaint for the cause of action was filed on January 20, 1984,
barely six years had lapsed. Thus, we conclude that Ford's cause of action to recover the amount of
Citibank Check No. SN 04867 was seasonably filed within the period provided by law.
Finally, we also find thet Ford is not completely blameless in its failure to detect the fraud. Failure
on the part of the depositor to examine its passbook, statements of account, and cancelled checks
and to give notice within a reasonable time (or as required by statute) of any discrepancy which it
may in the exercise of due care and diligence find therein, serves to mitigate the banks' liability by
reducing the award of interest from twelve percent (12%) to six percent (6%) per annum. As
provided in Article 1172 of the Civil Code of the Philippines, respondibility arising from negligence in
the performance of every kind of obligation is also demandable, but such liability may be regulated
by the courts, according to the circumstances. In quasi-delicts, the contributory negligence of the
plaintiff shall reduce the damages that he may recover. 42
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No.
25017 areAFFIRMED. PCIBank, know formerly as Insular Bank of Asia and America, id declared
solely responsible for the loss of the proceeds of Citibank Check No SN 04867 in the amount
P4,746,114.41, which shall be paid together with six percent (6%) interest thereon to Ford
Philippines Inc. from the date when the original complaint was filed until said amount is fully paid.
However, the Decision and Resolution of the Court of Appeals in CA-G.R. No. 28430
are MODIFIED as follows: PCIBank and Citibank are adjudged liable for and must share the loss,
(concerning the proceeds of Citibank Check Numbers SN 10597 and 16508 totalling
P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDEREDto pay Ford Philippines Inc.
P6,081,649.05, with six percent (6%) interest thereon, from the date the complaint was filed until
full payment of said amount.1wphi1.nt
Costs against Philippine Commercial International Bank and Citibank N.A.
41
SO ORDERED.
-----
G.R. No. 139130 November 27, 2002
RAMON K. ILUSORIO, petitioner, vs. HON. COURT OF APPEALS, and THE MANILA BANKING
CORPORATION, respondents.
QUISUMBING, J.:
This petition for review seeks to reverse the decision 1 promulgated on January 28, 1999 by the
Court of Appeals in CA-G.R. CV No. 47942, affirming the decision of the then Court of First Instance
of Rizal, Branch XV (now the Regional Trial Court of Makati, Branch 138) dismissing Civil Case No.
43907, for damages.
The facts as summarized by the Court of Appeals are as follows:
Petitioner is a prominent businessman who, at the time material to this case, was the Managing
Director of Multinational Investment Bancorporation and the Chairman and/or President of several
other corporations. He was a depositor in good standing of respondent bank, the Manila Banking
Corporation, under current Checking Account No. 06-09037-0. As he was then running about 20
corporations, and was going out of the country a number of times, petitioner entrusted to his
secretary, Katherine2 E. Eugenio, his credit cards and his checkbook with blank checks. It was also
Eugenio who verified and reconciled the statements of said checking account.3
Between the dates September 5, 1980 and January 23, 1981, Eugenio was able to encash and
deposit to her personal account about seventeen (17) checks drawn against the account of the
petitioner at the respondent bank, with an aggregate amount of P119,634.34. Petitioner did not
bother to check his statement of account until a business partner apprised him that he saw Eugenio
use his credit cards. Petitioner fired Eugenio immediately, and instituted a criminal action against
her for estafa thru falsification before the Office of the Provincial Fiscal of Rizal. Private respondent,
through an affidavit executed by its employee, Mr. Dante Razon, also lodged a complaint for estafa
thru falsification of commercial documents against Eugenio on the basis of petitioners statement
that his signatures in the checks were forged.4 Mr. Razons affidavit states:
That I have examined and scrutinized the following checks in accordance with prescribed
verification procedures with utmost care and diligence by comparing the signatures affixed thereat
against the specimen signatures of Mr. Ramon K. Ilusorio which we have on file at our said office on
such dates,
xxx
That the aforementioned checks were among those issued by Manilabank in favor of its client MR.
RAMON K. ILUSORIO,
That the same were personally encashed by KATHERINE E. ESTEBAN, an executive secretary of MR.
RAMON K. ILUSORIO in said Investment Corporation;
That I have met and known her as KATHERINE E. ESTEBAN the attending verifier when she
personally encashed the above-mentioned checks at our said office;
That MR. RAMON K. ILUSORIO executed an affidavit expressly disowning his signature appearing
on the checks further alleged to have not authorized the issuance and encashment of the same.5
Petitioner then requested the respondent bank to credit back and restore to its account the value of
the checks which were wrongfully encashed but respondent bank refused. Hence, petitioner filed
the instant case.6
At the trial, petitioner testified on his own behalf, attesting to the truth of the circumstances as
narrated above, and how he discovered the alleged forgeries. Several employees of Manila Bank
were also called to the witness stand as hostile witnesses. They testified that it is the banks
standard operating procedure that whenever a check is presented for encashment or clearing, the
signature on the check is first verified against the specimen signature cards on file with the bank.
Manila Bank also sought the expertise of the National Bureau of Investigation (NBI) in determining
the genuineness of the signatures appearing on the checks. However, in a letter dated March 25,
1987, the NBI informed the trial court that they could not conduct the desired examination for the
reason that the standard specimens submitted were not sufficient for purposes of rendering a
definitive opinion. The NBI then suggested that petitioner be asked to submit seven (7) or more
additional standard signatures executed before or about, and immediately after the dates of the
questioned checks. Petitioner, however, failed to comply with this request.
After evaluating the evidence on both sides, the court a quo rendered judgment on May 12, 1994
with the following dispositive portion:
WHEREFORE, finding no sufficient basis for plaintiff's cause herein against defendant bank, in the
light of the foregoing considerations and established facts, this case would have to be, as it is
hereby DISMISSED.
Defendants counterclaim is likewise DISMISSED for lack of sufficient basis.
SO ORDERED.7
Aggrieved, petitioner elevated the case to the Court of Appeals by way of a petition for review but
without success. The appellate court held that petitioners own negligence was the proximate cause
of his loss. The appellate court disposed as follows:
WHEREFORE, the judgment appealed from is AFFIRMED. Costs against the appellant.
SO ORDERED.8
Before us, petitioner ascribes the following errors to the Court of Appeals:
A. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE RESPONDENT BANK IS ESTOPPED
FROM RAISING THE DEFENSE THAT THERE WAS NO FORGERY OF THE SIGNATURES OF THE
PETITIONER IN THE CHECK BECAUSE THE RESPONDENT FILED A CRIMINAL COMPLAINT FOR
ESTAFA THRU FALSIFICATION OF COMMERCIAL DOCUMENTS AGAINST KATHERINE EUGENIO
USING THE AFFIDAVIT OF PETITIONER STATING THAT HIS SIGNATURES WERE FORGED AS PART
OF THE AFFIDAVIT-COMPLAINT.9
B. THE COURT OF APPEALS ERRED IN NOT APPLYING SEC. 23, NEGOTIABLE INSTRUMENTS LAW. 10
C. THE COURT OF APPEALS ERRED IN NOT HOLDING THE BURDEN OF PROOF IS WITH THE
RESPONDENT BANK TO PROVE THE DUE DILIGENCE TO PREVENT DAMAGE, TO THE PETITIONER,
AND THAT IT WAS NOT NEGLIGENT IN THE SELECTION AND SUPERVISION OF ITS EMPLOYEES. 11
D. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT BANK SHOULD BEAR THE
LOSS, AND SHOULD BE MADE TO PAY PETITIONER, WITH RECOURSE AGAINST KATHERINE
EUGENIO ESTEBAN.12
Essentially the issues in this case are: (1) whether or not petitioner has a cause of action against
private respondent; and (2) whether or not private respondent, in filing an estafa case against
petitioners secretary, is barred from raising the defense that the fact of forgery was not
established.
Petitioner contends that Manila Bank is liable for damages for its negligence in failing to detect the
discrepant checks. He adds that as a general rule a bank which has obtained possession of a check
upon an unauthorized or forged endorsement of the payees signature and which collects the
amount of the check from the drawee is liable for the proceeds thereof to the payee. Petitioner
invokes the doctrine of estoppel, saying that having itself instituted a forgery case against Eugenio,
Manila Bank is now estopped from asserting that the fact of forgery was never proven.
For its part, Manila Bank contends that respondent appellate court did not depart from the accepted
and usual course of judicial proceedings, hence there is no reason for the reversal of its ruling.
Manila Bank additionally points out that Section 23 13 of the Negotiable Instruments Law is
inapplicable, considering that the fact of forgery was never proven. Lastly, the bank negates
petitioners claim of estoppel.14
On the first issue, we find that petitioner has no cause of action against Manila Bank. To be entitled
to damages, petitioner has the burden of proving negligence on the part of the bank for failure to
detect the discrepancy in the signatures on the checks. It is incumbent upon petitioner to establish
the fact of forgery, i.e., by submitting his specimen signatures and comparing them with those on
the questioned checks. Curiously though, petitioner failed to submit additional specimen signatures
as requested by the National Bureau of Investigation from which to draw a conclusive finding
regarding forgery. The Court of Appeals found that petitioner, by his own inaction, was precluded
from setting up forgery. Said the appellate court:
We cannot fault the court a quo for such declaration, considering that the plaintiffs evidence on the
alleged forgery is not convincing enough. The burden to prove forgery was upon the plaintiff, which
burden he failed to discharge. Aside from his own testimony, the appellant presented no other
42
evidence to prove the fact of forgery. He did not even submit his own specimen signatures, taken
on or about the date of the questioned checks, for examination and comparison with those of the
subject checks. On the other hand, the appellee presented specimen signature cards of the
appellant, taken at various years, namely, in 1976, 1979 and 1981 (Exhibits "1", "2", "3" and "7"),
showing variances in the appellants unquestioned signatures. The evidence further shows that the
appellee, as soon as it was informed by the appellant about his questioned signatures, sought to
borrow the questioned checks from the appellant for purposes of analysis and examination (Exhibit
"9"), but the same was denied by the appellant. It was also the former which sought the assistance
of the NBI for an expert analysis of the signatures on the questioned checks, but the same was
unsuccessful for lack of sufficient specimen signatures.15
Moreover, petitioners contention that Manila Bank was remiss in the exercise of its duty as drawee
lacks factual basis. Consistently, the CA and the RTC found that Manila Bank employees exercised
due diligence in cashing the checks. The banks employees in the present case did not have a hint
as to Eugenios modus operandi because she was a regular customer of the bank, having been
designated by petitioner himself to transact in his behalf. According to the appellate court, the
employees of the bank exercised due diligence in the performance of their duties. Thus, it found
that:
The evidence on both sides indicates that TMBCs employees exercised due diligence before
encashing the checks. Its verifiers first verified the drawers signatures thereon as against his
specimen signature cards, and when in doubt, the verifier went further, such as by referring to a
more experienced verifier for further verification. In some instances the verifier made a
confirmation by calling the depositor by phone. It is only after taking such precautionary measures
that the subject checks were given to the teller for payment.
Of course it is possible that the verifiers of TMBC might have made a mistake in failing to detect
any forgery -- if indeed there was. However, a mistake is not equivalent to negligence if they were
honest mistakes. In the instant case, we believe and so hold that if there were mistakes, the same
were not deliberate, since the bank took all the precautions. 16
As borne by the records, it was petitioner, not the bank, who was negligent. Negligence is the
omission to do something which a reasonable man, guided by those considerations which ordinarily
regulate the conduct of human affairs, would do, or the doing of something which a prudent and
reasonable man would do.17 In the present case, it appears that petitioner accorded his secretary
unusual degree of trust and unrestricted access to his credit cards, passbooks, check books, bank
statements, including custody and possession of cancelled checks and reconciliation of accounts.
Said the Court of Appeals on this matter:
Moreover, the appellant had introduced his secretary to the bank for purposes of reconciliation of
his account, through a letter dated July 14, 1980 (Exhibit "8"). Thus, the said secretary became a
familiar figure in the bank. What is worse, whenever the bank verifiers call the office of the
appellant, it is the same secretary who answers and confirms the checks.
The trouble is, the appellant had put so much trust and confidence in the said secretary, by
entrusting not only his credit cards with her but also his checkbook with blank checks. He also
entrusted to her the verification and reconciliation of his account. Further adding to his injury was
the fact that while the bank was sending him the monthly Statements of Accounts, he was not
personally checking the same. His testimony did not indicate that he was out of the country during
the period covered by the checks. Thus, he had all the opportunities to verify his account as well as
the cancelled checks issued thereunder -- month after month. But he did not, until his partner
asked him whether he had entrusted his credit card to his secretary because the said partner had
seen her use the same. It was only then that he was minded to verify the records of his account. 18
The abovecited findings are binding upon the reviewing court. We stress the rule that the factual
findings of a trial court, especially when affirmed by the appellate court, are binding upon us19 and
entitled to utmost respect20 and even finality. We find no palpable error that would warrant a
reversal of the appellate courts assessment of facts anchored upon the evidence on record.
Petitioners failure to examine his bank statements appears as the proximate cause of his own
damage. Proximate cause is that cause, which, in natural and continuous sequence, unbroken by
any efficient intervening cause, produces the injury, and without which the result would not have
occurred.21 In the instant case, the bank was not shown to be remiss in its duty of sending monthly
bank statements to petitioner so that any error or discrepancy in the entries therein could be
brought to the banks attention at the earliest opportunity. But, petitioner failed to examine these
bank statements not because he was prevented by some cause in not doing so, but because he did
not pay sufficient attention to the matter. Had he done so, he could have been alerted to any
anomaly committed against him. In other words, petitioner had sufficient opportunity to prevent or
detect any misappropriation by his secretary had he only reviewed the status of his accounts based
on the bank statements sent to him regularly. In view of Article 2179 of the New Civil Code, 22 when
the plaintiffs own negligence was the immediate and proximate cause of his injury, no recovery
could be had for damages.
Petitioner further contends that under Section 23 of the Negotiable Instruments Law a forged check
is inoperative, and that Manila Bank had no authority to pay the forged checks. True, it is a rule
that when a signature is forged or made without the authority of the person whose signature it
purports to be, the check is wholly inoperative. No right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against any party, can be acquired through or
under such signature. However, the rule does provide for an exception, namely: "unless the party
against whom it is sought to enforce such right is precluded from setting up the forgery or want of
authority." In the instant case, it is the exception that applies. In our view, petitioner is precluded
from setting up the forgery, assuming there is forgery, due to his own negligence in entrusting to
his secretary his credit cards and checkbook including the verification of his statements of account.
Petitioners reliance on Associated Bank vs. Court of Appeals 23 and Philippine Bank of Commerce vs.
CA24 to buttress his contention that respondent Manila Bank as the collecting or last endorser
generally suffers the loss because it has the duty to ascertain the genuineness of all prior
endorsements is misplaced. In the cited cases, the fact of forgery was not in issue. In the present
case, the fact of forgery was not established with certainty. In those cited cases, the collecting
banks were held to be negligent for failing to observe precautionary measures to detect the
forgery. In the case before us, both courts below uniformly found that Manila Banks personnel
diligently performed their duties, having compared the signature in the checks from the specimen
signatures on record and satisfied themselves that it was petitioners.
On the second issue, the fact that Manila Bank had filed a case for estafa against Eugenio would not
estop it from asserting the fact that forgery has not been clearly established. Petitioner cannot hold
private respondent in estoppel for the latter is not the actual party to the criminal action. In a
criminal action, the State is the plaintiff, for the commission of a felony is an offense against the
State.25 Thus, under Section 2, Rule 110 of the Rules of Court the complaint or information filed in
court is required to be brought in the name of the "People of the Philippines." 26
Further, as petitioner himself stated in his petition, respondent bank filed the estafa case against
Eugenio on the basis of petitioners own affidavit,27 but without admitting that he had any personal
knowledge of the alleged forgery. It is, therefore, easy to understand that the filing of the estafa
case by respondent bank was a last ditch effort to salvage its ties with the petitioner as a valuable
client, by bolstering the estafa case which he filed against his secretary.
All told, we find no reversible error that can be ascribed to the Court of Appeals.
WHEREFORE, the instant petition is DENIED for lack of merit. The assailed decision of the Court of
Appeals dated January 28, 1999 in CA-G.R. CV No. 47942, is AFFIRMED.
Costs against petitioner.
SO ORDERED.
-----
G.R. No. 129015 August 13, 2004
SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC., petitioner, vs. FAR EAST BANK
AND TRUST COMPANY AND COURT OF APPEALS, respondents.
TINGA, J.:
Called to fore in the present petition is a classic textbook question if a bank pays out on a forged
check, is it liable to reimburse the drawer from whose account the funds were paid out? The Court
of Appeals, in reversing a trial court decision adverse to the bank, invoked tenuous reasoning to
acquit the bank of liability. We reverse, applying time-honored principles of law.
The salient facts follow.
Plaintiff Samsung Construction Company Philippines, Inc. ("Samsung Construction"), while based in
Bian, Laguna, maintained a current account with defendant Far East Bank and Trust
Company1 ("FEBTC") at the latters Bel-Air, Makati branch.2 The sole signatory to Samsung
43
Constructions account was Jong Kyu Lee ("Jong"), its Project Manager, 3 while the checks remained
in the custody of the companys accountant, Kyu Yong Lee ("Kyu").4
On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC Check No. 432100 to
the banks branch in Bel-Air, Makati. The check, payable to cash and drawn against Samsung
Constructions current account, was in the amount of Nine Hundred Ninety Nine Thousand Five
Hundred Pesos (P999,500.00). The bank teller, Cleofe Justiani, first checked the balance of
Samsung Constructions account. After ascertaining there were enough funds to cover the
check,5 she compared the signature appearing on the check with the specimen signature of Jong as
contained in the specimen signature card with the bank. After comparing the two signatures,
Justiani was satisfied as to the authenticity of the signature appearing on the check. She then
asked Gonzaga to submit proof of his identity, and the latter presented three (3) identification
cards.6
At the same time, Justiani forwarded the check to the branch Senior Assistant Cashier Gemma
Velez, as it was bank policy that two bank branch officers approve checks exceeding One Hundred
Thousand Pesos, for payment or encashment. Velez likewise counterchecked the signature on the
check as against that on the signature card. He too concluded that the check was indeed signed by
Jong. Velez then forwarded the check and signature card to Shirley Syfu, another bank officer, for
approval. Syfu then noticed that Jose Sempio III ("Sempio"), the assistant accountant of Samsung
Construction, was also in the bank. Sempio was well-known to Syfu and the other bank officers, he
being the assistant accountant of Samsung Construction. Syfu showed the check to Sempio, who
vouched for the genuineness of Jongs signature. Confirming the identity of Gonzaga, Sempio said
that the check was for the purchase of equipment for Samsung Construction. Satisfied with the
genuineness of the signature of Jong, Syfu authorized the banks encashment of the check to
Gonzaga.
The following day, the accountant of Samsung Construction, Kyu, examined the balance of the bank
account and discovered that a check in the amount of Nine Hundred Ninety Nine Thousand Five
Hundred Pesos (P999,500.00) had been encashed. Aware that he had not prepared such a check
for Jongs signature, Kyu perused the checkbook and found that the last blank check was
missing.7 He reported the matter to Jong, who then proceeded to the bank. Jong learned of the
encashment of the check, and realized that his signature had been forged. The Bank Manager
reputedly told Jong that he would be reimbursed for the amount of the check. 8Jong proceeded to
the police station and consulted with his lawyers.9 Subsequently, a criminal case for qualified theft
was filed against Sempio before the Laguna court.10
In a letter dated 6 May 1992, Samsung Construction, through counsel, demanded that FEBTC credit
to it the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), with
interest.11 In response, FEBTC said that it was still conducting an investigation on the matter.
Unsatisfied, Samsung Construction filed aComplaint on 10 June 1992 for violation of Section 23 of
the Negotiable Instruments Law, and prayed for the payment of the amount debited as a result of
the questioned check plus interest, and attorneys fees. 12 The case was docketed as Civil Case No.
92-61506 before the Regional Trial Court ("RTC") of Manila, Branch 9. 13
During the trial, both sides presented their respective expert witnesses to testify on the claim that
Jongs signature was forged. Samsung Corporation, which had referred the check for investigation
to the NBI, presented Senior NBI Document Examiner Roda B. Flores. She testified that based on
her examination, she concluded that Jongs signature had been forged on the check. On the other
hand, FEBTC, which had sought the assistance of the Philippine National Police (PNP), 14 presented
Rosario C. Perez, a document examiner from the PNP Crime Laboratory. She testified that her
findings showed that Jongs signature on the check was genuine. 15
Confronted with conflicting expert testimony, the RTC chose to believe the findings of the NBI
expert. In aDecision dated 25 April 1994, the RTC held that Jongs signature on the check was
forged and accordingly directed the bank to pay or credit back to Samsung Constructions account
the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), together
with interest tolled from the time the complaint was filed, and attorneys fees in the amount of
Fifteen Thousand Pesos (P15,000.00).
FEBTC timely appealed to the Court of Appeals. On 28 November 1996, the Special Fourteenth
Division of the Court of Appeals rendered a Decision,16 reversing the RTC Decision and absolving
FEBTC from any liability. The Court of Appeals held that the contradictory findings of the NBI and
the PNP created doubt as to whether there was forgery. 17 Moreover, the appellate court also held
that assuming there was forgery, it occurred due to the negligence of Samsung Construction,
imputing blame on the accountant Kyu for lack of care and prudence in keeping the checks, which if
observed would have prevented Sempio from gaining access thereto. 18 The Court of Appeals
invoked the ruling in PNB v. National City Bank of New York19 that, if a loss, which must be borne
by one or two innocent persons, can be traced to the neglect or fault of either, such loss would be
borne by the negligent party, even if innocent of intentional fraud. 20
Samsung Construction now argues that the Court of Appeals had seriously misapprehended the
facts when it overturned the RTCs finding of forgery. It also contends that the appellate court erred
in finding that it had been negligent in safekeeping the check, and in applying the equity principle
enunciated in PNB v. National City Bank of New York.
Since the trial court and the Court of Appeals arrived at contrary findings on questions of fact, the
Court is obliged to examine the record to draw out the correct conclusions. Upon examination of the
record, and based on the applicable laws and jurisprudence, we reverse the Court of Appeals.
Section 23 of the Negotiable Instruments Law states:
When a signature is forged or made without the authority of the person whose signature it
purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against any party thereto, can be acquired
through or under such signature, unless the party against whom it is sought to enforce
such right is precluded from setting up the forgery or want of authority. (Emphasis supplied)
The general rule is to the effect that a forged signature is "wholly inoperative," and payment made
"through or under such signature" is ineffectual or does not discharge the instrument.21 If payment
is made, the drawee cannot charge it to the drawers account. The traditional justification for the
result is that the drawee is in a superior position to detect a forgery because he has the makers
signature and is expected to know and compare it.22 The rule has a healthy cautionary effect on
banks by encouraging care in the comparison of the signatures against those on the signature cards
they have on file. Moreover, the very opportunity of the drawee to insure and to distribute the cost
among its customers who use checks makes the drawee an ideal party to spread the risk to
insurance.23
Brady, in his treatise The Law of Forged and Altered Checks, elucidates:
When a person deposits money in a general account in a bank, against which he has the
privilege of drawing checks in the ordinary course of business, the relationship between the
bank and the depositor is that of debtor and creditor. So far as the legal relationship between
the two is concerned, the situation is the same as though the bank had borrowed money from
the depositor, agreeing to repay it on demand, or had bought goods from the depositor,
agreeing to pay for them on demand. The bank owes the depositor money in the same sense
that any debtor owes money to his creditor. Added to this, in the case of bank and depositor,
there is, of course, the banks obligation to pay checks drawn by the depositor in proper form
and presented in due course. When the bank receives the deposit, it impliedly agrees to pay
only upon the depositors order. When the bank pays a check, on which the depositors
signature is a forgery, it has failed to comply with its contract in this respect. Therefore, the
bank is held liable.
The fact that the forgery is a clever one is immaterial. The forged signature may so closely
resemble the genuine as to defy detection by the depositor himself. And yet, if a bank pays
the check, it is paying out its own money and not the depositors.
The forgery may be committed by a trusted employee or confidential agent. The bank still
must bear the loss. Even in a case where the forged check was drawn by the depositors
partner, the loss was placed upon the bank. The case referred to is Robinson v. Security Bank,
Ark., 216 S. W. Rep. 717. In this case, the plaintiff brought suit against the defendant bank
for money which had been deposited to the plaintiffs credit and which the bank had paid out
on checks bearing forgeries of the plaintiffs signature.
xxx
It was held that the bank was liable. It was further held that the fact that the plaintiff waited
eight or nine months after discovering the forgery, before notifying the bank, did not, as a
matter of law, constitute a ratification of the payment, so as to preclude the plaintiff from
holding the bank liable. xxx
This rule of liability can be stated briefly in these words: "A bank is bound to know its
depositors signature." The rule is variously expressed in the many decisions in which the
44
question has been considered. But they all sum up to the proposition that a bank must know
the signatures of those whose general deposits it carries. 24
By no means is the principle rendered obsolete with the advent of modern commercial transactions.
Contemporary texts still affirm this well-entrenched standard. Nickles, in his book Negotiable
Instruments and Other Related Commercial Paper wrote, thus:
The deposit contract between a payor bank and its customer determines who can draw against
the customers account by specifying whose signature is necessary on checks that are
chargeable against the customers account. Therefore, a check drawn against the account of
an individual customer that is signed by someone other than the customer, and without
authority from her, is not properly payable and is not chargeable to the customers account,
inasmuch as any "unauthorized signature on an instrument is ineffective" as the signature of
the person whose name is signed. 25
Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute defense by the
party whose signature is forged.26 On the premise that Jongs signature was indeed forged, FEBTC
is liable for the loss since it authorized the discharge of the forged check. Such liability attaches
even if the bank exerts due diligence and care in preventing such faulty discharge. Forgeries often
deceive the eye of the most cautious experts; and when a bank has been so deceived, it is a harsh
rule which compels it to suffer although no one has suffered by its being deceived.27 The forgery
may be so near like the genuine as to defy detection by the depositor himself, and yet the bank is
liable to the depositor if it pays the check.28
Thus, the first matter of inquiry is into whether the check was indeed forged. A document formally
presented is presumed to be genuine until it is proved to be fraudulent. In a forgery trial, this
presumption must be overcome but this can only be done by convincing testimony and effective
illustrations.29
In ruling that forgery was not duly proven, the Court of Appeals held:
[There] is ground to doubt the findings of the trial court sustaining the alleged forgery in view
of the conflicting conclusions made by handwriting experts from the NBI and the PNP, both
agencies of the government.
xxx
These contradictory findings create doubt on whether there was indeed a forgery. In the case
of Tenio-Obsequio v. Court of Appeals, 230 SCRA 550, the Supreme Court held that forgery
cannot be presumed; it must be proved by clear, positive and convincing evidence.
This reasoning is pure sophistry. Any litigator worth his or her salt would never allow an opponents
expert witness to stand uncontradicted, thus the spectacle of competing expert witnesses is not
unusual. The trier of fact will have to decide which version to believe, and explain why or why not
such version is more credible than the other. Reliance therefore cannot be placed merely on the
fact that there are colliding opinions of two experts, both clothed with the presumption of official
duty, in order to draw a conclusion, especially one which is extremely crucial. Doing so is
tantamount to a jurisprudential cop-out.
Much is expected from the Court of Appeals as it occupies the penultimate tier in the judicial
hierarchy. This Court has long deferred to the appellate court as to its findings of fact in the
understanding that it has the appropriate skill and competence to plough through the minutiae that
scatters the factual field. In failing to thoroughly evaluate the evidence before it, and relying
instead on presumptions haphazardly drawn, the Court of Appeals was sadly remiss. Of course,
courts, like humans, are fallible, and not every error deserves a stern rebuke. Yet, the appellate
courts error in this case warrants special attention, as it is absurd and even dangerous as a
precedent. If this rationale were adopted as a governing standard by every court in the land, barely
any actionable claim would prosper, defeated as it would be by the mere invocation of the existence
of a contrary "expert" opinion.
On the other hand, the RTC did adjudge the testimony of the NBI expert as more credible than that
of the PNP, and explained its reason behind the conclusion:
After subjecting the evidence of both parties to a crucible of analysis, the court arrived at the
conclusion that the testimony of the NBI document examiner is more credible because the
testimony of the PNP Crime Laboratory Services document examiner reveals that there are a
lot of differences in the questioned signature as compared to the standard specimen signature.
Furthermore, as testified to by Ms. Rhoda Flores, NBI expert, the manner of execution of the
 standard signatures used reveals that it is a free rapid continuous execution or stroke as
shown by the tampering terminal stroke of the signatures whereas the questioned signature is
a hesitating slow drawn execution stroke. Clearly, the person who executed the questioned
signature was hesitant when the signature was made.30
During the testimony of PNP expert Rosario Perez, the RTC bluntly noted that "apparently, there
[are] differences on that questioned signature and the standard signatures." 31 This Court, in
examining the signatures, makes a similar finding. The PNP expert excused the noted "differences"
by asserting that they were mere "variations," which are normal deviations found in writing.32 Yet
the RTC, which had the opportunity to examine the relevant documents and to personally observe
the expert witness, clearly disbelieved the PNP expert. The Court similarly finds the testimony of
the PNP expert as unconvincing. During the trial, she was confronted several times with apparent
differences between strokes in the questioned signature and the genuine samples. Each time, she
would just blandly assert that these differences were just "variations," 33 as if the mere conjuration
of the word would sufficiently disquiet whatever doubts about the deviations. Such conclusion,
standing alone, would be of little or no value unless supported by sufficiently cogent reasons which
might amount almost to a demonstration.34
The most telling difference between the questioned and genuine signatures examined by the PNP is
in the final upward stroke in the signature, or "the point to the short stroke of the terminal in the
capital letter L," as referred to by the PNP examiner who had marked it in her comparison chart as
"point no. 6." To the plain eye, such upward final stroke consists of a vertical line which forms a
ninety degree (90) angle with the previous stroke. Of the twenty one (21) other genuine samples
examined by the PNP, at least nine (9) ended with an upward stroke. 35 However, unlike the
questioned signature, the upward strokes of eight (8) of these signatures are looped, while the
upward stroke of the seventh36 forms a severe forty-five degree (45) with the previous stroke. The
difference is glaring, and indeed, the PNP examiner was confronted with the inconsistency in point
no. 6.
Q: Now, in this questioned document point no. 6, the "s" stroke is directly upwards.
A: Yes, sir.
Q: Now, can you look at all these standard signature (sic) were (sic) point 6 is repeated or the
last stroke "s" is pointing directly upwards?
37
A: There is none in the standard signature, sir.
Again, the PNP examiner downplayed the uniqueness of the final stroke in the questioned signature
as a mere variation,38 the same excuse she proffered for the other marked differences noted by the
Court and the counsel for petitioner.39
There is no reason to doubt why the RTC gave credence to the testimony of the NBI examiner, and
not the PNP experts. The NBI expert, Rhoda Flores, clearly qualifies as an expert witness. A
document examiner for fifteen years, she had been promoted to the rank of Senior Document
Examiner with the NBI, and had held that rank for twelve years prior to her testimony. She had
placed among the top five examinees in the Competitive Seminar in Question Document
Examination, conducted by the NBI Academy, which qualified her as a document examiner. 40She
had trained with the Royal Hongkong Police Laboratory and is a member of the International
Association for Identification.41 As of the time she testified, she had examined more than fifty to
fifty-five thousand questioned documents, on an average of fifteen to twenty documents a day. 42 In
comparison, PNP document examiner Perez admitted to having examined only around five hundred
documents as of her testimony.43
In analyzing the signatures, NBI Examiner Flores utilized the scientific comparative examination
method consisting of analysis, recognition, comparison and evaluation of the writing habits with the
use of instruments such as a magnifying lense, a stereoscopic microscope, and varied lighting
substances. She also prepared enlarged photographs of the signatures in order to facilitate the
necessary comparisons.44 She compared the questioned signature as against ten (10) other sample
signatures of Jong. Five of these signatures were executed on checks previously issued by Jong,
while the other five contained in business letters Jong had signed. 45 The NBI found that there were
significant differences in the handwriting characteristics existing between the questioned and the
sample signatures, as to manner of execution, link/connecting strokes, proportion characteristics,
and other identifying details.46
The RTC was sufficiently convinced by the NBI examiners testimony, and explained her reasons in
its Decisions. While the Court of Appeals disagreed and upheld the findings of the PNP, it failed to
45
convincingly demonstrate why such findings were more credible than those of the NBI expert. As a
throwaway, the assailed Decision noted that the PNP, not the NBI, had the opportunity to examine
the specimen signature card signed by Jong, which was relied upon by the employees of FEBTC in
authenticating Jongs signature. The distinction is irrelevant in establishing forgery. Forgery can be
established comparing the contested signatures as against those of any sample signature duly
established as that of the persons whose signature was forged.
FEBTC lays undue emphasis on the fact that the PNP examiner did compare the questioned
signature against the bank signature cards. The crucial fact in question is whether or not the
check was forged, not whether the bank could have detected the forgery. The latter issue
becomes relevant only if there is need to weigh the comparative negligence between the
bank and the party whose signature was forged.
At the same time, the Court of Appeals failed to assess the effect of Jongs testimony that the
signature on the check was not his.47 The assertion may seem self-serving at first blush, yet it
cannot be ignored that Jong was in the best position to know whether or not the signature on the
check was his. While his claim should not be taken at face value, any averments he would have on
the matter, if adjudged as truthful, deserve primacy in consideration. Jongs testimony is supported
by the findings of the NBI examiner. They are also backed by factual circumstances that support
the conclusion that the assailed check was indeed forged. Judicial notice can be taken that is highly
unusual in practice for a business establishment to draw a check for close to a million pesos and
make it payable to cash or bearer, and not to order. Jong immediately reported the forgery upon its
discovery. He filed the appropriate criminal charges against Sempio, the putative forger. 48
Now for determination is whether Samsung Construction was precluded from setting up the defense
of forgery under Section 23 of the Negotiable Instruments Law. The Court of Appeals concluded
that Samsung Construction was negligent, and invoked the doctrines that "where a loss must be
borne by one of two innocent person, can be traced to the neglect or fault of either, it is reasonable
that it would be borne by him, even if innocent of any intentional fraud, through whose means it
has succeeded49 or who put into the power of the third person to perpetuate the wrong." 50 Applying
these rules, the Court of Appeals determined that it was the negligence of Samsung Construction
that allowed the encashment of the forged check.
In the case at bar, the forgery appears to have been made possible through the acts of one
Jose Sempio III, an assistant accountant employed by the plaintiff Samsung [Construction]
Co. Philippines, Inc. who supposedly stole the blank check and who presumably is responsible
for its encashment through a forged signature of Jong Kyu Lee. Sempio was assistant to the
Korean accountant who was in possession of the blank checks and who through negligence,
enabled Sempio to have access to the same. Had the Korean accountant been more careful
and prudent in keeping the blank checks Sempio would not have had the chance to steal a
page thereof and to effect the forgery. Besides, Sempio was an employee who appears to
have had dealings with the defendant Bank in behalf of the plaintiff corporation and on the
date the check was encashed, he was there to certify that it was a genuine check issued to
purchase equipment for the company.51
We recognize that Section 23 of the Negotiable Instruments Law bars a party from setting up the
defense of forgery if it is guilty of negligence.52 Yet, we are unable to conclude that Samsung
Construction was guilty of negligence in this case. The appellate court failed to explain precisely
how the Korean accountant was negligent or how more care and prudence on his part would have
prevented the forgery. We cannot sustain this "tar and feathering" resorted to without any basis.
The bare fact that the forgery was committed by an employee of the party whose signature was
forged cannot necessarily imply that such partys negligence was the cause for the forgery.
Employers do not possess the preternatural gift of cognition as to the evil that may lurk within the
hearts and minds of their employees. The Courts pronouncement in PCI Bank v. Court of
Appeals53 applies in this case, to wit:
[T]he mere fact that the forgery was committed by a drawer-payors confidential employee or
agent, who by virtue of his position had unusual facilities for perpetrating the fraud and
imposing the forged paper upon the bank, does not entitle the bank to shift the loss to the
drawer-payor, in the absence of some circumstance raising estoppel against the drawer. 54
Admittedly, the record does not clearly establish what measures Samsung Construction employed
to safeguard its blank checks. Jong did testify that his accountant, Kyu, kept the checks inside a
"safety box,"55 and no contrary version was presented by FEBTC. However, such testimony cannot
prove that the checks were indeed kept in a safety box, as Jongs testimony on that point is
hearsay, since Kyu, and not Jong, would have the personal knowledge as to how the checks were
kept.
Still, in the absence of evidence to the contrary, we can conclude that there was no negligence on
Samsung Constructions part. The presumption remains that every person takes ordinary care of
his concerns,56 and that the ordinary course of business has been followed. 57 Negligence is not
presumed, but must be proven by him who alleges it.58 While the complaint was lodged at the
instance of Samsung Construction, the matter it had to prove was the claim it had alleged -
whether the check was forged. It cannot be required as well to prove that it was not negligent,
because the legal presumption remains that ordinary care was employed.
Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact that Samsung
Construction was negligent. While the payee, as in this case, may not have the personal knowledge
as to the standard procedures observed by the drawer, it well has the means of disputing the
presumption of regularity. Proving a negative fact may be "a difficult office,"59 but necessarily so,
as it seeks to overcome a presumption in law. FEBTC was unable to dispute the presumption of
ordinary care exercised by Samsung Construction, hence we cannot agree with the Court of
Appeals finding of negligence.
The assailed Decision replicated the extensive efforts which FEBTC devoted to establish that there
was no negligence on the part of the bank in its acceptance and payment of the forged check.
However, the degree of diligence exercised by the bank would be irrelevant if the drawer is not
precluded from setting up the defense of forgery under Section 23 by his own negligence. The rule
of equity enunciated in PNB v. National City Bank of New York, 60 as relied upon by the Court of
Appeals, deserves careful examination.
The point in issue has sometimes been said to be that of negligence. The drawee who has
paid upon the forged signature is held to bear the loss, because he has been
negligent in failing to recognize that the handwriting is not that of his customer. But
it follows obviously that if the payee, holder, or presenter of the forged paper has himself been
in default, if he has himself been guilty of a negligence prior to that of the banker, or if by any
act of his own he has at all contributed to induce the banker's negligence, then he may lose
his right to cast the loss upon the banker.61 (Emphasis supplied)
Quite palpably, the general rule remains that the drawee who has paid upon the forged signature
bears the loss. The exception to this rule arises only when negligence can be traced on the part of
the drawer whose signature was forged, and the need arises to weigh the comparative negligence
between the drawer and the drawee to determine who should bear the burden of loss. The Court
finds no basis to conclude that Samsung Construction was negligent in the safekeeping of its
checks. For one, the settled rule is that the mere fact that the depositor leaves his check book lying
around does not constitute such negligence as will free the bank from liability to him, where a clerk
of the depositor or other persons, taking advantage of the opportunity, abstract some of the check
blanks, forges the depositors signature and collect on the checks from the bank. 62 And for another,
in point of fact Samsung Construction was not negligent at all since it reported the forgery almost
immediately upon discovery.63
It is also worth noting that the forged signatures in PNB v. National City Bank of New York were not
of the drawer, but of indorsers. The same circumstance attends PNB v. Court of Appeals,64 which
was also cited by the Court of Appeals. It is accepted that a forged signature of the drawer differs
in treatment than a forged signature of the indorser.
The justification for the distinction between forgery of the signature of the drawer and forgery
of an indorsement is that the drawee is in a position to verify the drawers signature by
comparison with one in his hands, but has ordinarily no opportunity to verify an
indorsement.65
Thus, a drawee bank is generally liable to its depositor in paying a check which bears either a
forgery of the drawers signature or a forged indorsement. But the bank may, as a general
rule, recover back the money which it has paid on a check bearing a forged indorsement,
whereas it has not this right to the same extent with reference to a check bearing a forgery of
the drawers signature.66
The general rule imputing liability on the drawee who paid out on the forgery holds in this case.
Since FEBTC puts into issue the degree of care it exercised before paying out on the forged check,
we might as well comment on the banks performance of its duty. It might be so that the bank
46
complied with its own internal rules prior to paying out on the questionable check. Yet, there are
several troubling circumstances that lead us to believe that the bank itself was remiss in its duty.
The fact that the check was made out in the amount of nearly one million pesos is unusual enough
to require a higher degree of caution on the part of the bank. Indeed, FEBTC confirms this through
its own internal procedures. Checks below twenty-five thousand pesos require only the approval of
the teller; those between twenty-five thousand to one hundred thousand pesos necessitate the
approval of one bank officer; and should the amount exceed one hundred thousand pesos, the
concurrence of two bank officers is required. 67
In this case, not only did the amount in the check nearly total one million pesos, it was also payable
to cash. That latter circumstance should have aroused the suspicion of the bank, as it is not
ordinary business practice for a check for such large amount to be made payable to cash or to
bearer, instead of to the order of a specified person. 68 Moreover, the check was presented for
payment by one Roberto Gonzaga, who was not designated as the payee of the check, and who did
not carry with him any written proof that he was authorized by Samsung Construction to encash
the check. Gonzaga, a stranger to FEBTC, was not even an employee of Samsung
Construction.69 These circumstances are already suspicious if taken independently, much more so if
they are evaluated in concurrence. Given the shadiness attending Gonzagas presentment of the
check, it was not sufficient for FEBTC to have merely complied with its internal procedures, but
mandatory that all earnest efforts be undertaken to ensure the validity of the check, and of the
authority of Gonzaga to collect payment therefor.
According to FEBTC Senior Assistant Cashier Gemma Velez, the bank tried, but failed, to contact
Jong over the phone to verify the check.70 She added that calling the issuer or drawer of the check
to verify the same was not part of the standard procedure of the bank, but an "extra effort." 71 Even
assuming that such personal verification is tantamount to extraordinary diligence, it cannot be
denied that FEBTC still paid out the check despite the absence of any proof of verification from the
drawer. Instead, the bank seems to have relied heavily on the say-so of Sempio, who was present
at the bank at the time the check was presented.
FEBTC alleges that Sempio was well-known to the bank officers, as he had regularly transacted with
the bank in behalf of Samsung Construction. It was even claimed that everytime FEBTC would
contact Jong about problems with his account, Jong would hand the phone over to
Sempio.72 However, the only proof of such allegations is the testimony of Gemma Velez, who also
testified that she did not know Sempio personally,73 and had met Sempio for the first time only on
the day the check was encashed.74 In fact, Velez had to inquire with the other officers of the bank
as to whether Sempio was actually known to the employees of the bank. 75 Obviously, Velez had no
personal knowledge as to the past relationship between FEBTC and Sempio, and any averments of
her to that effect should be deemed hearsay evidence. Interestingly, FEBTC did not present as a
witness any other employee of their Bel-Air branch, including those who supposedly had transacted
with Sempio before.
Even assuming that FEBTC had a standing habit of dealing with Sempio, acting in behalf of
Samsung Construction, the irregular circumstances attending the presentment of the forged check
should have put the bank on the highest degree of alert. The Court recently emphasized that the
highest degree of care and diligence is required of banks.
Banks are engaged in a business impressed with public interest, and it is their duty to protect
in return their many clients and depositors who transact business with them. They have the
obligation to treat their clients account meticulously and with the highest degree of care,
considering the fiduciary nature of their relationship. The diligence required of banks,
therefore, is more than that of a good father of a family. 76
Given the circumstances, extraordinary diligence dictates that FEBTC should have ascertained from
Jong personally that the signature in the questionable check was his.
Still, even if the bank performed with utmost diligence, the drawer whose signature was forged
may still recover from the bank as long as he or she is not precluded from setting up the defense of
forgery. After all, Section 23 of the Negotiable Instruments Law plainly states that no right to
enforce the payment of a check can arise out of a forged signature. Since the drawer, Samsung
Construction, is not precluded by negligence from setting up the forgery, the general rule should
apply. Consequently, if a bank pays a forged check, it must be considered as paying out of its funds
and cannot charge the amount so paid to the account of the depositor.77 A bank is liable,
irrespective of its good faith, in paying a forged check. 78
WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 28 November
1996 is REVERSED, and the Decision of the Regional Trial Court of Manila, Branch 9, dated 25 April
1994 is REINSTATED. Costs against respondent.
SO ORDERED.
-----
G.R. No. L-43596 October 31, 1936
PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs. THE NATIONAL CITY BANK OF NEW
YORK, and MOTOR SERVICE COMPANY, INC., defendants.
MOTOR SERVICE COMPANY, INC., appellant.
RECTO, J.:
This case was submitted for decision to the court below on the following stipulation of facts:
1. That plaintiff is a banking corporation organized and existing under and by virtue of a
special act of the Philippine Legislature, with office as principal place of business at the
Masonic Temple Bldg., Escolta, Manila, P. I.; that the defendant National City Bank of New
York is a foreign banking corporation with a branch office duly authorized and licensed to carry
and engage in banking business in the Philippine Islands, with branch office and place of
business in the National City Bank Bldg., City of Manila, P. I., and that the defendant Motor
Service Company, Inc., is a corporation organized and existing under and by virtue of the
general corporation law of the Philippine Islands, with office and principal place of business at
408 Rizal Avenue, City of Manila, P. I., engaged in the purchase and sale of automobile spare
parts and accessories.
2. That on April 7 and 9, 1933, an unknown person or persons negotiated with defendant
Motor Service Company, Inc., the checks marked as Exhibits A and A-1, respectively, which
are made parts of the stipulation, in payment for automobile tires purchased from said
defendant's stores, purporting to have been issued by the "Pangasinan Transportation Co.,
Inc. by J. L. Klar, Manager and Treasurer", against the Philippine National Bank and in favor of
the International Auto Repair Shop, for P144.50 and P215.75; and said checks were indorsed
by said unknown persons in the manner indicated at the back thereof, the Motor Service Co.,
Inc., believing at the time that the signature of J. L. Klar, Manager and Treasurer of the
Pangasinan Transportation Co., Inc., on both checks were genuine.
3. The checks Exhibits A and A-1 were then indorsed for deposit by the defendant Motor
Service Company, Inc, at the National City Bank of New York and the former was accordingly
credited with the amounts thereof, or P144.50 and P215.75.
4. On April 8 and 10, 1933, the said checks were cleared at the clearing house and the
Philippine National Bank credited the National City Bank of New York for the amounts thereof,
believing at the time that the signatures of the drawer were genuine, that the payee is an
existing entity and the endorsement at the back thereof regular and genuine.
5. The Philippine National Bank then found out that the purported signatures of J. L. Klar, as
Manager and Treasurer of the Pangasinan Transportation Company, Inc., in said Exhibits A
and A-1 were forged when so informed by the said Company, and it accordingly demanded
from the defendants the reimbursement of the amounts for which it credited the National City
Bank of New York at the clearing house and for which the latter credited the Motor Service
Co., but the defendants refused, and continue to refuse, to make such reimbursements.
6. The Pangasinan Transportation Co., Inc., objected to have the proceeds of said check
deducted from their deposit.
7. Exhibits B, C, D, E, F, and G, which were introduced at the trial in the municipal court of
Manila and forming part of the record of the present case, are admitted by the parties as
genuine and are made part of this stipulation as well as Exhibit H hereto attached and made a
part hereof.
Upon plaintiff's motion, the case was dismissed before trial as to the defendant National City Bank
of New York. a decision was thereafter rendered giving plaintiff judgment for the total amount of
P360.25, with interest and costs. From this decision the instant appeal was taken.
Before us is the preliminary question of whether the original appeal taken by the plaintiff from the
decision of the municipal court of Manila where this case originated, became perfected because of
plaintiff's failure to attach to the record within 15 days from receipt of notice of said decision, the
47
certificate of appeal bond required by section 76 of the Code of Civil Procedure. It is not disputed
that both the appeal docket fee and the appeal cash bond were paid and deposited within the
prescribed time. The issue is whether the mere failure to file the official receipt showing that such
deposit was made within the said period is a sufficient ground to dismiss plaintiff's appeal. This
question was settled by our decision in the case of Blanco vs. Bernabe and lawyers Cooperative
Publishing Co. (page 124, ante), and no further consideration. No error was committed in allowing
said appeal.
We now pass on to consider and determine the main question presented by this appeal, namely,
whether the appellee has the right to recover from the appellant, under the circumstances of this
case, the value of the checks on which the signatures of the drawer were forged. The appellant
maintains that the question should be answered in the negative and in support of its contention
appellant advanced various reasons presently to be examined carefully.
I. It is contended, first of all, that the payment of the checks in question made by the drawee bank
constitutes an "acceptance", and, consequently, the case should be governed by the provisions of
section 62 of the Negotiable Instruments Law, which says:
SEC. 62. Liability of acceptor. The acceptor by accepting the instrument engages that he will
pay it according to the tenor of his acceptance; and admits:
(a) The existence of the drawer, the genuineness of his signature, and his capacity and
authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
This contention is without merit. A check is a bill of exchange payable on demand and only the
rules governing bills of exchange payable on demand are applicable to it, according to section 185
of the Negotiable Instruments Law. In view of the fact that acceptance is a step unnecessary, in so
far as bills of exchange payable on demand are concerned (sec. 143), it follows that the provisions
relative to "acceptance" are without application to checks. Acceptance implies, in effect, subsequent
negotiation of the instrument, which is not true in case of the payment of a check because from the
moment a check is paid it is withdrawn from circulation. The warranty established by section 62, is
in favor of holders of the instrument after its acceptance. When the drawee bank cashes or pays a
check, the cycle of negotiation is terminated, and it is illogical thereafter to speak of subsequent
holders who can invoke the warranty provided in section 62 against the drawee. Moreover,
according to section 191, "acceptance" means "an acceptance completed by delivery or notification"
and this concept is entirely incompatible with payment, because when payment is made the check
is retained by the bank, and there is no such thing as delivery or notification to the party receiving
the payment. Checks are not to be accepted, but presented at once for payment. (1 Bouvier's Law
Dictionary, 476.) There can be no such thing as "acceptance" in the ordinary sense of the term. A
check being payable immediately and on demand, the bank can fulfill its duty to the depositor only
by paying the amount demanded. The holder has no right to demand from the bank anything but
payment of the check, and the bank has no right, as against the drawer, to do anything but pay it.
(5 R. C. L., p. 516, par. 38.) A check is not an instrument which in the ordinary course of business
calls for acceptance. The holder can never claim acceptance as his legal right. He can present for
payment, and only for payment. (1 Morse on Banks and Banking, 6th ed., pp. 898, 899.)
There is, however, nothing in the law or in, business practice against the presentation of checks for
acceptance, before they are paid, in which case we have a "certification" equivalent to "acceptance"
according to section 187, which provides that "where a check is certified by the bank on which it is
drawn, the certification is equivalent to an acceptance", and it is then that the warranty under
section 62 exists. This certification or acceptance consists in the signification by the drawee of his
assent to the order of the drawer, which must not express that the drawee will perform his promise
by any other means than the payment of money. (Sec. 132.) When the holder of a check procures
it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon (sec.
188), and then the check operates as an assignment of a part of the funds to the credit of the
drawer with the bank. (Sec. 189.) There is nothing in the nature of the check which intrinsically
precludes its acceptance, in like manner and with like effect as a bill of exchange or draft may be
accepted. The bank may accept if it chooses; and it is frequently induced by convenience, by the
exigencies of business, or by the desire to oblige customers, voluntarily to incur the obligation. The
act by which the bank places itself under obligation to pay to the holder the sum called for by a
check must be the expressed promise or undertaking of the bank signifying its intent to assume the
obligation, or some act from which the law will imperatively imply such valid promise or
undertaking. The most ordinary form which such an act assumes is the acceptance by the bank of
the check, or, as it is perhaps more often called, the certifying of the check. (1 Morse on Banks and
Banking, pp. 898, 899; 5 R. C. L., p. 520.)
No doubt a bank may by an unequivocal promise in writing make itself liable in any event to pay
the check upon demand, but this is not an "acceptance" of the check in the true sense of that term.
Although a check does not call for acceptance, and the holder can present it only for payment, the
certification of checks is a means in constant and extensive use in the business of banking, and its
effects and consequences are regulated by the law merchant. Checks drawn upon banks or
bankers, thus marked and certified, enter largely into the commercial and financial transactions of
the country; they pass from hand to hand, in the payment of debts, the purchase of property, and
in the transfer of balances from one house and one bank to another. In the great commercial
centers, they make up no inconsiderable portion of the circulation, and thus perform a useful,
valuable, and an almost indispensable office. The purpose of procuring a check to be certified is to
impart strength and credit to the paper by obtaining an acknowledgment from the certifying bank
that the drawer has funds therein sufficient to cover the check and securing the engagement of the
bank that the check will be paid upon presentation. A certified check has a distinctive character as a
species of commercial paper, and performs important functions in banking and commercial
business. When a check is certified, it ceases to possess the character, or to perform the functions,
of a check, and represents so much money on deposit, payable to the holder on demand. The check
becomes a basis of credit an easy mode of passing money from hand to hand, and answers the
purposes of money. (5 R. C. L., pp. 516, 517.)lwphi1.nt
All the authorities, both English and American, hold that a check may be accepted, though
acceptance is not usual. By the law merchant, the certificate of the bank that a check is good is
equivalent to acceptance. It implies that the check is drawn upon sufficient funds in the hands of
the drawee, that they have been set apart for its satisfaction, and that they shall be so applied
whenever the check is presented for payment. It is an undertaking that the check is good then, and
shall continue good, and this agreement is as binding on the bank as its notes of circulation, a
certificate of deposit payable to the order of the depositor, or any other obligation it can assume.
The object of certifying a check, as regards both parties is to enable the holder to use it as money.
The transferee takes it with the same readiness and sense of security that he would take the notes
of the bank. It is available also to him for all the purposes of money. Thus it continues to perform
its important functions until in the course of business it goes back to the bank for redemption, and
is extinguished by payment. It cannot be doubted that the certifying bank intended these
consequences, and it is liable accordingly. To hold otherwise would render these important
securities only a snare and a delusion. A bank incurs no greater risk in certifying a check than in
giving a certificate of deposit. In well-regulated banks the practice is at once to charge the check to
the account of the drawer, to credit it in a certified check account, and, when the check is paid, to
debit that account with the amount. Nothing can be simpler or safer than this process. (Merchants'
Bank vs. States Bank, 10 Wall., 604, at p. 647; 19 Law. ed., 1008, 1019.)
Ordinarily the acceptance or certification of a check is performed and evidenced by some word or
mark, usually the words "good", "certified" or "accepted" written upon the check by the banker or
bank officer. (1 Morse, Banks and Banking, 915; 1 Bouvier's Law Dictionary, 476.) The bank
virtually says, that check is good; we have the money of the drawer here ready to pay it. We will
pay it now if you will receive it. The holder says, No, I will not take the money; you may certify the
check and retain the money for me until this check is presented. The law will not permit a check,
when due, to be thus presented, and the money to be left with the bank for the accommodation of
the holder without discharging the drawer. The money being due and the check presented, it is his
own fault if the holder declines to receive the pay, and for his own convenience has the money
appropriated to that check subject to its future presentment at any time within the statute of
limitations. (1 Morse on Banks and Banking, p. 920.)
The theory of the appellant and of the decisions on which it relies to support its view is vitiated by
the fact that they take the word "acceptance" in its ordinary meaning and not in the technical sense
in which it is used in the Negotiable Instruments Law. Appellant says that when payment is made,
such payment amounts to an acceptance, because he who pays accepts. This is true in common
parlance but "acceptance" in legal contemplation. The word "acceptance" has a peculiar meaning in
the Negotiable Instruments Law, and, as has been above stated, in the instant case there was
payment but no acceptatance, or what is equivalent to acceptance, certification.
With few exceptions, the weight of authority is to the effect that "payment" neither includes nor
implies "acceptance".
48
In National Bank vs. First National Bank ([19101, 141 Mo. App., 719; 125 S. W., 513), the court
asks, if a mere promise to pay a check is binding on a bank, why should not the absolute payment
of the check have the same effect? In response, it is submitted that the two things, that is
acceptance and payment, are entirely different. If the drawee accepts the paper after seeing it,
and then permits it to go into circulation as genuine, on all the principles of estoppel, he ought to
be prevented from setting up forgery to defeat liability to one who has taken the paper on the faith
of the acceptance, or certification. On the other hand, mere payment of the paper at the
termination of its course does not act as an estoppel. The attempt to state a general rule covering
both acceptance and payment is responsible for a large part of the conflicting arguments which
have been advanced by the courts with respect to the rule. (Annotation at 12 A. L. R., 1090 1921].)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the court said:
We are of the opinion that "payment is not acceptance". Acceptance, as defined by section
131, cannot be confounded with payment. . . .
Acceptance, certification, or payment of a check, by the express language of the statute,
discharges the liability only of the persons named in the statute, to wit, the drawer and all
indorsers, and the contract of indorsement by the negotiator if the check is discharged by
acceptance, certification, or payment. But clearly the statute does not say that the contract of
warranty of the negotiator, created by section 65, is discharged by these acts.
The rule supported by the majority of the cases (14 A. L. R. 764), that payment of a check on a
forged or unauthorized indorsement of the payee's name, and charging the same to the drawer's
account, do not amount to an acceptance so as to make the bank liable to the payee, is supported
by all of the recent cases in which the question is considered. (Cases cited, Annotation at 69 A. L.
R., 1076, 1077 [1930].)
Merely stamping a check "Paid" upon its payment on a forged or unauthorized indorsement is not
an acceptance thereof so as to render the drawee bank liable to the true payee.
(Anderson vs. Tacoma National Bank [1928], 146 Wash., 520; 264 Pac., 8; Annotation at 69 A. L.
R., 1077, [1930].)
In State Bank of Chicago vs. Mid-City Trust & Savings Bank (12 A. L. R., 989, 991, 992), the court
said:
The defendant in error contends that the payment of the check shows acceptance by the bank,
urging that there can be no more definite act by the bank upon which a check has been drawn,
showing acceptance than the payment of the check. Section 184 of the Negotiable Instruments Act
(sec. 202) provides that the provisions of the act applicable to bills of exchange apply to a check,
and section 131 (sec. 149), that the acceptance of a bill must be in writing signed by the drawee.
Payment is the final act which extinguishes a bill. Acceptance is a promise to pay in the future and
continues the life of the bill. It was held in the First National Bank vs. Whitman (94 U. S., 343; 24
L. ed., 229), that payment of a check upon a forged indorsement did not operate as an acceptance
in favor of the true owner. The contrary was held in Pickle vs. Muse (Fickle vs. People's Nat. Bank,
88 Tenn., 380; 7 L.R.A., 93; 17 Am. St. Rep., 900; 12 S. W., 919), and Seventh National
Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751) at a time when the Negotiable Instruments Act was
not in force in those states. The opinion of the Supreme Court of the United States seems more
logical, and the provision of the Negotiable Instruments Act now require an acceptance to be in
writing. Under this statute the payment of a check on a forged indorsement, stamping it "paid," and
charging it to the account of the drawer, do not constitute an acceptance of the check or create a
liability of the bank to the true holder or the payee. (Elyria Sav. & Bkg. Co. vs. Walker Bin Co., 92
Ohio St., 406; L. R. A., 1916D, 433; 111 N. E., 147; Ann. Cas. 1917D, 1055; Baltimore & O. R.
Co. vs. First National Bank, 102 Va., 753; 47 S. E., 837; State Bank of Chicago vs. Mid-City Trust &
Savings Bank 12 A. L. R., pp. 989, 991, 992.)
Before drawee's acceptance of check there is no privity of contract between drawee and payee.
Drawee's payment of check on unauthorized indorsement does not constitute "acceptance" of
check. (Sinclair Refining Co.vs. Moultrie Banking Co., 165 S. E., 860 [1932].)
The great weight of authority is to the effect that the payment of a check upon a forged or
unauthorized indorsement and the stamping of it "paid" does not constitute an acceptance. (Dakota
Radio Apparatus Co. vs.First Nat. Bank of Rapid City, 244 N. W., 351, 352 [1932].)
Payment of the check, cashing it on presentment is not acceptance. (South Boston Trust
Co. vs. Levin, 249 Mass., 45, 48, 49; 143 N. E., 816; Blocker, Shepard Co. vs. Granite Trust
Company, 187 Me., 53, 54 [1933].)
In Rauch vs. Bankers National Bank of Chicago (143 Ill. App., 625, 636, 637 [1908]), the language
of the decision was as follows:
. . . The plaintiffs say that this acceptance was made by the very unauthorized payments of
which they complain. This suggestion does not seem forceful to us. It is the contention which
was made before the Supreme Court of the United States in First National Bank vs. Whitman
(94 U. S., 343), and repudiated by that court. The language of the opinion in that case is so
apt in the present case that we quote it:
"It is further contended that such an acceptance of a check as creates a privity between the
payee and the bank is established by the payment of the amount of this check in the manner
described. This argument is based upon the erroneous assumption that the bank has paid this
check. If this were true, it would have discharged all of its duty, and there would be an end to
the claim against it. The bank supposed that it had paid the check, but this was an error. The
money it paid was upon a pretended and not a real indorsement of the name of the payee. . .
. We cannot recognize the argument that payment of the amount of the check or sight draft
under such circumstances amounts to an acceptance creating a privity of contract with the
real owner.
"It is difficult to construe a payment as an acceptance under any circumstances. . . . A banker
or individual may be ready to make actual payment of a check or draft when presented, while
unwilling to make a promise to pay at a future time. Many, on the other hand, are more ready
to promise to pay than to meet the promise when required. The difference between the
transactions is essential and inherent."
And in Wharf vs. Seattle National Bank (24 Pac. [2d]), 120, 123 [1933]):
It is the rule that payment of a check on unauthorized or forged indorsement does not operate
as an acceptance of the check so as to authorize an action by the real owner to recover its
amount from the drawee bank. (Michie on Banks and Banking, vol. 5, sec. 278, p. 521.) A full
list of the authorities supporting the rule will be found in a footnote to the foregoing citation.
(See also, Federal Land Bank vs. Collins, 156 Miss., 893; 127 So., 570; 69 A. L. R., 1068.)
In a very recent case, Federal Land Bank vs. Collins (69 A. L. R., 1068, 1072-1074), this question
was discussed at considerable length. The court said:
In the light of the first of these statutes, counsel for appellant is forced to stand upon the narrow
ledge that the payment of the check by the two banks will constitute an acceptance. The drawee
bank simply marked it "paid" and did not write anything else except the date. The bank first paying
the check, the Commercial National Bank and Trust Company, simply wrote its name as indorser
and passed the check on to the drawee bank; does this constitute an acceptance? The precise
question has not been presented to this court for decision. Without reference to authorities in other
jurisdictions it would appear that the drawee bank had never written its name across the paper and
therefore, under the strict terms of the statute, could not be bound as an acceptor; in the second
place, it does not appear to us to be illogical and unsound to say that the payment of a check by
the drawee, and the stamping of it "paid", is equivalent to the same thing as the acceptance of a
check; however, there is a variety of opinions in the various jurisdictions on this question. Counsel
correctly states that the theory upon which the numerous courts hold that the payment of a check
creates privity between the holder of the check and the drawee bank is tantamount to a pro
tanto assignment of that part of the funds. It is most easily understood how the payment of the
check, when not authorized to be done by the drawee bank, might under such circumstances create
liability on the part of the drawee to the drawer. Counsel cites the case of Pickle vs.Muse (88 Tenn,
380; 12 S. W., 919; 7 L. R. A., 93; 17 Am. St. Rep., 900), wherein Judge Lurton held that the
acceptance of a check was necessary in order to give the holder thereof a right of action thereon
against the bank, and further held in a case similar to this, so far as this question is concerned, that
the acceptance of a check so as to give a right of action to the payee is inferred from the retention
of the check by the bank and its subsequent charge of the amount to the drawer, although it was
presented by, and payment made, an unauthorized person. Judge Lurton cited the case of National
Bank of the Republic vs. Millard (10 Wall., 152; 19 L. ed., 897), wherein the Supreme Court of the
United States, not having such a case before it, threw out the suggestion that, if it was shown that
a bank had charged the check on its books against the drawer and made settlement with the
drawee that the holder could recover on account of money had and received, invoking the rule of
justice and fairness, it might be said there was an implied promise to the holder to pay it on
demand. (SeeNational Bank of the Republic vs. Millard, 10 Wall. [77 U. S.], 152; 19 L. ed., 899.)
The Tennessee court then argued that it would be inequitable and unconscionable for the owner
and payee of the check to be limited to an action against an insolvent drawer and might thereby
49
lose the debt. They recognized the legal principle that there is no privity between the drawer bank
and the holder, or payee, of the check, and proceeded to hold that no particular kind of writing was
necessary to constitute an acceptance and that it became a question of fact, and the bank became
liable when it stamped it "paid" and charged it to the account of the drawer, and cites, in support of
its opinion, Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751); Saylor vs. Bushong
(100 Pa., 23; 45 Am. Rep., 353); and Dodge vs. Bank (20 Ohio St., 234; 5 Am. Rep., 648).
This decision was in 1890, prior to the enactment of the Negotiable Instruments Law by the
State of Tennessee. However, in this case Judge Snodgrass points out that the Millard
case, supra, was dicta. The Dodge case, from the Ohio court, held exactly as the Tennessee
court, but subsequently in the case of Elyria Bank vs. Walker Bin Co. (92 Ohio St., 406; 111
N. E., 147; L. R. A. 1916D, 433; Ann. Cas. 1917D, 1055), the court held to the contrary,
called attention to the fact that the Dodge case was no longer the law, and proceeded to
announce that, whatever might have been the law before the passage of the Negotiable
Instrument Act in that state, it was no longer the law; that the rule announced in the Dodge
case had been "discarded." The court, in the latter case, expressed its doubts that the courts
of Tennessee and Pennsylvania would adhere to the rule announced in the Pickle case,
quoted supra, in the face of the Negotiable Instrument Law. Subsequent to the Millard case,
the Supreme Court of the United States, in the case of First National Bank of
Washington vs. Whitman (94 U. S., 343, 347; 24 L. ed., 229), where the bank, without any
knowledge that the indorsement of the payee was unauthorized, paid the check, and it was
contended that by the payment the privity of contract existing between the drawer and
drawee was imparted to the payee, said:
"It is further contended that such an acceptance of the check as creates a privity between the
payee and the bank is established by the payment of the amount of this check in the manner
described. This argument is based upon the erroneous assumption that the bank has paid this
check. If this were true, it would have discharged all of its duty, and there would be an end of
the claim against it. The bank supposed that it had paid the check; but this was an error. The
money it paid was upon a pretended and not a real indorsement of the name of the payee.
The real indorsement of the payee was as necessary to a valid payment as the real signature
of the drawer; and in law the check remains unpaid. Its pretended payment did not diminish
the funds of the drawer in the bank, or put money in the pocket of the person entitled to the
payment. The state of the account was the same after the pretended payment as it was
before.
"We cannot recognize the argument that a payment of the amount of a check or sight draft
under such circumstances amounts to an acceptance, creating a privity of contract with the
real owner. It is difficult to construe a payment as an acceptance under any circumstances.
The two things are essentially different. One is a promise to perform an act, the other an
actual performance. A banker or an individual may be ready to make actual payment of a
check or draft when presented, while unwilling to make a promise to pay at a future time.
Many, on the other hand, are more ready to promise to pay than to meet the promise when
required. The difference between the transactions is essential and inherent."
Counsel for the appellant cite other cases holding that the stamping of the check "paid" and
the charging of the amount thereof to the drawer constituted an acceptance, but we are of
opinion that none of these cases cited hold that it is in compliance with the Negotiable
Instruments Act; paying the check and stamping same is not the equivalent of accepting the
check in writing signed by the drawee. The cases holding that payment as indicated above
constituted acceptance were rendered prior to the adoption of the Negotiable Instruments Act
in the particular state, and these decisions are divided into two classes: the one holding that
the check delivered by the drawer to the holder and presented to the bank or drawee
constitutes an assignment pro tanto; the other holding that the payment of the check and the
charging of same to the drawee although paid to an unauthorized person creates privity of
contract between the holder and the drawee bank.
We have already seen that our own court has repudiated the assignment pro tanto theory, and
since the adoption of the Negotiable Instrument Act by this state we are compelled to say that
payment of a check is not equivalent to accepting a check in writing and signing the name of
the acceptor thereon. Payment of the check and the charging of same to the drawer does not
constitute an acceptance. Payment of the check is the end of the voyage; acceptance of the
check is to fuel the vessel and strengthen it for continued operation on the commercial sea.
What we have said applies to the holder and not to the drawer of the check. On this question
we conclude that the general rule is that an action cannot be maintained by a payee of the
 check against the bank on which is draw unless the check has been certified or accepted by
the bank in compliance with the statute, even though at the time the check is that an action
cannot be maintained by a payee of the drawer of the check out of which the check is legally
payable; and that the payment of the check by the bank on which it is drawn, even though
paid on the unauthorized indorsement of the name of the holder (without notice of the defect
by the bank), does not constitute a certification thereof, neither is it an acceptance thereof;
and without acceptance or certification, as provided by statute, there is no privity of contract
between the drawee bank and the payee, or holder of the check. Neither is there an
assignment pro tanto of the funds where the check is not drawn on a particular fund, or does
not show on its face that it is an assignment of a particular fund. The above rule as stated
seems to have been the rule in the majority of the states even before the passage of the
uniform Negotiable Instruments Act in the several states.
The decision in the case of First National Bank vs. Bank of Cottage Grove (59 Or., 388), which
appellant cites in its brief (pp. 12, 13 ) has been expressly overruled by the Supreme Court of
Massachusetts in South Boston Trust Co. vs. Levin (143 N. E., 816, 817), in the following language:
In First National Bank vs. Bank of Cottage Grove (59 Or., 388; 117 Pac., 293, 296, at page
396), it was said: "The payment of a bill or check by the drawee amounts to more than an
acceptance. The rule, holding that such a payment has all the efficacy of an acceptance, is
founded upon the principle that the greater includes the less." We are unable to agree with
this statement as there is no similarity between acceptance and payment; payment discharges
the instrument, and no one else is expected to advance anything on the faith of it;
acceptance, contemplates further circulation, induced by the fact of acceptance. The rule that
the acceptor made certain admissions which will inure to the benefit of subsequent holders,
has no applicability to payment of the instrument where subsequent holders can never exist.
II. The old doctrine that a bank was bound to know its correspondent's signature and that a drawee
could not recover money paid upon a forgery of the drawer's name, because it was said, the
drawee was negligent not to know the forgery and it must bear the consequence of its negligence,
is fast fading into the misty past, where it belongs. It was founded in misconception of the
fundamental principles of law and common sense. (2 Morse, Banks and Banking, p. 1031.)
Some of the cases carried the rule to its furthest limit and held that under no circumstances
(except, of course, where the purchaser of the bill has participated in the fraud upon the drawee)
would the drawee be allowed to recover bank money paid under a mistake of fact upon a bill of
exchange to which the name of the drawer had been forged. This doctrine has been freely criticized
by the eminent authorities, as a rule too favorable to the holder, not the most fair, nor best
calculated to effectuate justice between the drawee and the drawer. (5 R.C.L., p. 556.)
The old rule which was originally announced by Lord Mansfield in the leading case of Price vs. Neal
(3 Burr., 1354), elicited the following comment from Justice Holmes, then Chief Justice of the
Supreme Court of Massachusetts, in the case of Dedham National Bank vs. Everett National Bank
(177 Mass., 392). "Probably the rule was adopted from an impression of convenience rather than
for any more academic reason; or perhaps we may say that Lord Mansfield took the case out of the
doctrine as to payments under a mistake of fact by the assumption that a holder who simply
presents negotiable paper for payment makes no representation as to the signature, and that the
drawee pays at his peril."
Such was the reaction that followed Lord Mansfield's rule which Justice Story of the United States
Supreme adopted in the case of Bank of United States vs. Georgia (10 Wheat., 333), that in B. B.
Ford & Co. vs. People's Bank of Orangeburg (74 S. C., 180), it was held that "an unrestricted
indorsement of a draft and presentation to the drawee is a representation that the signature of the
drawer is genuine", and in Lisbon First National Bank vs.Wyndmere Bank (15 N. D., 299), it was
also held that "the drawee of a forged check who has paid the same without detecting the forgery,
may upon discovery of the forgery, recover the money paid from the party who received the
money, even though the latter was a good faith holder, provided the latter has not been misled or
prejudiced by the drawee's failure to detect the forgery."
Daniel, in his treatise on Negotiable Instruments, has the following to say:
In all the cases which hold the drawee absolutely estoppel by acceptance or payment from denying
genuineness of the drawer's name, the loss is thrown upon him on the ground of negligence on his
part in accepting or paying, until he has ascertained the bill to be genuine. But the holder has
preceded him in negligence, by himself not ascertaining the true character of the paper before he
received it, or presented it for acceptance or payment. And although, as a general rule, the drawee
50
is more likely to know the drawer's handwriting than a stranger is, if he is in fact deceived as to its
genuineness, we do not perceive that he should suffer more deeply by mistake than a stranger,
who, without knowing the handwriting, has taken the paper without previously ascertaining its
genuineness. And the mistake of the drawee should always be allowed to be corrected, unless the
holder, acting upon faith and confidence induced by his honoring the draft, would be placed in a
worse position by according such privilege to him. This view has been applied in a well considered
case, and is intimidated in another; and is forcibly presented by Mr. Chitty, who says it is going a
great way to charge the acceptor with knowledge of his correspondent's handwriting, "unless
some bona fide holder has purchased the paper on the faith of such an act." Negligence in making
payment under a mistake of fact is not now deemed a bar to recovery of it, and we do not see why
any exception should be made to the principle, which would apply as well as to release an
obligation not consummated by payment. ( Vol. 2, 6th edition, pp. 1537-1539.)
III. But now the rule is perfectly well settled that in determining the relative rights of a drawee
who, under a mistake of fact, has paid, and a holder who has received such payment, upon a check
to which the name of the drawer has been forged, it is only fair to consider the question of diligence
or negligence of the parties in respect thereto. (Woods and Malone vs. Colony Bank [1902], 56 L.
R. A., 929, 932.) The responsibility of the drawee who pays a forged check, for the genuineness of
the drawer's signature, is absolute only in favor of one who has not, by his own fault or negligence,
contributed to the success of the fraud or to mislead the drawee. (National Bank of
America vs. Bangs, 106 Mass., 441; 8 Am. Rep., 349; Woods and Malone vs. Colony Bank, supra;
De Feriet vs.Bank of America, 23 La. Ann., 310; B. B. Ford & Co. vs. People's Bank of Orangeburg,
74 S. C., 180; 10 L. R. A. [N. S.], 63.) If it appears that the one to whom payment was made was
not an innocent sufferer, but was guilty of negligence in not doing something, which plain duty
demanded, and which, if it had been done, would have avoided entailing loss on any one, he is not
entitled to retain the moneys paid through a mistake on the part of the drawee bank. (First Nat.
Bank of Danvers vs. First Nat. Bank of Salem, 151 Mass., 280; 24 N. E., 44; 21 A. S. R., 450; First
Nat. Bank of Orleans vs. State Bank of Alma, 22 Neb., 769; 36 N. W., 289; 3 A. S. R., 294;
American Exp. Co. vs. State Nat. Bank, 27 Okla., 824; 113 Pac., 711; 33 L. R. A. [N. S.], 188; B.
B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 54 S. E., 204; 114 A. S. R., 986; 7
Ann. Cas., 744; 10 L. R. A. [N. S.], 63; People's Bank vs. Franklin Bank, 88 Tenn. 299; 12 S. W.,
716; 17 A. S. R.) 884; 6 L. R. A., 724; Canadian Bank of Commerce vs. Bingham, 30 Wash., 484;
71 Pac., 43; 60 L. R. A., 955.) In other words, to entitle the holder of a forged check to retain the
money obtained he must be able to show that the whole responsibility of determining the validity of
the signature was upon the drawee, and that the negligence of such drawee was not lessened by
any failure of any precaution which, from his implied assertion in presenting the check as a
sufficient voucher, the drawee had the right to believe he had taken. (Ellis vs. Ohio Life Insurance &
Trust Co., 4 Ohio St., 628; Rouvantvs. Bank, 63 Tex., 610; Bank vs. Ricker, 71 Ill., 429; First
National Bank of Danvers vs. First Nat. Bank of Salem, 24 N. E., 44, 45; B. B. Ford &
Co. vs. People's Bank of Orangeburg, supra.) The recovery is permitted in such case, because,
although the drawee was constructively negligent in failing to detect the forgery, yet if the
purchaser had performed his duty, the forgery would in all probability have been detected and the
fraud defeated. (First National Bank of Lisbon vs. Bank of Wyndmere, 15 N. D., 209; 10 L. R. A. [N.
S.], 49.) In the absence of actual fault on the part of the drawee, his constructive fault in not
knowing the signature of the drawer and detecting the forgery will not preclude his recovery from
one who took the check under circumstances of suspicion without proper precaution, or whose
conduct has been such as to mislead the drawee or induce him to pay the check without the usual
scrutiny or other precautions against mistake or fraud. (National Bank of America vs.Bangs, supra;
First National Bank vs. Indiana National Bank, 30 N. E., 808-810; Woods and Malone vs. Colony
Bank, supra; First National Bank of Danvers vs. First Nat. Bank of Salem, 151 Mass., 280.) Where a
loss, which must be borne by one of two parties alike innocent of forgery, can be traced to the
neglect or fault of either, it is unreasonable that it would be borne by him, even if innocent of any
intentional fraud, through whose means it has succeeded. (Gloucester Bank vs. Salem Bank, 17
Mass., 33; First Nat. Bank of Danvers vs. First National Bank of Salem, supra; B. B. Ford &
Co. vs. People's Bank of Orangeburg, supra.) Again if the indorser is guilty of negligence in
receiving and paying the check or draft, or has reason to believe that the instrument is not
genuine, but fails to inform the drawee of his suspicions the indorser according to the reasoning of
some courts will be held liable to the drawee upon his implied warranty that the instrument is
genuine. (B. B. Ford & Co. vs. People's Bank of Orangeburg, supra; Newberry Sav. Bank vs. Bank
of Columbia, 93 S. C., 294; 38 L. R. A. [N. S], 1200.) Most of the courts now agree that one who
purchases a check or draft is bound to satisfy himself that the paper is genuine; and that by
indorsing it or presenting it for payment or putting it into circulation before presentation he
impliedly asserts that he has performed his duty, the drawee, who has, without actual negligence
on his part, paid the forged demand, may recover the money paid from such negligent purchaser.
(Lisbon First National Bank vs.Wyndmere Bank, supra.) Of course, the drawee must, in order to
recover back the holder, show that he himself was free from fault. (See also 5 R. C. L., pp. 556-
558.)
So, if a collecting bank is alone culpable, and, on account of its negligence only, the loss has
occurred, the drawee may recover the amount it paid on the forged draft or check. (Security
Commercial & Sav. Bank vs.Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)
But we are aware of no case in which the principle that the drawee is bound to know the signature
of the drawer of a bill or check which he undertakes to pay has been held to be decisive in favor of
a payee of a forged bill or check to which he has himself given credit by his indorsement. (Secalso,
Mckleroy vs. Bank, 14 La. Ann., 458; Canal Bank vs. Bank of Albany, 1 Hill, 287;
Rouvant vs. Bank, supra, First Nat. Bank vs. Indiana National Bank; 30 N. E., 808-810.)
In First Nat. Bank vs. United States National Bank ([1921], 100 Or., 264; 14 A. L. R., 479; 197
Pac., 547), the court declared: "A holder cannot profit by a mistake which his negligent disregard of
duty has contributed to induce the drawee to commit. . . . The holder must refund, if by his
negligence he has contributed to the consummation of the mistake on the part of the drawee by
misleading him. . . . If the only fault attributable to the drawee is the constructive fault which the
law raises from the bald fact that he has failed to detect the forgery, and if he is not chargeable
with actual fault in addition to such constructive fault, then he is not precluded from recovery from
a holder whose conduct has been such as to mislead the drawee or induce him to pay the check or
bill of exchange without the usual security against fraud. The holder must refund to a drawee who
is not guilty of actual fault if the holder was negligent in not making due inquiry concerning the
validity of the check before he took it, and if the drawee can be said to have been excused from
making inquiry before taking the check because of having had a right to, presume that the holder
had made such inquiry."
The rule that one who first negotiates forged paper without taking some precaution to learn
whether or not it is genuine should not be allowed to retain the proceeds of the draft or check from
the drawee, whose sole fault was that he did not discover the forgery before he paid the draft or
check, has been followed by the later cases. (Security Commercial & Savings Bank vs. Southern
Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945; Hutcheson Hardware Co. vs. Planters
State Bank [1921], 26 Ga. App., 321; 105 S. E., 854; [Annotation at 71 A. L. R., 337].)
Where a bank, without inquiry or identification of the person presenting a forged check, purchases
it, indorses it, generally, and presents it to the drawee bank, which pays it, the latter may recover
if its only negligence was its mistake in having failed to detect the forgery, since its mistake, did
not mislead the purchaser or bring about a change in position. (Security Commercial & Savings
Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)
Also, a drawee could recover from another bank the portion of the proceeds of a forged check
cashed by the latter and deposited by the forger in the second bank and never withdrawn, upon the
discovery of the forgery three months later, after the drawee had paid the check and returned the
voucher to the purported drawer, where the purchasing bank was negligent in taking the check,
and was not injured by the drawee's negligence in discovering and reporting the forgery as to the
amount left on deposit, since it was not a purchaser for value. (First State Bank & T. Co. vs. First
Nat. Bank [1924], 314 Ill., 269; 145 N. E., 382.)
Similarly, it has been held that the drawee of a check could recover the amount paid on the check,
after discovery of the forgery, from another bank, which put the check into circulation by cashing it
for the one who had forged the signature of both drawer and payee without making any inquiry as
to who he was although he was a stranger, after which the check reached, and was paid by, the
drawee, after going through the hands of several intermediate indorsees. (71 A. L. R., p. 340.)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the following
statement was made:
We are clearly of opinion, therefore that the warranty of genuineness, arising upon the act of the
Brule National Bank in putting the check in circulation, was not discharged by payment of the check
by the drawee (First National Bank), nor was the Brule National Bank deceived or misled to its
prejudice by such payment. The Brule National Bank by its indorsement and delivery warranted its
own identification of Kost and the genuineness of his signature. The indorsement of the check by
the Brule National Bank was such as to assign the title to the check to its assignee, the Whitbeck
National Bank, and the amount was credited to the indorser. The check bore no indication that it
was deposited for collection, and was not in any manner restricted so as to constitute the indorsee
51
the agent of the indorser, nor did it prohibit farther negotiation of the instrument, nor did it appear
to be in trust for, or to the use of, any other person, nor was it conditional. Certainly the Pukwana
Bank was justified in relying upon the warrant of genuineness, which implied the full identification
of Kost, and his signature by the defendant bank. This view of the statute is in accord with the
decisions of many courts. (First National Bank vs.State Bank, 22 Neb., 769; 3 Am. St. Rep., 294;
36 N. W., 289; First National Bank vs. First National Bank, 151 Mass., 280; 21 Am. St. Rep., 450;
24 N. E., 44; People's Bank vs. Franklin Bank, 88 Tenn., 299; 6 L. R. A., 727; 17 Am. St. Rep.,
884; 12 S. W., 716.)"
The appellant leans heavily on the case of Fidelity & Co. vs. Planenscheck (71 A. L. R., 331),
decided in 1929. We have carefully examined this decision and we do not feel justified in accepting
its conclusions. It is but a restatement of the long abandoned rule of Neal vs. Price, and it
predicated on the wrong premise that the payment includes acceptance, and that a bank drawee
paying a check drawn on it becomes ipso facto an acceptor within the meaning of section 62 of the
Negotiable Instruments Act. Moreover in a more recent decision, that of Louisa National
Bank vs. Kentucky National Bank (39 S. W. [2nd] 497, 501) decided in 1931, the Court of Appeals
of Kentucky held the following:
The appellee, on presentation for payment of $600 check, failed to discover it was a forgery. It
was bound to know the signature of its customer, Armstrong, and it was derelict in failing to
give his signature to the check sufficient attention and examination to enable it to discover
instantly the forgery. The appellant, when the check was presented to it by Banfield, failed to
make an inquiry of or about him and did not cause or have him to be identified. Its act in so
paying to him the check is a degree of negligence on its part equivalent to positive negligence.
It indorsed the check, and, while such indorsement may not be regarded within the meaning
of the Negotiable Instrument Law as amounting to a warranty to appellant of that which it
indorsed, it at least substantially served as a representation to it that it had exercised ordinary
care and had complied with the rules and customs of prudent banking. Its indorsement was
calculated, if it did not in fact do so, to lull the drawee bank into indifference as to the
drawer's signature to it when paying the check and charging it to its customer's account and
remitting its proceeds to appellant's correspondent.
If in such a transaction between the drawee and the holder of a check both are without fault,
no recovery may be had of the money so paid. (Deposit Bank of Georgetown vs. Fayette
National Bank, supra, and cases cited.) Or the rule may be more accurately stated that, where
the drawee pays the money, he cannot recover it back from a holder in good faith, for value
and without fault.
If, on the other hand, the holder acts in bad faith, or is guilty of culpable negligence, a
recovery may be had by the drawee of such holder. The negligence of the Bank of Louisa in
failing to inquire of and about Banfield, and to cause or to have him identified before it parted
with its money on the forged check, may be regarded as the primary and proximate cause of
the loss. Its negligence in this respect reached in its effect the appellee, and induced incaution
on its part. In comparison of the degrees of the negligence of the two, it is apparent that of
the appellant excels in culpability. Both appellant and appellee inadvertently made a mistake,
doubtless due to a hurry incident to business. The first and most grievous one was made by
the appellant , amounting to its disregard of the duty, it owed itself as well as the duty it owed
to the appellee, and it cannot on account thereof retain as against the appellee the money
which it so received. It cannot shift the loss to the appellee, for such disregard of its duty
inevitably contributed to induce the appellee to omit its duty critically to examine the
signature of Armstrong, even if it did not know it instantly at the time it paid the check.
(Farmers' Bank of Augusta vs. Farmer's Bank of Maysville, supra, and cases cited.)
IV. The question now is to determine whether the appellant's negligence in purchasing the checks
in question is such as to give the appellee the right to recover upon said checks, and on the other
hand, whether the drawee bank was not itself negligent, except for its constructive fault in not
knowing the signature of the drawer and detecting the forgery.
We quote with approval the following conclusions of the court a quo:
Check Exhibit A bears number 637023-D and is dated April 6, 1933, whereas check Exhibit A-
1 bears number 637020-D and is dated April 7, 1933. Therefore, the latter check, which is
prior in number to the former check, is however, issued on a later date. This circumstance
must have aroused at least the curiosity of the Motor Service Co., Inc.
 The Motor Service Co., Inc., accepted the two checks from unknown persons. And not only
this; check Exhibit A is indorsed by a subagent of the agent of the payee, International Auto
Repair Shop. The Motor Service Co., Inc., made no inquiry whatsoever as to the extent of the
authority of these unknown persons. Our Supreme Court said once that "any person taking
checks made payable to a corporation, which can act only by agents, does so at his peril, and
must abide by the consequences if the agent who indorses the same is without authority"
(Insular Drug Co. vs. National Bank, 58, Phil., 684).
xxx xxx xxx
Check Exhibit A-1, aside from having been indorsed by a supposed agent of the international
Auto Repair Shop is crossed generally. The existence of two parallel lines transversally drawn
on the face of this check was a warning that the check could only be collected through a
banking institution (Jacobs, Law of Bills of Exchange, etc., pp., 179, 180; Bills of Exchange Act
of England, secs. 76 and 79). Yet the Motor Service Co., Inc., accepted the check in payment
for merchandise.
. . . In Exhibit H attached to the stipulation of facts as an integral part thereof, the Motor
Service Co., Inc., stated the following:
"The Pangasinan Transportation Co. is a good customer of this firm and we received checks
from them every month in payment of their account. The two checks in question seem to be
exactly similar to the checks which we received from the Pangasinan Transportation Co. every
month."
If the failure of the Motor Service Co., Inc., to detect the forgery of the drawer's signature in
the two checks, may be considered as an omission in good faith because of the similarity
stated in the letter, then the same consideration applies to the Philippine National Bank, for
the drawer is a customer of both the Motor Service Co., Inc., and the Philippine National Bank.
(B. of E., pp. 25, 28, 35.)
We are of opinion that the facts of the present case do not make it one between two equally
innocent persons, the drawee bank and the holder, and that they are governed by the authorities
already cited and also the following:
The point in issue has sometimes been said to be that of negligence. The drawee who has paid
upon the forged signature is held to bear the loss, because he has been negligent in failing to
recognize that the handwriting is not that of his customer. But it follows obviously that if the
payee, holder, or presenter of the forged paper has himself been in default, if he has himself
been guilty of a negligence prior to that of the banker, or if by any act of his own he has at all
contributed to induce the banker's negligence, then he may lose his right to cast the loss upon
the banker. The courts have shown a steadily increasing disposition to extend the application
of this rule over the new conditions of fact which from time to time arise, until it can now
rarely happen that the holder, payee, or presenter can escape the imputation of having been
in some degree contributory towards the mistake. Without any actual change in the abstract
doctrines of the law, which are clear, just, and simple enough, the gradual but sure tendency
and effect of the decisions have been to put as heavy a burden of responsibility upon the
payee as upon the drawee, contrary to the original custom. . . . (2 Morse on Banks and
Banking, 5th ed., secs. 464 and 466, pp. 82-85 and 86, 87.)
In First National Bank vs. Brule National Bank (12 A. L. R., 1079, 1088, 1089), the following
statement appears in the concurring opinion:
What, then, should be the rule? The drawee asks to recover for money had and received. If his
claim did not rest upon a transaction relating to a negotiable instrument plaintiff could recover
as for money paid under mistake, unless defendant could show some equitable reason, such
as changed condition since, and relying upon, payment by plaintiff. In the Wyndmere Case,
the North Dakota court holds that this rule giving right to recover money paid under mistake
should extend to negotiable paper, and it rejects in its entirety the theory of estoppel and puts
a case of this kind on exactly the same basis as the ordinary case of payment under mistake.
But the great weight of authority, and that based on the better reasoning, holds that the
exigencies of business demand a different rule in relation to negotiable paper. What is that
rule? Is it an absolute estoppel against the drawee in favor of a holder, no matter how
negligent such holder has been? It surely is not. The correct rule recognizes the fact that, in
case of payment without a prior acceptance or certification, the holder takes the paper upon
the of the prior indorsers and the credit of the drawer, and not upon the credit of the drawee,
in making payment, has a right to rely upon the assumption that the payee used due
52
diligence, especially where such payee negotiated the bill or check to a holder, thus
representing that it had so fully satisfied itself as to the identity and signature of the maker
that it was willing to warrant as relates thereto to all subsequent holders. (Uniform Act, secs.
65 and 66.) Such correct rule denies the drawee the right to recover when the holder was
without fault or when there has been some change of position calling for equitable relief. When
a holder of a bill of exchange uses all due care in the taking of bill or check and the drawee
thereafter pays same, the transaction is absolutely closed modern business could not be
done on any other basis. While the correct rule promotes the fluidity of two recognized
mediums of exchange, those mediums by which the great bulk of business is carried on,
checks and drafts, upon the other hand it encourages and demands prudent business methods
upon the part of those receiving such mediums of exchange. (Pennington County
Bank vs. First State Bank, 110 Minn., 263; 26 L. R. A. [N. S.], 849; 136 Am. St. Rep., 496;
125 N. W., 119; First National Bank vs. State Bank, 22 Neb., 769; 3 Am. St. Rep., 294; 36 N.
W., 289; Bank of Williamson, vs. McDowell County Bank, 66 W. Va., 545; 36 L. R. A. [N. S.],
605; 66 S. E., 761; Germania Bank vs. Boutell, 60 Minn., 189; 27 L. R. A., 635; 51 Am. St.
Rep., 519; 62 N. W., 327; American Express Co. vs. State National Bank, 27 Okla., 824; 33 L.
R. A. [N. S.], 188; 113 Pac., 711; Farmers' National Bank vs. Farmers' & Traders Bank, L. R.
A., 1915A, 77, and note (159 Ky., 141; 166 S. W., 986].)
That the defendant bank did not use reasonable business prudence is clear. It took this check
from a stranger without other identification than that given by another stranger; its cashier
witnessed the mark of such stranger thus vouching for the identity and signature of the
maker; and it indorsed the check as "Paid," thus further throwing plaintiff off guard. Defendant
could not but have known, when negotiating such check and putting it into the channel
through which it would finally be presented to plaintiff for payment, that plaintiff, if it paid
such check, as defendant was asking it to do, would have to rely solely upon the apparent
faith and credit that defendant had placed in the drawer. From the very circumstances of this
case plaintiff had to act on the facts as presented to it by defendant, upon such facts only.
But appellant argues that it so changed its position, after payment by plaintiff, that in "equity
and good conscience" plaintiff should not recover it says it did not pay over any money to
the forger until after plaintiff had paid the check. There would be merit in such contention if
defendant had indorsed the check for "collection," thus advising plaintiff that it was relying on
plaintiff and not on the drawer. It stands in court where it would have been if it had done as it
represented.
In Woods and Malone vs. Colony Bank (56 L. R. A., 929, 932), the court said:
. . . If the holder has been negligent in paying the forged paper, or has by his conduct,
however innocent, misled or deceived the drawee to his damage, it would be unjust for him to
be allowed to shield himself from the results of his own carelessness by asserting that the
drawee was bound in law to know his drawer's signature.
V. Section 23 of the Negotiable Instruments Act provides that "when a signature is forged or made
without the authority of the person whose signature it purports to be, is wholly inoperative, and no
right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof
against any party thereto, can be acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded from setting up the forgery or want of
authority.
It not appearing that the appellee bank did not warrant to the appellant the genuineness of the
checks in question, by its acceptance thereof, nor did it perform any act which would have induced
the appellant to believe in the genuineness of said instruments before appellant purchased them for
value, it can not be said that the appellee is precluded from setting up the forgery and, therefore,
the appellant is not entitled to retain the amount of the forged check paid to it by the appellee.
VI. It has been held by many courts that a drawee of a check, who is deceived by a forgery of the
drawer's signature may recover the payment back, unless his mistake has placed an innocent
holder of the paper in a worse position than he would have been in if the discovery of the forgery
had been made on presentation. (5 R. C. L., p. 559; 2 Daniel on Negotiable Instruments, 1538.)
Forgeries often deceived the eye of the most cautious experts; and when a bank has been
deceived, it is a harsh rule which compels it to suffer although no one has suffered by its being
deceived. (17 A. L. R. 891; 5 R. C. L., 559.)
In the instant case should the drawee bank be allowed recovery, the appellant's position would not
become worse than if the drawee had refused the payment of these checks upon their presentation.
The appellant has lost nothing by anything which the drawee has done. It had in its hands some
forged worthless papers. It did not purchase or acquire these papers because of any representation
made to it by the drawee. It purchased them from unknown persons and under suspicious
circumstances. It had no valid title to them, because the persons from whom it received them did
not have such title. The appellant could not have compelled the drawee to pay them, and the
drawee could have refused payment had it been able to detect the forgery. By making a refund, the
appellant would only returning what it had received without any title or right. And when appellant
pays back the money it had received it will be entitled to have restored to it the forged papers it
parted with. There is no good reason why the accidental payment made by the appellant should
inure to the benefit of the appellant. If there were injury to the appellant said injury was caused not
by the failure of the appellee to detect the forgery but by the very negligence of the appellant in
purchasing commercial papers from unknown persons without making inquiry as to their
genuineness.
In the light of the foregoing discussion, we conclude:
1. That where a check is accepted or certified by the bank on which it is drawn, the bank is
estopped to deny the genuineness of the drawer's signature and his capacity to issue the
instrument;
2. That if a drawee bank pays a forged check which was previously accepted or certified by the
said bank it cannot recover from a holder who did not participate in the forgery and did not
have actual notice thereof;
3. That the payment of a check does not include or imply its acceptance in the sense that this
word is used in section 62 of the Negotiable Instruments Law;
4. That in the case of the payment of a forged check, even without former acceptance, the
drawee can not recover from a holder in due course not chargeable with any act of negligence
or disregard of duty;
5. That to entitle the holder of a forged check to retain the money obtained thereon, there
must be a showing that the duty to ascertain the genuineness of the signature rested entirely
upon the drawee, and that the constructive negligence of such drawee in failing to detect the
forgery was not affected by any disregard of duty on the part of the holder, or by failure of
any precaution which, from his implied assertion in presenting the check as a sufficient
voucher, the drawee had the right to believe he had taken;
6. That in the absence of actual fault on the part of the drawee, his constructive fault in not
knowing the signature of the drawer and detecting the forgery will nor preclude his recovery
from one who took the check under circumstances of suspicion and without proper precaution,
or whose conduct has been such as to mislead the drawee or induce him to pay the check
without the usual scrutiny or other precautions against mistake or fraud;
7. That on who purchases a check or draft is bound to satisfy himself that the paper is
genuine, and that by indorsing it or presenting it for payment or putting it into circulation
before presentation he impliedly asserts that he performed his duty;
8. That while the foregoing rule, chosen from a welter of decisions on the issue as the correct
one, will not hinder the circulation of two recognized mediums of exchange by which the great
bulk of business is carried on, namely, drafts and checks, on the other hand, it will encourage
and demand prudent business methods on the part of those receiving such mediums of
exchange;
9. That it being a matter of record in the present case, that the appellee bank in no more
chargeable with the knowledge of the drawer's signature than the appellant is, as the drawer
was as much the customer of the appellant as of the appellee, the presumption that a drawee
bank is bound to know more than any indorser the signature of its depositor does not hold;
10. That according to the undisputed facts of the case the appellant in purchasing the papers
in question from unknown persons without making any inquiry as to the identity and authority
of the said persons negotiating and indorsing them, acted negligently and contributed to the
appellee's constructive negligence in failing to detect the forgery;
11. That under the circumstances of the case, if the appellee bank is allowed to recover, there
will be no change of position as to the injury or prejudice of the appellant.
Wherefore, the assignments of error are overruled, and the judgment appealed from must be, as it
is hereby, affirmed, with costs against the appellant. So ordered.
53
-----
G.R. No. 107508 April 25, 1996
PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS, CAPITOL CITY
DEVELOPMENT BANK, PHILIPPINE BANK OF COMMUNICATIONS, and F. ABANTE
MARKETING, respondents.
KAPUNAN, J.:p
This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the decision
dated April 29, 1992 of respondent Court of Appeals in CA-G.R. CV No. 24776 and its resolution
dated September 16, 1992, denying petitioner Philippine National Bank's motion for reconsideration
of said decision.
The facts of the case are as follows.
A check with serial number 7-3666-223-3, dated August 7, 1981 in the amount of P97,650.00 was
issued by the Ministry of Education and Culture (now Department of Education, Culture and Sports
[DECS]) payable to F. Abante Marketing. This check was drawn against Philippine National Bank
(herein petitioner).
On August 11, 1981, F. Abante Marketing, a client of Capitol City Development Bank (Capitol),
deposited the questioned check in its savings account with said bank. In turn, Capitol deposited the
same in its account with the Philippine Bank of Communications (PBCom) which, in turn, sent the
check to petitioner for clearing.
Petitioner cleared the check as good and, thereafter, PBCom credited Capitol's account for the
amount stated in the check. However, on October 19, 1981, petitioner returned the check to
PBCom and debited PBCom's account for the amount covered by the check, the reason being that
there was a "material alteration" of the check number.
PBCom, as collecting agent of Capitol, then proceeded to debit the latter's account for the same
amount, and subsequently, sent the check back to petitioner. Petitioner, however, returned the
check to PBCom.
On the other hand, Capitol could not, in turn, debit F. Abante Marketing's account since the latter
had already withdrawn the amount of the check as of October 15, 1981. Capitol sought clarification
from PBCom and demanded the re-crediting of the amount. PBCom followed suit by requesting an
explanation and re-crediting from petitioner.
Since the demands of Capitol were not heeded, it filed a civil suit with the Regional Trial Court of
Manila against PBCom which, in turn, filed a third-party complaint against petitioner for
reimbursement/indemnity with respect to the claims of Capitol. Petitioner, on its part, filed a
fourth-party complaint against F. Abante Marketing.
On October 3, 1989; the Regional Trial Court rendered its decision the dispositive portion of which
reads:
WHEREFORE, judgment is hereby rendered as follows:
1.) On plaintiffs complaint, defendant Philippine Bank of Communications is ordered to re-
credit or reimburse plaintiff Capitol City Development Bank the amount of P97,650.00, plus
interest of 12 percent thereto from October 19, 1981 until the amount is fully paid;
2.) On Philippine Bank of Communications third-party complaint third-party defendant PNB is
ordered to reimburse and indemnify Philippine Bank of Communications for whatever amount
PBCom pays to plaintiff;
3.) On Philippine National Bank's fourth-party complaint, F. Abante Marketing is ordered to
reimburse and indemnify PNB for whatever amount PNB pays to PBCom;
4.) On attorney's fees, Philippine Bank of Communications is ordered to pay Capitol City
Development Bank attorney's fees in the amount of Ten Thousand (P10,000.00) Pesos; but
PBCom is entitled to reimbursement/indemnity from PNB; and Philippine National Bank to be,
in turn reimbursed or indemnified by F. Abante Marketing for the same amount;
5.) The Counterclaims of PBCom and PNB are hereby dismissed;
6.) No pronouncement as to costs.
SO ORDERED. 1
An appeal was interposed before the respondent Court of Appeals which rendered its decision on
April 29, 1992, the decretal portion of which reads:
WHEREFORE, the judgment appealed from is modified by exempting PBCom from liability to
plaintiff-appellee for attorney's fees and ordering PNB to honor the check for P97,650.00, with
interest as declared by the trial court, and pay plaintiff-appellee attorney's fees of P10,000.00.
After the check shall have been honored by PNB, PBCom shall re-credit plaintiff-appellee's
account with it with the amount. No pronouncement as to costs.
SO ORDERED. 2
A motion for reconsideration of the decision was denied by the respondent Court in its resolution
dated September 16, 1992 for lack of merit. 3
Hence, petitioner filed the instant petition which raises the following issues:
I
WHETHER OR NOT AN ALTERATION OF THE SERIAL NUMBER OF A CHECK IS A MATERIAL
ALTERATION UNDER THE NEGOTIABLE INSTRUMENTS LAW.
II
WHETHER OR NOT A CERTIFICATION HEREIN ISSUED BY THE MINISTRY OF EDUCATION CAN
BE GIVEN WEIGHT IN EVIDENCE.
III
WHETHER OR NOT A DRAWEE BANK WHO FAILED TO RETURN A. CHECK WITHIN THE TWENTY
FOUR (24) HOUR CLEARING PERIOD MAY RECOVER THE VALUE OF THE CHECK FROM THE
COLLECTING BANK.
IV
WHETHER OR NOT IN THE ABSENCE OF MALICE OR ILL WILL PETITIONER PNB MAY BE HELD
LIABLE FOR ATTORNEY'S FEES. 4
We find no merit in the petition.
We shall first deal with the effect of the alteration of the serial number on the negotiability of the
check in question.
Petitioner anchors its position on Section 125 of the Negotiable Instruments Law (ACT No.
2031) 5 which provides:
Sec. 225. What constitutes a material alteration. Any alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
(f) Or which adds a place of payment where no place of payment is specified, or any other
change or addition which alters the effect of the instrument in any respect, is a material
alteration.
Petitioner alleges that there is no hard and fast rule in the interpretation of the aforequoted
provision of the Negotiable Instruments Law. It maintains that under Section 125(f), any change
that alters the effect of the instrument is a material alteration. 6
We do not agree.
An alteration is said to be material if it alters the effect of the
instrument. 7 It means an unauthorized change in an instrument that purports to modify in any
respect the obligation of a party or an unauthorized addition of words or numbers or other change
to an incomplete instrument relating to the obligation of a party. 8 In other words, a material
alteration is one which changes the items which are required to be stated under Section 1 of the
Negotiable Instruments Law.
Section 1 of the Negotiable Instruments Law provides:
54
Sec. 1. Form of negotiable instruments. An instrument to be negotiable must conform to
the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.
In his book entitled "Pandect of Commercial Law and Jurisprudence," Justice Jose C. Vitug opines
that "an innocent alteration (generally, changes on items other than those required to be stated
under Sec. 1, N.I.L.) and spoliation (alterations done by a stranger) will not avoid the instrument,
but the holder may enforce it only according to its original tenor." 9
Reproduced hereunder are some examples of material and immaterial alterations:
A. Material Alterations:
(1) Substituting the words "or bearer" for "order."
(2) Writing "protest waived" above blank indorsements.
(3) A change in the date from which interest is to run.
(4) A check was originally drawn as follows: "Iron County Bank, Crystal Falls, Mich. Aug. 5,
1901. Pay to G.L. or order $9 fifty cents CTR" The insertion of the figure 5 before the figure 9,
the instrument being otherwise unchanged.
(5) Adding the words "with interest" with or without a fixed rate.
(6) An alteration in the maturity of a note, whether the time for payment is thereby curtailed
or extended.
(7) An instrument was payable "First Nat'l Bank" the plaintiff added the word "Marion."
(8) Plaintiff, without consent of the defendant, struck out the name of the defendant as payee
and inserted the name of the maker of the original note.
(9) Striking out the name of the payee and substituting that of the person who actually
discounted the note.
(10) Substituting the address of the maker for the name of a co-maker. 10
B. Immaterial Alterations:
(1) Changing "I promise to pay" to "We promise to pay", where there are two makers.
(2) Adding the word "annual" after the interest clause.
(3) Adding the date of maturity as a marginal notation.
(4) Filling in the date of actual delivery where the makers of a note gave it with the date in
blank, "July ____."
(5) An alteration of the marginal figures of a note where the sum stated in words in the body
remained unchanged.
(6) The insertion of the legal rate of interest where the note had a provision for "interest at
_______ per cent."
(7) A printed form of promissory note had on the margin the printed words, "Extended to
________." The holder on or after maturity wrote in the blank space the words "May 1, 1913,"
as a reference memorandum of a promise made by him to the principal maker at the time the
words were written to extend the time of payment.
(8) Where there was a blank for the place of payment, filling in the blank with the place
desired.
(9) Adding to an indorsee's name the abbreviation "Cash" when it had been agreed that the
draft should be discounted by the trust company of which the indorsee was cashier.
 (10) The indorsement of a note by a stranger after its delivery to the payee at the time the
note was negotiated to the plaintiff.
(11) An extension of time given by the holder of a note to the principal maker, without the
consent of a surety co-maker. 11
The case at bench is unique in the sense that what was altered is the serial number of the check in
question, an item which, it can readily be observed, is not an essential requisite for negotiability
under Section 1 of the Negotiable Instruments Law. The aforementioned alteration did not change
the relations between the parties. The name of the drawer and the drawee were not altered. The
intended payee was the same. The sum of money due to the payee remained the same. Despite
these findings, however, petitioner insists, that:
xxx xxx xxx
It is an accepted concept, besides being a negotiable instrument itself, that a TCAA check by
its very nature is the medium of exchange of governments (sic) instrumentalities of agencies.
And as (a) safety measure, every government office o(r) agency (is) assigned TCAA checks
bearing different number series.
A concrete example is that of the disbursements of the Ministry of Education and Culture. It is
issued by the Bureau of Treasury sizeable bundles of checks in booklet form with serial
numbers different from other government office or agency. Now, for fictitious payee to
succeed in its malicious intentions to defraud the government, all it need do is to get hold of a
TCAA Check and have the serial numbers of portion (sic) thereof changed or altered to make it
appear that the same was issued by the MEG.
Otherwise, stated, it is through the serial numbers that (a) TCAA Check is determined to have
been issued by a particular office or agency of the government. 12
xxx xxx xxx
Petitioner's arguments fail to convince. The check's serial number is not the sole indication of its
origin.. As succinctly found by the Court of Appeals, the name of the government agency which
issued the subject check was prominently printed therein. The check's issuer was therefore
sufficiently identified, rendering the referral to the serial number redundant and inconsequential.
Thus, we quote with favor the findings of the respondent court:
xxx xxx xxx
If the purpose of the serial number is merely to identify the issuing government office or
agency, its alteration in this case had no material effect whatsoever on the integrity of the
check. The identity of the issuing government office or agency was not changed thereby and
the amount of the check was not charged against the account of another government office or
agency which had no liability under the check. The owner and issuer of the check is boldly and
clearly printed on its face, second line from the top: "MINISTRY OF EDUCATION AND
CULTURE," and below the name of the payee are the rubber-stamped words: "Ministry of
Educ. & Culture." These words are not alleged to have been falsely or fraudulently intercalated
into the check. The ownership of the check is established without the necessity of recourse to
the serial number. Neither there any proof that the amount of the check was erroneously
charged against the account of a government office or agency other than the Ministry of
Education and Culture. Hence, the alteration in the number of the check did not affect or
change the liability of the Ministry of Education and Culture under the check and, therefore, is
immaterial. The genuineness of the amount and the signatures therein of then Deputy Minister
of Education Hermenegildo C. Dumlao and of the resident Auditor, Penomio C. Alvarez are not
challenged. Neither is the authenticity of the different codes appearing therein questioned . .
. 13 (Emphasis ours.)
Petitioner, thus cannot refuse to accept the check in question on the ground that the serial number
was altered, the same being an immaterial or innocent one.
We now go to the second issue. It is petitioner's submission that the certification issued by Minrado
C. Batonghinog, Cashier III of the MEC clearly shows that the check was altered. Said certification
reads:
July 22, 1985
TO WHOM IT MAY CONCERN:
55
This is to certify that according to the records of this Office, TCAA PNB Check Mo. SN7-
3666223-3 dated August 7, 1981 drawn in favor of F. Abante Marketing in the amount of
NINETY (S)EVEN THOUSAND SIX HUNDRED FIFTY PESOS ONLY (P97,650.00) was not issued
by this Office nor released to the payee concerned. The series number of said check was not
included among those requisition by this Office from the Bureau of Treasury.
Very truly yours,
(SGD.) MINRADO C. BATONGHINOG
Cashier III 14
Petitioner claims that even if the author of the certification issued by the Ministry of Education and
Culture (MEG) was not presented, still the best evidence of the material alteration would be the
disputed check itself and the serial number thereon. Petitioner thus assails the refusal of
respondent court to give weight to the certification because the author thereof was not presented
to identify it and to be cross-examined thereon. 15
We agree with the respondent court.
The one who signed the certification was not presented before the trial court to prove that the said
document was really the document he prepared and that the signature below the said document is
his own signature. Neither did petitioner present an eyewitness to the execution of the questioned
document who could possibly identify it. 16 Absent this proof, we cannot rule on the authenticity of
the contents of the certification. Moreover, as we previously emphasized, there was no material
alteration on the check, the change of its serial number not being substantial to its negotiability.
Anent the third issue whether or not the drawee bank may still recover the value of the check
from the collecting bank even if it failed to return the check within the twenty-four (24) hour
clearing period because the check was tampered suffice it to state that since there is no material
alteration in the check, petitioner has no right to dishonor it and return it to PBCom, the same
being in all respects negotiable.
However, the amount of P10,000.00 as attorney's fees is hereby deleted. In their respective
decisions, the trial court and the Court of Appeals failed to explicitly state the rationale for the said
award. The trial court merely ruled as follows:
With respect to Capitol's claim for damages consisting of alleged loss of opportunity, this Court
finds that Capitol failed to adequately substantiate its claim. What Capitol had presented was a
self-serving, unsubstantiated and speculative computation of what it allegedly could have
earned or realized were it not for the debit made by PBCom which was triggered by the return
and debit made by PNB. However, this Court finds that it would be fair and reasonable to
impose interest at 12% per annum on the principal amount of the check computed from
October 19, 1981 (the date PBCom debited Capitol's account) until the amount is fully
paid and reasonable attorney's fees. 17 (Emphasis ours.)
And contrary to the Court of Appeal's resolution, petitioner unambiguously questioned before it the
award of attorney's fees, assigning the latter as one of the errors committed by the trial court. 18
The foregoing is in conformity with the guiding principles laid down in a long line of cases and
reiterated recently inConsolidated Bank & Trust Corporation (Solidbank) v. Court of Appeals: 19
The award of attorney's fees lies within the discretion of the court and depends upon the
circumstances of each case. However, the discretion of the court to award attorney's fees
under Article 2208 of the Civil Code of the Philippines demands factual, legal and equitable
justification, without which the award is a conclusion without a premise and improperly left to
speculation and conjecture. It becomes a violation of the proscription against the imposition of
a penalty on the right to litigate (Universal Shipping Lines, Inc. v. Intermediate Appellate
Court, 188 SCRA 170 [1990]). The reason for the award must be stated in the text of the
court's decision. If it is stated only in the dispositive portion of the decision, the same shall be
disallowed. As to the award of attorney's fees being an exception rather than the rule, it is
necessary for the court to make findings of fact and law that would bring the case within the
exception and justify the grant of the award (Refractories Corporation of the Philippines v.
Intermediate Appellate Court, 176 SCRA 539 [176 SCRA 539]).
WHEREFORE, premises considered, except for the deletion of the award of attorney's fees, the
decision of the Court of Appeals is hereby AFFIRMED.
SO ORDERED.
-----
G.R. No. L-2861 February 26, 1951
ENRIQUE P. MONTINOLA, plaintiff-appellant, vs. THE PHILIPPINE NATIONAL BANK, ET
AL., defendants-appellees.
MONTEMAYOR, J.:
In August, 1947, Enrique P. Montinola filed a complaint in the Court of First Instance of Manila
against the Philippine National Bank and the Provincial Treasurer of Misamis Oriental to collect the
sum of P100,000, the amount of Check No. 1382 issued on May 2, 1942 by the Provincial Treasurer
of Misamis Oriental to Mariano V. Ramos and supposedly indorsed to Montinola. After hearing, the
court rendered a decision dismissing the complaint with costs against plaintiff-appellant. Montinola
has appealed from that decision directly to this Court inasmuch as the amount in controversy
exceeds P50,000.
There is no dispute as to the following facts. In April and May, 1942, Ubaldo D. Laya was the
Provincial Treasurer of Misamis Oriental. As such Provincial Treasurer he was ex officio agent of the
Philippine National Bank branch in the province. Mariano V. Ramos worked under him as assistant
agent in the bank branch aforementioned. In April of that year 1942, the currency being used in
Mindanao, particularly Misamis Oriental and Lanao which had not yet been occupied by the
Japanese invading forces, was the emergency currency which had been issued since January, 1942
by the Mindanao Emergency Currency Board by authority of the late President Quezon.
About April 26, 1942, thru the recommendation of Provincial Treasurer Laya, his assistant agent M.
V. Ramos was inducted into the United States Armed Forces in the Far East (USAFFE) as disbursing
officer of an army division. As such disbursing officer, M. V. Ramos on April 30, 1942, went to the
neighboring Province Lanao to procure a cash advance in the amount of P800,000 for the use of the
USAFFE in Cagayan de Misamis. Pedro Encarnacion, Provincial Treasurer of Lanao did not have that
amount in cash. So, he gave Ramos P300,000 in emergency notes and a check for P500,000. On
May 2, 1942 Ramos went to the office of Provincial Treasurer Laya at Misamis Oriental to encash
the check for P500,000 which he had received from the Provincial Treasurer of Lanao. Laya did not
have enough cash to cover the check so he gave Ramos P400,000 in emergency notes and a check
No. 1382 for P100,000 drawn on the Philippine National Bank. According to Laya he had previously
deposited P500,000 emergency notes in the Philippine National Bank branch in Cebu and he
expected to have the check issued by him cashed in Cebu against said deposit.
Ramos had no opportunity to cash the check because in the evening of the same day the check was
issued to him, the Japanese forces entered the capital of Misamis Oriental, and on June 10, 1942,
the USAFFE forces to which he was attached surrendered. Ramos was made a prisoner of war until
February 12, 1943, after which, he was released and he resumed his status as a civilian.
About the last days of December, 1944 or the first days of January, 1945, M. V. Ramos allegedly
indorsed this check No. 1382 to Enrique P. Montinola. The circumstances and conditions under
which the negotiation or transfer was made are in controversy.
According to Montinola's version, sometime in June, 1944, Ramos, needing money with which to
buy foodstuffs and medicine, offered to sell him the check; to be sure that it was genuine and
negotiable, Montinola, accompanied by his agents and by Ramos himself, went to see President
Carmona of the Philippine National Bank in Manila about said check; that after examining it
President Carmona told him that it was negotiable but that he should not let the Japanese catch
him with it because possession of the same would indicate that he was still waiting for the return of
the Americans to the Philippines; that he and Ramos finally agreed to the sale of the check for
P850,000 Japanese military notes, payable in installments; that of this amount, P450,000 was paid
to Ramos in Japanese military notes in five installments, and the balance of P400,000 was paid in
kind, namely, four bottles of sulphatia sole, each bottle containing 1,000 tablets, and each tablet
valued at P100; that upon payment of the full price, M. V. Ramos duly indorsed the check to him.
This indorsement which now appears on the back of the document is described in detail by trial
court as follows:
The endorsement now appearing at the back of the check (see Exhibit A-1) may be described
as follows: The woods, "pay to the order of" in rubber stamp and in violet color are placed
about one inch from the top. This is followed by the words "Enrique P. Montinola" in
typewriting which is approximately 5/8 an inch below the stamped words "pay to the order
of". Below "Enrique P. Montinola", in typewriting are words and figures also in typewriting,
"517 Isabel Street" and about /8 of an inch therefrom, the edges of the check appear to have
56
been burned, but there are words stamped apparently in rubber stamp which, according to
Montinola, are a facsimile of the signature of Ramos. There is a signature which apparently
reads "M. V. Ramos" also in green ink but made in handwriting."
To the above description we may add that the name of M. V. Ramos is hand printed in green ink,
under the signature. According to Montinola, he asked Ramos to hand print it because Ramos'
signature was not clear.
Ramos in his turn told the court that the agreement between himself and Montinola regarding the
transfer of the check was that he was selling only P30,000 of the check and for this reason, at the
back of the document he wrote in longhand the following:
Pay to the order of Enrique P. Montinola P30,000 only. The balance to be deposited in the
Philippine National Bank to the credit of M. V. Ramos.
Ramos further said that in exchange for this assignment of P30,000 Montinola would pay him
P90,000 in Japanese military notes but that Montinola gave him only two checks of P20,000 and
P25,000, leaving a balance unpaid of P45,000. In this he was corroborated by Atty. Simeon Ramos
Jr. who told the court that the agreement between Ramos and Montinola was that the latter, for the
sale to him of P30,000 of the check, was to pay Ramos P90,000 in Japanese military notes; that
when the first check for P20,000 was issued by Montinola, he (Simeon) prepared a document
evidencing said payment of P20,000; that when the second check for P25,000 was issued by
Montinola, he (Simeon) prepared another document with two copies, one for Montinola and the
other for Ramos, both signed by Montinola and M. V. Ramos, evidencing said payment, with the
understanding that the balance of P45,000 would be paid in a few days.
The indorsement or writing described by M. V. Ramos which had been written by him at the back of
the check, Exhibit A, does not now appear at the back of said check. What appears thereon is the
indosement testified to by Montinola and described by the trial court as reproduced above. Before
going into a discussion of the merits of the version given by Ramos and Montinola as to the
indorsement or writing at the back of the check, it is well to give a further description of it as we
shall later.
When Montinola filed his complaint in 1947 he stated therein that the check had been lost, and so
in lieu thereof he filed a supposed photostic copy. However, at the trial, he presented the check
itself and had its face marked Exhibit A and the back thereof Exhibit A-1. But the check is badly
mutilated, bottled, torn and partly burned, and its condition can best be appreciated by seeing it.
Roughly, it may be stated that looking at the face of the check (Exhibit A) we see that the left third
portion of the paper has been cut off perpendicularly and severed from the remaining 2/3 portion;
a triangular portion of the upper right hand corner of said remaining 2/3portion has been similarly
cut off and severed, and to keep and attach this triangular portion and the rectangular /3 portion
to the rest of the document, the entire check is pasted on both sides with cellophane; the edges of
the severed portions as well as of the remaining major portion, where cut bear traces of burning
and searing; there is a big blot with indelible ink about the right middle portion, which seems to
have penetrated to the back of the check (Exhibit A-1), which back bears a larger smear right
under the blot, but not black and sharp as the blot itself; finally, all this tearing, burning, blotting
and smearing and pasting of the check renders it difficult if not impossible to read some of the
words and figures on the check.
In explanation of the mutilation of the check Montinola told the court that several months after
indorsing and delivering the check to him, Ramos demanded the return of the check to him,
threatening Montinola with bodily harm, even death by himself or his guerrilla forces if he did not
return said check, and that in order to justify the non-delivery of the document and to discourage
Ramos from getting it back, he (Montinola) had to resort to the mutilation of the document.
As to what was really written at the back of the check which Montinola claims to be a full
indorsement of the check, we agree with trial court that the original writing of Ramos on the back
of the check was to the effect that he was assigning only P30,000 of the value of the document and
that he was instructing the bank to deposit to his credit the balance. This writing was in some
mysterious way obliterated, and in its place was placed the present indorsement appearing
thereon. Said present indorsement occupies a good portion of the back of the check. It has already
been described in detail. As to how said present indorsement came to be written, the circumstances
surrounding its preparation, the supposed participation of M. V. Ramos in it and the writing
originally appearing on the reverse side of the check, Exhibit A-1, we quote with approval what the
trial court presided over by Judge Conrado V. Sanchez, in its well-prepared decision, says on these
points:
The allegedly indorsement: "Pay to the order of Enrique P. Montinola the amount of P30,000
only. The balance to be deposited to the credit of M. V. Ramos", signed by M. V. Ramos-
according to the latter-does not now appear at the back of the check. A different indorsement,
as aforesaid, now appears.
Had Montinola really paid in full the sum of P850,000 in Japanese Military Notes as
consideration for the check? The following observations are in point:
(a) According to plaintiff's witness Gregorio A. Cortado, the oval line in violet, enclosing "P." of
the words "Enrique P. Montinola" and the line in the form of cane handle crossing the word
"street" in the words and figures "517 Isabel Street" in the endorsement Exhibit A-1 "unusual"
to him, and that as far as he could remember this writing did not appear on the instrument
and he had no knowledge as to how it happened to be there. Obviously Cortado had no
recollection as to how such marks ever were stamped at the back of the check.
(b) Again Cortado, speaking of the endorsement as it now appears at the back of the check
(Exh. A-1) stated that Ramos typewrote these words outside of the premises of Montinola,
that is, a nearby house. Montinola, on the other hand, testified that Ramos typewrote the
words "Enrique P. Montinola 517 Isabel Street", in his own house. Speaking of the rubber
stamp used at the back of the check and which produced the words "pay to the order of",
Cortado stated that when he (Cortado), Atadero, Montinola and Ramos returned in group to
the house of Montinola, the rubber stamp was already in the house of Montinola, and it was on
the table of the upper floor of the house, together with the stamp pad used to stamp the
same. Montinola, on the other hand, testified that Ramos carried in his pocket the said rubber
stamp as well as the ink pad, and stamped it in his house.
The unusually big space occupied by the indorsement on the back of the check and the
discrepancies in the versions of Montinola and his witness Cortado just noted, create doubts as
to whether or not really Ramos made the indorsement as it now appears at the back of Exhibit
A. One thing difficult to understand is why Ramos should go into the laborious task of placing
the rubber stamp "Pay to the order of" and afterwards move to the typewriter and write the
words "Enrique P. Montinola" "and "517 Isabel Street", and finally sign his name too far below
the main indorsement.
(c) Another circumstances which bears heavily upon the claim of plaintiff Montinola that he
acquired the full value of the check and paid the full consideration therefor is the present
condition of said check. It is now so unclean and discolored; it is pasted in cellophane, bottled
with ink on both sides torn three parts, and with portions thereof burned-all done by plaintiff,
the alleged owner thereof.
The acts done by the very plaintiff on a document so important and valuable to him, and
which according to him involves his life savings, approximate intentional cancellation. The only
reason advanced by plaintiff as to why tore check, burned the torn edges and bottled out the
registration at the back, is found in the following: That Ramos came to his house, armed with
a revolver, threatened his life and demanded from him the return of the check; that when he
informed Ramos that he did not have it in the house, but in some deposit outside thereof and
that Ramos promised to return the next day; that the same night he tore the check into three
parts, burned the sides with a parrafin candle to show traces of burning; and that upon the
return of Ramos the next day he showed the two parts of the check, the triangle on the right
upper part and the torn piece on the left part, and upon seeing the condition thereof Ramos
did not bother to get the check back. He also said that he placed the blots in indelible ink to
prevent Ramos if he would be forced to surrender the middle part of the check from
seeing that it was registered in the General Auditing Office.
Conceding at the moment these facts to be true, the question is: Why should Montinola be
afraid of Ramos? Montinola claims that Ramos went there about April, 1945, that is, during
liberation. If he believed he was standing by his rights, he could have very well sought police
protection or transferred to some place where Ramos could not bother him. And then, really
Ramos did not have anything more to do with this check for the reason that Montinola had
obtained in full the amount thereof, there could not be any reason why Ramos should have
threatened Montinola as stated by the latter. Under the circumstances, the most logical
conclusion is that Ramos wanted the check at all costs because Montinola did not acquire the
check to such an extent that it borders on intentional cancellation thereof (see Sections 119-
123 Negotiable Instruments Law) there is room to believe that Montinola did not have so
much investments in that check as to adopted an "what do I care?" attitude.
57
And there is the circumstance of the alleged loss of the check. At the time of the filing of the
complaint the check was allegedly lost, so much so that a photostatic copy thereof was merely
attached to the complaint (see paragraph 7 of the complaint). Yet, during the trial the original
check Exhibit A was produced in court.
But a comparison between the photostatic copy and the original check reveals discrepancies
between the two. The condition of the check as it was produced is such that it was partially
burned, partially blotted, badly mutilated, discolored and pasted with cellophane. What is
worse is that Montinola's excuse as to how it was lost, that it was mixed up with household
effects is not plausible, considering the fact that it involves his life savings, and that before the
alleged loss, he took extreme pains and precautions to save the check from the possible
ravages of the war, had it photographed, registered said check with the General Auditing
Office and he knew that Ramos, since liberation, was hot after the possession of that check.
(d) It seems that Montinola was not so sure as to what he had testified to in reference to the
consideration he paid for the check. In court he testified that he paid P450,000 in cash from
June to December 1944, and P400,000 worth of sulphatiazole in January 1945 to complete the
alleged consideration of P850,000. When Montinola testified this way in court, obviously he
overlooked a letter he wrote to the provincial treasurer of Cagayan, Oriental Misamis, dated
May 1, 1947, Exhibit 3 the record. In that letter Exhibit 3, Montinola told Provincial Treasurer
Elizalde of Misamis Oriental that "Ramos endorsed it (referring to check) to me for goods in
kind, medicine, etc., received by him for the use of the guerrillas." In said letter Exhibit 3,
Montinola did not mention the cash that he paid for the check.
From the foregoing the court concludes that plaintiff Montinola came into the possession of the
check in question about the end of December 1944 by reason of the fact that M. V. Ramos
sold to him P30,000 of the face value thereof in consideration of the sum of P90,000 Japanese
money, of which only one-half or P45,000 (in Japanese money) was actually paid by said
plaintiff to Ramos. (R. on A., pp. 31-33; Brief of Appellee, pp. 14-20.)
At the beginning of this decision, we stated that as Provincial Treasurer of Misamis Oriental, Ubaldo
D. Laya wasex officio agent of the Philippine National Bank branch in that province. On the face of
the check (Exh. A) we now find the words in parenthesis "Agent, Phil. National Bank" under the
signature of Laya, purportedly showing that he issued the check as agent of the Philippine National
Bank. It this is true, then the bank is not only drawee but also a drawer of the check, and Montinola
evidently is trying to hold the Philippine National Bank liable in that capacity of drawer, because as
drawee alone, inasmuch as the bank has not yet accepted or certified the check, it may yet avoid
payment.
Laya, testifying in court, stated that he issued the check only as Provincial Treasurer, and that the
words in parenthesis "Agent, Phil. National Bank" now appearing under his signature did not appear
on the check when he issued the same. In this he was corroborated by the payee M. V. Ramos who
equally assured the court that when he received the check and then delivered it to Montinola, those
words did not appear under the signature of Ubaldo D. Laya. We again quote with approval the
pertinent portion of the trial court's decision:
The question is reduced to whether or not the words, "Agent, Phil. National Bank" were added
after Laya had issued the check. In a straightforward manner and without vacillation Laya
positively testified that the check Exhibit A was issued by him in his capacity as Provincial
Treasurer of Misamis Oriental and that the words "Agent, Phil. National Bank" which now
appear on the check Exhibit A were not typewritten below his signature when he signed the
said check and delivered the same to Ramos. Laya assured the court that there could not be
any mistake as to this. For, according to Laya, when he issued check in his capacity as agent
of the Misamis Oriental agency of the Philippine National Bank the said check must be
countersigned by the cashier of the said agency not by the provincial auditor. He also
testified that the said check was issued by him in his capacity as provincial treasurer of
Misamis Oriental and that is why the same was countersigned by Provincial Auditor Flores. The
Provincial Auditor at that time had no connection in any capacity with the Misamis Oriental
agency of the Philippine National Bank. Plaintiff Montinola on the other hand testified that
when he received the check Exhibit A it already bore the words "Agent, Phil. National Bank"
below the signature of Laya and the printed words "Provincial Treasurer".
After considering the testimony of the one and the other, the court finds that the
preponderance of the evidence supports Laya's testimony. In the first place, his testimony was
corroborated by the payee M. V. Ramos. But what renders more probable the testimony of
Laya and Ramos is the fact that the money for which the check was issued was expressly for
 the use of the USAFFE of which Ramos was then disbursing officer, so much so that upon the
delivery of the P400,000 in emergency notes and the P100,000 check to Ramos, Laya credited
his depository accounts as provincial treasurer with the corresponding credit entry. In the
normal course of events the check could not have been issued by the bank, and this is borne
by the fact that the signature of Laya was countersigned by the provincial auditor, not the
bank cashier. And then, too there is the circumstance that this check was issued by the
provincial treasurer of Lanao to Ramos who requisitioned the said funds in his capacity as
disbursing officer of the USAFFE. The check, Exhibit A is not what we may term in business
parlance, "certified check" or "cashier's check."
Besides, at the time the check was issued, Laya already knew that Cebu and Manila were
already occupied. He could not have therefore issued the check-as a bank employee-payable
at the central office of the Philippine National Bank.
Upon the foregoing circumstances the court concludes that the words "Agent, Phil. National
Bank' below the signature of Ubaldo D. Laya and the printed words "Provincial Treasurer" were
added in the check after the same was issued by the Provincial Treasurer of Misamis Oriental.
From all the foregoing, we may safely conclude as we do that the words "Agent, Phil. National
Bank" now appearing on the face of the check (Exh. A) were added or placed in the instrument
after it was issued by Provincial Treasurer Laya to M. V. Ramos. There is no reason known to us
why Provincial Treasurer Laya should issue the check (Exh. A) as agent of the Philippine National
Bank. Said check for P100,000 was issued to complete the payment of the other check for
P500,000 issued by the Provincial Treasurer of Lanao to Ramos, as part of the advance funds for
the USAFFE in Cagayan de Misamis. The balance of P400,000 in cash was paid to Ramos by Laya
from the funds, not of the bank but of the Provincial Treasury. Said USAFFE were being financed
not by the Bank but by the Government and, presumably, one of the reasons for the issuance of
the emergency notes in Mindanao was for this purpose. As already stated, according to Provincial
Treasurer Laya, upon receiving a relatively considerable amount of these emergency notes for his
office, he deposited P500,000 of said currency in the Philippine National Bank branch in Cebu, and
that in issuing the check (Exh. A), he expected to have it cashed at said Cebu bank branch against
his deposit of P500,000.
The logical conclusion, therefore, is that the check was issued by Laya only as Provincial Treasurer
and as an official of the Government which was under obligation to provide the USAFFE with
advance funds, and not by the Philippine National Bank which has no such obligation. The very
Annex C, made part of plaintiff's complaint, and later introduced in evidence for him as Exhibit E
states that Laya issued the check "in his capacity as Provincial Treasurer of Misamis Oriental",
obviously, not as agent of the Bank.
Now, did M. V. Ramos add or place those words below the signature of Laya before transferring the
check to Montinola? Let us bear in mind that Ramos before his induction into the USAFFE had been
working as assistant of Treasurer Laya as ex-officio agent of the Misamis Oriental branch of the
Philippine National Bank. Naturally, Ramos must have known the procedure followed there as to the
issuance of checks, namely, that when a check is issued by the Provincial Treasurer as such, it is
countersigned by the Provincial Auditor as was done on the check (Exhibit A), but that if the
Provincial Treasurer issues a check as agent of the Philippine National Bank, the check is
countersigned not by the Provincial Auditor who has nothing to do with the bank, but by the bank
cashier, which was not done in this case. It is not likely, therefore, that Ramos had made the
insertion of the words "Agent, Phil. National Bank" after he received the check, because he should
have realized that following the practice already described, the check having been issued by Laya
as Provincial Treasurer, and not as agent of the bank, and since the check bears the
countersignature not of the Bank cashier of the Provincial Auditor, the addition of the words "Agent,
Phil. National Bank" could not change the status and responsibility of the bank. It is therefore more
logical to believe and to find that the addition of those words was made after the check had been
transferred by Ramos to Montinola. Moreover, there are other facts and circumstances involved in
the case which support this view. Referring to the mimeographed record on appeal filed by the
plaintiff-appellant, we find that in transcribing and copying the check, particularly the face of it
(Exhibit A) in the complaint, the words "Agent, Phil. National Bank" now appearing on the face of
the check under the signature of the Provincial Treasurer, is missing. Unless the plaintiff in making
this copy or transcription in the complaint committed a serious omission which is decisive as far as
the bank is concerned, the inference is, that at the time the complaint was filed, said phrase did not
appear on the face of the check. That probably was the reason why the bank in its motion to
dismiss dated September 2, 1947, contended that if the check in question had been issued by the
provincial treasurer in his capacity as agent of the Philippine National Bank, said treasurer would
58
have placed below his signature the words "Agent of the Philippine National Bank". The plaintiff
because of the alleged loss of the check, allegedly attached to the complaint a photostatic copy of
said check and marked it as Annex A. But in transcribing and copying said Annex A in his
complaint, the phrase "Agent, Phil. National Bank" does not appear under the signature of the
provincial treasurer. We tried to verify this discrepancy by going over the original records of the
Court of First Instance so as to compare the copy of Annex A in the complaint, with the original
Annex A, the photostatic copy, but said original Annex A appears to be missing from the record.
How it disappeared is not explained. Of course, now we have in the list of exhibit a photostatic copy
marked Annex A and Exhibit B, but according to the manifestation of counsel for the plaintiff dated
October 15, 1948, said photostatic copy now marked Annex A and Exhibit B was submitted on
October 15, 1948, in compliance with the verbal order of the trial court. It is therefore evident that
the Annex A now available is not the same original Annex A attached to the complaint in 1947.
There is one other circumstance, important and worth nothing. If Annex A also marked Exhibit B is
the photostatic copy of the original check No. 1382 particularly the face thereof (Exhibit A), then
said photostatic copy should be a faithful and accurate reproduction of the check, particularly of the
phrase "Agent, Phil. National Bank" now appearing under the signature of the Provincial Treasurer
on the face of the original check (Exhibit A). But a minute examination of and comparison between
Annex A, the photostatic copy also marked Exhibit B and the face of the check, Exhibit A, especially
with the aid of a handlens, show notable differences and discrepancies. For instance, on Exhibit A,
the letter A of the word "Agent" is toward the right of the tail of the beginning letter of the
signature of Ubaldo D. Laya; this same letter "A" however in Exhibit B is directly under said tail.
The letter "N" of the word "National" on Exhibit A is underneath the space between "Provincial" and
"Treasurer"; but the same letter "N" is directly under the letter "I" of the word "Provincial" in
Exhibit B.
The first letter "a" of the word "National" is under "T" of the word "Treasurer" in Exhibit A; but the
same letter "a" in Exhibit "B" is just below the space between the words "Provincial" and
"Treasurer".
The letter "k" of the word "Bank" in Exhibit A is after the green perpendicular border line near the
lower right hand corner of the edge of the check (Exh. A); this same letter "k" however, on Exhibit
B is on the very border line itself or even before said border line.
The closing parenthesis ")" on Exhibit A is a little far from the perpendicular green border line and
appears to be double instead of one single line; this same ")" on Exhibit B appears in a single line
and is relatively nearer to the border line.
There are other notable discrepancies between the check Annex A and the photostatic copy, Exhibit
B, as regards the relative position of the phrase "Agent, Phil. National Bank", with the title
Provincial Treasurer, giving ground to the doubt that Exhibit B is a photostatic copy of the check
(Exhibit A).
We then have the following facts. Exhibit A was issued by Laya in his capacity as Provincial
Treasurer of Misamis Oriental as drawer on the Philippine National Bank as drawee. Ramos sold
P30,000 of the check to Enrique P. Montinola for P90,000 Japanese military notes, of which only
P45,000 was paid by Montinola. The writing made by Ramos at the back of the check was an
instruction to the bank to pay P30,000 to Montinola and to deposit the balance to his (Ramos)
credit. This writing was obliterated and in its place we now have the supposed indorsement
appearing on the back of the check (Exh. A-1).
At the time of the transfer of this check (Exh. A) to Montinola about the last days of December,
1944, or the first days of January, 1945, the check which, being a negotiable instrument, was
payable on demand, was long overdue by about 2 years. It may therefore be considered, even
then, a stable check. Of course, Montinola claims that about June, 1944 when Ramos supposedly
approached him for the purpose of negotiating the check, he (Montinola) consulted President
Carmona of the Philippine National Bank who assured him that the check was good and negotiable.
However, President Carmona on the witness stand flatly denied Montinola's claim and assured the
court that the first time that he saw Montinola was after the Philippine National Bank, of which he
was President, reopened, after liberation, around August or September, 1945, and that when
shown the check he told Montinola that it was stale. M. V. Ramos also told the court that it is not
true that he ever went with Montinola to see President Carmona about the check in 1944.
On the basis of the facts above related there are several reasons why the complaint of Montinola
cannot prosper. The insertion of the words "Agent, Phil. National Bank" which converts the bank
from a mere drawee to a drawer and therefore changes its liability, constitutes a material alteration
of the instrument without the consent of the parties liable thereon, and so discharges the
instrument. (Section 124 of the Negotiable Instruments Law). The check was not legally negotiated
within the meaning of the Negotiable Instruments Law. Section 32 of the same law provides that
"the indorsement must be an indorsement of the entire instrument. An indorsement which purports
to transfer to the indorsee a part only of the amount payable, . . . (as in this case) does not
operate as a negotiation of the instrument." Montinola may therefore not be regarded as an
indorsee. At most he may be regarded as a mere assignee of the P30,000 sold to him by Ramos, in
which case, as such assignee, he is subject to all defenses available to the drawer Provincial
Treasurer of Misamis Oriental and against Ramos. Neither can Montinola be considered as a holder
in due course because section 52 of said law defines a holder in due course as a holder who has
taken the instrument under certain conditions, one of which is that he became the holder before it
was overdue. When Montinola received the check, it was long overdue. And, Montinola is not even
a holder because section 191 of the same law defines holder as the payee or indorsee of a bill or
note and Montinola is not a payee. Neither is he an indorsee for as already stated, at most he can
be considered only as assignee. Neither could it be said that he took it in good faith. As already
stated, he has not paid the full amount of P90,000 for which Ramos sold him P30,000 of the value
of the check. In the second place, as was stated by the trial court in its decision, Montinola
speculated on the check and took a chance on its being paid after the war. Montinola must have
known that at the time the check was issued in May, 1942, the money circulating in Mindanao and
the Visayas was only the emergency notes and that the check was intended to be payable in that
currency. Also, he should have known that a check for such a large amount of P100,000 could not
have been issued to Ramos in his private capacity but rather in his capacity as disbursing officer of
the USAFFE, and that at the time that Ramos sold a part of the check to him, Ramos was no longer
connected with the USAFFE but already a civilian who needed the money only for himself and his
family.
As already stated, as a mere assignee Montinola is subject to all the defenses available against
assignor Ramos. And, Ramos had he retained the check may not now collect its value because it
had been issued to him as disbursing officer. As observed by the trial court, the check was issued
to M. V. Ramos not as a person but M. V. Ramos as the disbursing officer of the USAFFE. Therefore,
he had no right to indorse it personally to plaintiff. It was negotiated in breach of trust, hence he
transferred nothing to the plaintiff.
In view of all the foregoing, finding no reversible error in the decision appealed from, the same is
hereby affirmed with costs.
In the prayer for relief contained at the end of the brief for the Philippine National Bank dated
September 27, 1949, we find this prayer:
It is also respectfully prayed that this Honorable Court refer the check, Exhibit A, to the City
Fiscal's Office for appropriate criminal action against the plaintiff-appellant if the facts so
warrant.
Subsequently, in a petition signed by plaintiff-appellant Enrique P. Montinola dated February 27,
1950, he asked this Court to allow him to withdraw the original check (Exh. A) for him to keep,
expressing his willingness to submit it to the court whenever needed for examination and
verification. The bank on March 2, 1950 opposed the said petition on the ground that inasmuch as
the appellant's cause of action in this case is based on the said check, it is absolutely necessary for
the court to examine the original in order to see the actual alterations supposedly made thereon,
and that should this Court grant the prayer contained in the bank's brief that the check be later
referred to the city fiscal for appropriate action, said check may no longer be available if the
appellant is allowed to withdraw said document. In view of said opposition this Court resolution of
March 6, 1950, denied said petition for withdrawal.
Acting upon the petition contained in the bank's brief already mentioned, once the decision
becomes final, let the Clerk of Court transmit to the city fiscal the check (Exh. A) together with all
pertinent papers and documents in this case, for any action he may deem proper in the premises.
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59
G.R. No. 168274 August 20, 2008
FAR EAST BANK & TRUST COMPANY, petitioner, vs. GOLD PALACE JEWELLERY CO., as
represented by Judy L. Yang, Julie Yang-Go and Kho Soon Huat, respondent.
NACHURA, J.:
For the review of the Court through a Rule 45 petition are the following issuances of the Court of
Appeals (CA) in CA-G.R. CV No. 71858: (1) the March 15, 2005 Decision 1 which reversed the trial
court's ruling, and (2) the May 26, 2005 Resolution2 which denied the motion for reconsideration of
the said CA decision.
The instant controversy traces its roots to a transaction consummated sometime in June 1998,
when a foreigner, identified as Samuel Tagoe, purchased from the respondent Gold Palace
Jewellery Co.'s (Gold Palace's) store at SM-North EDSA several pieces of jewelry valued
at P258,000.00.3 In payment of the same, he offered Foreign Draft No. M-069670 issued by the
United Overseas Bank (Malaysia) BHD Medan Pasar, Kuala Lumpur Branch (UOB), addressed to the
Land Bank of the Philippines, Manila (LBP), and payable to the respondent company
for P380,000.00.4
Before receiving the draft, respondent Judy Yang, the assistant general manager of Gold Palace,
inquired from petitioner Far East Bank & Trust Company's (Far East's) SM North EDSA Branch, its
neighbor mall tenant, the nature of the draft. The teller informed her that the same was similar to a
manager's check, but advised her not to release the pieces of jewelry until the draft had been
cleared.5 Following the bank's advice, Yang issued Cash Invoice No. 1609 6 to the foreigner, asked
him to come back, and informed him that the pieces of jewelry would be released when the draft
had already been cleared.7 Respondent Julie Yang-Go, the manager of Gold Palace, consequently
deposited the draft in the company's account with the aforementioned Far East branch on June 2,
1998.8
When Far East, the collecting bank, presented the draft for clearing to LBP, the drawee bank, the
latter cleared the same9-UOB's account with LBP was debited,10 and Gold Palace's account with Far
East was credited with the amount stated in the draft.11
The foreigner eventually returned to respondent's store on June 6, 1998 to claim the purchased
goods. After ascertaining that the draft had been cleared, respondent Yang released the pieces of
jewelry to Samuel Tagoe; and because the amount in the draft was more than the value of the
goods purchased, she issued, as his change, Far East Check No. 1730881 12 for P122,000.00.13 This
check was later presented for encashment and was, in fact, paid by the said bank. 14
On June 26, 1998, or after around three weeks, LBP informed Far East that the amount in Foreign
Draft No. M-069670 had been materially altered from P300.00 to P380,000.00 and that it was
returning the same. Attached to its official correspondence were Special Clearing Receipt No.
002593 and the duly notarized and consul-authenticated affidavit of a corporate officer of the
drawer, UOB.15It is noted at this point that the material alteration was discovered by UOB after LBP
had informed it that its funds were being depleted following the encashment of the subject
draft.16 Intending to debit the amount from respondent's account, Far East subsequently refunded
the P380,000.00 earlier paid by LBP.
Gold Palace, in the meantime, had already utilized portions of the amount. Thus, on July 20, 1998,
as the outstanding balance of its account was already inadequate, Far East was able to debit
onlyP168,053.36,17 but this was done without a prior written notice to the account holder. 18 Far
East only notified by phone the representatives of the respondent company.19
On August 12, 1998, petitioner demanded from respondents the payment of P211,946.64 or the
difference between the amount in the materially altered draft and the amount debited from the
respondent company's account.20 Because Gold Palace did not heed the demand, Far East
consequently instituted Civil Case No. 99-296 for sum of money and damages before the Regional
Trial Court (RTC), Branch 64 of Makati City.21
In their Answer, respondents specifically denied the material allegations in the complaint and
interposed as a defense that the complaint states no cause of action-the subject foreign draft
having been cleared and the respondent not being the party who made the material alteration.
Respondents further counterclaimed for actual damages, moral and exemplary damages, and
attorney's fees considering, among others, that the petitioner had confiscated without basis Gold
Palace's balance in its account resulting in operational loss, and had maliciously imputed to the
latter the act of alteration.22
After trial on the merits, the RTC rendered its July 30, 2001 Decision 23 in favor of Far East, ordering
Gold Palace to pay the former P211,946.64 as actual damages and P50,000.00 as attorney's
fees.24The trial court ruled that, on the basis of its warranties as a general indorser, Gold Palace
was liable to Far East.25
On appeal, the CA, in the assailed March 15, 2005 Decision,26 reversed the ruling of the trial court
and awarded respondents' counterclaim. It ruled in the main that Far East failed to undergo the
proceedings on the protest of the foreign draft or to notify Gold Palace of the draft's dishonor; thus,
Far East could not charge Gold Palace on its secondary liability as an indorser. 27 The appellate court
further ruled that the drawee bank had cleared the check, and its remedy should be against the
party responsible for the alteration. Considering that, in this case, Gold Palace neither altered the
draft nor knew of the alteration, it could not be held liable. 28 The dispositive portion of the CA
decision reads:
WHEREFORE, premises considered, the appeal is GRANTED; the assailed Decision dated 30
July 2001 of the Regional Trial Court of Makati City, Branch 64 is hereby REVERSED and SET
ASIDE; the Complaint dated January 1999 is DISMISSED; and appellee Far East Bank and
Trust Company is hereby ordered to pay appellant Gold Palace Jewellery Company the amount
of Php168,053.36 for actual damages plus legal interest of 12% per annum from 20 July
1998, Php50,000.00 for exemplary damages, and Php50,000.00 for attorney's fees. Costs
against appellee Far East Bank and Trust Company.29
The appellate court, in the further challenged May 26, 2005 Resolution, 30 denied petitioner's Motion
for Reconsideration,31 which prompted the petitioner to institute before the Court the instant
Petition for Review on Certiorari.32
We deny the petition.
Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the acceptor, by
accepting the instrument, engages that he will pay it according to the tenor of his
acceptance.33 This provision applies with equal force in case the drawee pays a bill without having
previously accepted it. His actual payment of the amount in the check implies not only his assent to
the order of the drawer and a recognition of his corresponding obligation to pay the aforementioned
sum, but also, his clear compliance with that obligation.34 Actual payment by the drawee is greater
than his acceptance, which is merely a promise in writing to pay. The payment of a check includes
its acceptance.35
Unmistakable herein is the fact that the drawee bank cleared and paid the subject foreign draft and
forwarded the amount thereof to the collecting bank. The latter then credited to Gold Palace's
account the payment it received. Following the plain language of the law, the drawee, by the said
payment, recognized and complied with its obligation to pay in accordance with the tenor of his
acceptance. The tenor of the acceptance is determined by the terms of the bill as it is when the
drawee accepts.36Stated simply, LBP was liable on its payment of the check according to the tenor
of the check at the time of payment, which was the raised amount.
Because of that engagement, LBP could no longer repudiate the payment it erroneously made to a
due course holder. We note at this point that Gold Palace was not a participant in the alteration of
the draft, was not negligent, and was a holder in due course-it received the draft complete and
regular on its face, before it became overdue and without notice of any dishonor, in good faith and
for value, and absent any knowledge of any infirmity in the instrument or defect in the title of the
person negotiating it.37 Having relied on the drawee bank's clearance and payment of the draft and
not being negligent (it delivered the purchased jewelry only when the draft was cleared and paid),
respondent is amply protected by the said Section 62. Commercial policy favors the protection of
any one who, in due course, changes his position on the faith of the drawee bank's clearance and
payment of a check or draft.38
This construction and application of the law gives effect to the plain language of the NIL 39 and is in
line with the sound principle that where one of two innocent parties must suffer a loss, the law will
leave the loss where it finds it.40 It further reasserts the usefulness, stability and currency of
negotiable paper without seriously endangering accepted banking practices. Indeed, banking
institutions can readily protect themselves against liability on altered instruments either by
qualifying their acceptance or certification, or by relying on forgery insurance and special paper
which will make alterations obvious.41 This is not to mention, but we state nevertheless for
emphasis, that the drawee bank, in most cases, is in a better position, compared to the holder, to
verify with the drawer the matters stated in the instrument. As we have observed in this case, were
it not for LBP's communication with the drawer that its account in the Philippines was being
60
depleted after the subject foreign draft had been encashed, then, the alteration would not have
been discovered. What we cannot understand is why LBP, having the most convenient means to
correspond with UOB, did not first verify the amount of the draft before it cleared and paid the
same. Gold Palace, on the other hand, had no facility to ascertain with the drawer, UOB Malaysia,
the true amount in the draft. It was left with no option but to rely on the representations of LBP
that the draft was good.
In arriving at this conclusion, the Court is not closing its eyes to the other view espoused in
common law jurisdictions that a drawee bank, having paid to an innocent holder the amount of an
uncertified, altered check in good faith and without negligence which contributed to the loss, could
recover from the person to whom payment was made as for money paid by mistake.42 However,
given the foregoing discussion, we find no compelling reason to apply the principle to the instant
case.
The Court is also aware that under the Uniform Commercial Code in the United States of America, if
an unaccepted draft is presented to a drawee for payment or acceptance and the drawee pays or
accepts the draft, the person obtaining payment or acceptance, at the time of presentment, and a
previous transferor of the draft, at the time of transfer, warrant to the drawee making payment or
accepting the draft in good faith that the draft has not been altered.43 Nonetheless, absent any
similar provision in our law, we cannot extend the same preferential treatment to the paying bank.
Thus, considering that, in this case, Gold Palace is protected by Section 62 of the NIL, its collecting
agent, Far East, should not have debited the money paid by the drawee bank from respondent
company's account. When Gold Palace deposited the check with Far East, the latter, under the
terms of the deposit and the provisions of the NIL, became an agent of the former for the collection
of the amount in the draft.44 The subsequent payment by the drawee bank and the collection of the
amount by the collecting bank closed the transaction insofar as the drawee and the holder of the
check or his agent are concerned, converted the check into a mere voucher, 45 and, as already
discussed, foreclosed the recovery by the drawee of the amount paid. This closure of the
transaction is a matter of course; otherwise, uncertainty in commercial transactions, delay and
annoyance will arise if a bank at some future time will call on the payee for the return of the money
paid to him on the check.46
As the transaction in this case had been closed and the principal-agent relationship between the
payee and the collecting bank had already ceased, the latter in returning the amount to the drawee
bank was already acting on its own and should now be responsible for its own actions. Neither can
petitioner be considered to have acted as the representative of the drawee bank when it debited
respondent's account, because, as already explained, the drawee bank had no right to recover what
it paid. Likewise, Far East cannot invoke the warranty of the payee/depositor who indorsed the
instrument for collection to shift the burden it brought upon itself. This is precisely because the said
indorsement is only for purposes of collection which, under Section 36 of the NIL, is a restrictive
indorsement.47 It did not in any way transfer the title of the instrument to the collecting bank. Far
East did not own the draft, it merely presented it for payment. Considering that the warranties of a
general indorser as provided in Section 66 of the NIL are based upon a transfer of title and are
available only to holders in due course,48 these warranties did not attach to the indorsement for
deposit and collection made by Gold Palace to Far East. Without any legal right to do so, the
collecting bank, therefore, could not debit respondent's account for the amount it refunded to the
drawee bank.
The foregoing considered, we affirm the ruling of the appellate court to the extent that Far East
could not debit the account of Gold Palace, and for doing so, it must return what it had erroneously
taken. Far East's remedy under the law is not against Gold Palace but against the drawee-bank or
the person responsible for the alteration. That, however, is another issue which we do not find
necessary to discuss in this case.
However, we delete the exemplary damages awarded by the appellate court. Respondents have not
shown that they are entitled to moral, temperate or compensatory damages.49 Neither was
petitioner impelled by malice or bad faith in debiting the account of the respondent company and in
pursuing its cause.50 On the contrary, petitioner was honestly convinced of the propriety of the
debit. We also delete the award of attorney's fees for, in a plethora of cases, we have ruled that it
is not a sound public policy to place a premium on the right to litigate. No damages can be charged
to those who exercise such precious right in good faith, even if done erroneously. 51
WHEREFORE, premises considered, the March 15, 2005 Decision and the May 26, 2005 Resolution
of the Court of Appeals in CA-G.R. CV No. 71858 are AFFIRMED WITH THE MODIFICATION that
the award of exemplary damages and attorney's fees is DELETED. SO ORDERED.