Negotiable Instruments Law Cases

FIRST DIVISION
G.R. No. 154127 December 8, 2003

ROMEO C. GARCIA, petitioner,
vs.
DIONISIO V. LLAMAS, respondent.
DECISION
Novation cannot be presumed. It must be clearly shown either by the express

assent of the parties or by the complete incompatibility between the old and the
new agreements. Petitioner herein fails to show either requirement convincingly;
hence, the summary judgment holding him liable as a joint and solidary debtor
stands.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking
to nullify the November 26, 2001 Decision2 and the June 26, 2002 Resolution3 of
the Court of Appeals (CA) in CA-GR CV No. 60521. The appellate court disposed
as follows:
"UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed
from, insofar as it pertains to [Petitioner] Romeo Garcia, must be, as it hereby is,
AFFIRMED, subject to the modification that the award for attorney’s fees and
cost of suit is DELETED. The portion of the judgment that pertains to x x x
Eduardo de Jesus is SET ASIDE and VACATED. Accordingly, the case against x
x x Eduardo de Jesus is REMANDED to the court of origin for purposes of
receiving ex parte [Respondent] Dionisio Llamas’ evidence against x x x Eduardo
de Jesus."4
The challenged Resolution, on the other hand, denied petitioner’s Motion for
Reconsideration.
The Antecedents
The antecedents of the case are narrated by the CA as follows:
"This case started out as a complaint for sum of money and damages by x x x
[Respondent] Dionisio Llamas against x x x [Petitioner] Romeo Garcia and
Eduardo de Jesus. Docketed as Civil Case No. Q97-32-873, the complaint
alleged that on 23 December 1996[,] [petitioner and de Jesus] borrowed
₱400,000.00 from [respondent]; that, on the same day, [they] executed a
Negotiable Instruments Law Page 1

promissory note wherein they bound themselves jointly and severally to pay the
loan on or before 23 January 1997 with a 5% interest per month; that the loan
has long been overdue and, despite repeated demands, [petitioner and de Jesus]
have failed and refused to pay it; and that, by reason of the[ir] unjustified refusal,
[respondent] was compelled to engage the services of counsel to whom he
agreed to pay 25% of the sum to be recovered from [petitioner and de Jesus],
plus ₱2,000.00 for every appearance in court. Annexed to the complaint were the
promissory note above-mentioned and a demand letter, dated 02 May 1997, by
[respondent] addressed to [petitioner and de Jesus].
"Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he

assumed no liability under the promissory note because he signed it merely as
an accommodation party for x x x de Jesus; and, alternatively, that he is relieved
from any liability arising from the note inasmuch as the loan had been paid by x x
x de Jesus by means of a check dated 17 April 1997; and that, in any event, the
issuance of the check and [respondent’s] acceptance thereof novated or
superseded the note.
"[Respondent] tendered a reply to [Petitioner] Garcia’s answer, thereunder

asserting that the loan remained unpaid for the reason that the check issued by x
x x de Jesus bounced, and that [Petitioner] Garcia’s answer was not even
accompanied by a certificate of non-forum shopping. Annexed to the reply were
the face of the check and the reverse side thereof.
"For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim that out
of the supposed ₱400,000.00 loan, he received only ₱360,000.00,
the P40,000.00 having been advance interest thereon for two months, that is, for
January and February 1997; that[,] in fact[,] he paid the sum of ₱120,000.00 by
way of interests; that this was made when [respondent’s] daughter, one Nits
Llamas-Quijencio, received from the Central Police District Command at Bicutan,
Taguig, Metro Manila (where x x x de Jesus worked), the sum of ₱40,000.00,
representing the peso equivalent of his accumulated leave credits, another
₱40,000.00 as advance interest, and still another ₱40,000.00 as interest for the
months of March and April 1997; that he had difficulty in paying the loan and had
asked [respondent] for an extension of time; that [respondent] acted in bad faith
in instituting the case, [respondent] having agreed to accept the benefits he (de
Jesus) would receive for his retirement, but [respondent] nonetheless filed the
instant case while his retirement was being processed; and that, in defense of his
rights, he agreed to pay his counsel ₱20,000.00 [as] attorney’s fees, plus
₱1,000.00 for every court appearance.

"During the pre-trial conference, x x x de Jesus and his lawyer did not appear,
nor did they file any pre-trial brief. Neither did [Petitioner] Garcia file a pre-trial
brief, and his counsel even manifested that he would no [longer] present
evidence. Given this development, the trial court gave [respondent] permission to
present his evidence ex parte against x x x de Jesus; and, as regards [Petitioner]
Garcia, the trial court directed [respondent] to file a motion for judgment on the
pleadings, and for [Petitioner] Garcia to file his comment or opposition thereto.
"Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in default and

to allow him to present his evidence ex parte. Meanwhile, [Petitioner] Garcia filed
a [M]anifestation submitting his defense to a judgment on the pleadings.
Subsequently, [respondent] filed a [M]anifestation/[M]otion to submit the case for
judgement on the pleadings, withdrawing in the process his previous motion.
Thereunder, he asserted that [petitioner’s and de Jesus’] solidary liability under
the promissory note cannot be any clearer, and that the check issued by de
Jesus did not discharge the loan since the check bounced."5
On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222)
disposed of the case as follows:
"WHEREFORE, premises considered, judgment on the pleadings is hereby

rendered in favor of [respondent] and against [petitioner and De Jesus], who are
hereby ordered to pay, jointly and severally, the [respondent] the following sums,
to wit:
‘1) ₱400,000.00 representing the principal amount plus 5% interest

thereon per month from January 23, 1997 until the same shall have been
fully paid, less the amount of ₱120,000.00 representing interests already
paid by x x x de Jesus;
‘2) ₱100,000.00 as attorney’s fees plus appearance fee of ₱2,000.00 for

each day of [c]ourt appearance, and;
‘3) Cost of this suit.’"6
Ruling of the Court of Appeals
The CA ruled that the trial court had erred when it rendered a judgment on the
pleadings against De Jesus. According to the appellate court, his Answer raised
genuinely contentious issues. Moreover, he was still required to present his
evidence ex parte. Thus, respondent was not ipso facto entitled to the RTC

judgment, even though De Jesus had been declared in default. The case against
the latter was therefore remanded by the CA to the trial court for the ex parte
reception of the former’s evidence.
As to petitioner, the CA treated his case as a summary judgment, because his

Answer had failed to raise even a single genuine issue regarding any material
fact.
The appellate court ruled that no novation -- express or implied -- had taken
place when respondent accepted the check from De Jesus. According to the CA,
the check was issued precisely to pay for the loan that was covered by the
promissory note jointly and severally undertaken by petitioner and De Jesus.
Respondent’s acceptance of the check did not serve to make De Jesus the sole
debtor because, first, the obligation incurred by him and petitioner was joint and
several; and, second, the check -- which had been intended to extinguish the
obligation -- bounced upon its presentment.
Hence, this Petition.7
Issues
Petitioner submits the following issues for our consideration:
"I
Whether or not the Honorable Court of Appeals gravely erred in not holding that
novation applies in the instant case as x x x Eduardo de Jesus had expressly
assumed sole and exclusive liability for the loan obligation he obtained from x x x
Respondent Dionisio Llamas, as clearly evidenced by:
a) Issuance by x x x de Jesus of a check in payment of the full amount of

the loan of ₱400,000.00 in favor of Respondent Llamas, although the
check subsequently bounced[;]
b) Acceptance of the check by the x x x respondent x x x which resulted

in [the] substitution by x x x de Jesus or [the superseding of] the
promissory note;
c) x x x de Jesus having paid interests on the loan in the total amount of

₱120,000.00;

d) The fact that Respondent Llamas agreed to the proposal of x x x de
Jesus that due to financial difficulties, he be given an extension of time to
pay his loan obligation and that his retirement benefits from the Philippine
National Police will answer for said obligation.
"II
Whether or not the Honorable Court of Appeals seriously erred in not holding that
the defense of petitioner that he was merely an accommodation party, despite
the fact that the promissory note provided for a joint and solidary liability, should
have been given weight and credence considering that subsequent events
showed that the principal obligor was in truth and in fact x x x de Jesus, as
evidenced by the foregoing circumstances showing his assumption of sole
liability over the loan obligation.
"III
Whether or not judgment on the pleadings or summary judgment was properly

availed of by Respondent Llamas, despite the fact that there are genuine issues
of fact, which the Honorable Court of Appeals itself admitted in its Decision,
which call for the presentation of evidence in a full-blown trial."8
Simply put, the issues are the following: 1) whether there was novation of the
obligation; 2) whether the defense that petitioner was only an accommodation
party had any basis; and 3) whether the judgment against him -- be it a judgment
on the pleadings or a summary judgment -- was proper.
The Court’s Ruling
The Petition has no merit.
First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint and solidary
debtor by insisting that novation took place, either through the substitution of De
Jesus as sole debtor or the replacement of the promissory note by the check.
Alternatively, the former argues that the original obligation was extinguished
when the latter, who was his co-obligor, "paid" the loan with the check.

The fallacy of the second (alternative) argument is all too apparent. The check
could not have extinguished the obligation, because it bounced upon
presentment. By law,9 the delivery of a check produces the effect of payment only
when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its objects or

principal obligations, by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor.10 Article 1293 of the Civil
Code defines novation as follows:
"Art. 1293. Novation which consists in substituting a new debtor in the place of
the original one, may be made even without the knowledge or against the will of
the latter, but not without the consent of the creditor. Payment by the new debtor
gives him rights mentioned in articles 1236 and 1237."
In general, there are two modes of substituting the person of the debtor: (1)
expromision and (2) delegacion. In expromision, the initiative for the change does
not come from -- and may even be made without the knowledge of -- the debtor,
since it consists of a third person’s assumption of the obligation. As such, it
logically requires the consent of the third person and the creditor. In delegacion,
the debtor offers, and the creditor accepts, a third person who consents to the
substitution and assumes the obligation; thus, the consent of these three persons
are necessary.11Both modes of substitution by the debtor require the consent of
the creditor.12
Novation may also be extinctive or modificatory. It is extinctive when an old

obligation is terminated by the creation of a new one that takes the place of the
former. It is merely modificatory when the old obligation subsists to the extent
that it remains compatible with the amendatory agreement.13 Whether extinctive
or modificatory, novation is made either by changing the object or the principal
conditions, referred to as objective or real novation; or by substituting the person
of the debtor or subrogating a third person to the rights of the creditor, an act
known as subjective or personal novation.14 For novation to take place, the
following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.
4) There must be a valid new contract.15
Novation may also be express or implied. It is express when the new obligation
declares in unequivocal terms that the old obligation is extinguished. It is implied
when the new obligation is incompatible with the old one on every point. 16 The
test of incompatibility is whether the two obligations can stand together, each one
with its own independent existence.17
Applying the foregoing to the instant case, we hold that no novation took place.
The parties did not unequivocally declare that the old obligation had been
extinguished by the issuance and the acceptance of the check, or that the check
would take the place of the note. There is no incompatibility between the
promissory note and the check. As the CA correctly observed, the check had
been issued precisely to answer for the obligation. On the one hand, the note
evidences the loan obligation; and on the other, the check answers for it. Verily,
the two can stand together.
Neither could the payment of interests -- which, in petitioner’s view, also

constitutes novation18 -- change the terms and conditions of the obligation. Such
payment was already provided for in the promissory note and, like the check,
was totally in accord with the terms thereof.
Also unmeritorious is petitioner’s argument that the obligation was novated by the
substitution of debtors. In order to change the person of the debtor, the old one
must be expressly released from the obligation, and the third person or new
debtor must assume the former’s place in the relation. 19 Well-settled is the rule
that novation is never presumed.20 Consequently, that which arises from a
purported change in the person of the debtor must be clear and express.21 It is
thus incumbent on petitioner to show clearly and unequivocally that novation has
indeed taken place.
In the present case, petitioner has not shown that he was expressly released
from the obligation, that a third person was substituted in his place, or that the
joint and solidary obligation was cancelled and substituted by the solitary
undertaking of De Jesus. The CA aptly held:
"x x x. Plaintiff’s acceptance of the bum check did not result in substitution by de
Jesus either, the nature of the obligation being solidary due to the fact that the

promissory note expressly declared that the liability of appellants thereunder is
joint and [solidary.] Reason: under the law, a creditor may demand payment or
performance from one of the solidary debtors or some or all of them
simultaneously, and payment made by one of them extinguishes the obligation. It
therefore follows that in case the creditor fails to collect from one of the solidary
debtors, he may still proceed against the other or others. x x x "22
Moreover, it must be noted that for novation to be valid and legal, the law
requires that the creditor expressly consent to the substitution of a new
debtor.23 Since novation implies a waiver of the right the creditor had before the
novation, such waiver must be express.24 It cannot be supposed, without clear
proof, that the present respondent has done away with his right to exact
fulfillment from either of the solidary debtors.25
More important, De Jesus was not a third person to the obligation. From the
beginning, he was a joint and solidary obligor of the ₱400,000 loan; thus, he can
be released from it only upon its extinguishment. Respondent’s acceptance of his
check did not change the person of the debtor, because a joint and solidary
obligor is required to pay the entirety of the obligation.
It must be noted that in a solidary obligation, the creditor is entitled to demand

the satisfaction of the whole obligation from any or all of the debtors. 26 It is up to
the former to determine against whom to enforce collection. 27Having made
himself jointly and severally liable with De Jesus, petitioner is therefore liable 28 for
the entire obligation.29
Second Issue:
Accommodation Party
Petitioner avers that he signed the promissory note merely as an accommodation

party; and that, as such, he was released as obligor when respondent agreed to
extend the term of the obligation.
This reasoning is misplaced, because the note herein is not a negotiable

instrument. The note reads:
"PROMISSORY NOTE
"₱400,000.00

"RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED
THOUSAND PESOS, Philippine Currency payable on or before January 23,
1997 at No. 144 K-10 St. Kamias, Quezon City, with interest at the rate of 5% per
month or fraction thereof.
"It is understood that our liability under this loan is jointly and severally [sic].
"Done at Quezon City, Metro Manila this 23rd day of December, 1996."30
By its terms, the note was made payable to a specific person rather than to
bearer or to order31 -- a requisite for negotiability under Act 2031, the Negotiable
Instruments Law (NIL). Hence, petitioner cannot avail himself of the NIL’s
provisions on the liabilities and defenses of an accommodation party. Besides, a
non-negotiable note is merely a simple contract in writing and is evidence of such
intangible rights as may have been created by the assent of the parties. 32 The
promissory note is thus covered by the general provisions of the Civil Code, not
by the NIL.
Even granting arguendo that the NIL was applicable, still, petitioner would be
liable for the promissory note. Under Article 29 of Act 2031, an accommodation
party is liable for the instrument to a holder for value even if, at the time of its
taking, the latter knew the former to be only an accommodation party. The
relation between an accommodation party and the party accommodated is, in
effect, one of principal and surety -- the accommodation party being the
surety.33 It is a settled rule that a surety is bound equally and absolutely with the
principal and is deemed an original promissor and debtor from the beginning.
The liability is immediate and direct.34
Third Issue:
Propriety of Summary Judgment

or Judgment on the Pleadings
The next issue illustrates the usual confusion between a judgment on the
pleadings and a summary judgment. Under Section 3 of Rule 35 of the Rules of
Court, a summary judgment may be rendered after a summary hearing if the
pleadings, supporting affidavits, depositions and admissions on file show that (1)
except as to the amount of damages, there is no genuine issue regarding any
material fact; and (2) the moving party is entitled to a judgment as a matter of
law.

A summary judgment is a procedural device designed for the prompt disposition
of actions in which the pleadings raise only a legal, not a genuine, issue
regarding any material fact.35 Consequently, facts are asserted in the complaint
regarding which there is yet no admission, disavowal or qualification; or specific
denials or affirmative defenses are set forth in the answer, but the issues are
fictitious as shown by the pleadings, depositions or admissions.36 A summary
judgment may be applied for by either a claimant or a defending party.37
On the other hand, under Section 1 of Rule 34 of the Rules of Court, a judgment
on the pleadings is proper when an answer fails to render an issue or otherwise
admits the material allegations of the adverse party’s pleading. The essential
question is whether there are issues generated by the pleadings.38 A judgment on
the pleadings may be sought only by a claimant, who is the party seeking to
recover upon a claim, counterclaim or cross-claim; or to obtain a declaratory
relief. 39
Apropos thereto, it must be stressed that the trial court’s judgment against
petitioner was correctly treated by the appellate court as a summary judgment,
rather than as a judgment on the pleadings. His Answer40 apparently raised
several issues -- that he signed the promissory note allegedly as a mere
accommodation party, and that the obligation was extinguished by either
payment or novation. However, these are not factual issues requiring trial. We
quote with approval the CA’s observations:
"Although Garcia’s [A]nswer tendered some issues, by way of affirmative

defenses, the documents submitted by [respondent] nevertheless clearly showed
that the issues so tendered were not valid issues. Firstly, Garcia’s claim that he
was merely an accommodation party is belied by the promissory note that he
signed. Nothing in the note indicates that he was only an accommodation party
as he claimed to be. Quite the contrary, the promissory note bears the statement:
‘It is understood that our liability under this loan is jointly and severally [sic].’
Secondly, his claim that his co-defendant de Jesus already paid the loan by
means of a check collapses in view of the dishonor thereof as shown at the
dorsal side of said check."41
From the records, it also appears that petitioner himself moved to submit the
case for judgment on the basis of the pleadings and documents.1âwphi1 In a
written Manifestation,42 he stated that "judgment on the pleadings may now be
rendered without further evidence, considering the allegations and admissions of
the parties."43

In view of the foregoing, the CA correctly considered as a summary judgment
that which the trial court had issued against petitioner.
WHEREFORE, this Petition is hereby DENIED and the assailed Decision

AFFIRMED. Costs against petitioner.
SO ORDERED.

SECOND DIVISION
G.R. No. 105836 March 7, 1994
SPOUSES GEORGE MORAN and LIBRADA P. MORAN, petitioners,

vs.
THE HON. COURT OF APPEALS and CITYTRUST BANKING
CORPORATION, respondents.
REGALADO, J.:
Petitioner spouses George and Librada Moran are the owners of the Wack-Wack
Petron gasoline station located at Shaw Boulevard, corner Old Wack-Wack
Road, Mandaluyong, Metro Manila. They regularly purchased bulk fuel and other
related products from Petrophil Corporation on cash on delivery (COD) basis.
Orders for bulk fuel and other related products were made by telephone and
payments were effected by personal checks upon delivery.1
Petitioners maintained three joint accounts, namely one current account (No. 37-
00066-7) and two savings accounts, (Nos. 1037002387 and 1037001372) with
the Shaw Boulevard branch of Citytrust Banking Corporation. As a special
privilege to the Morans, whom it considered as valued clients, the bank allowed
them to maintain a zero balance in their current account. Transfers from Saving
Account No. 1037002387 to their current account could be made only with their
prior authorization, but they gave written authority to Citytrust to automatically
transfer funds from their Savings Account No. 1037001372 to their Current
Account No. 37-00066-7 at any time whenever the funds in their current account
were insufficient to meet withdrawals from said current account. Such
arrangement for automatic transfer of funds was called a pre-authorized transfer
(PAT) agreement.2
The PAT letter-agreement entered into by the parties on March 19, 1982
contained the following provisions:
xxx xxx xxx
1. The transfer may be effected on the day following the

overdrawing of the current account, but the check/s would be
honored if the savings account has sufficient balance to cover the
overdraft.

2. The regular charges on overdraft, and activity fees will be
imposed by the Bank.
3. This is merely an accommodation on our part and we have the

right, at all times and for any reason whatsoever, to refuse to
effect transfer of funds at our sole and absolute option and
discretion, reserving our right to terminate this arrangement at any
time without written notice to you.
4. You hold CITYTRUST free and harmless for any and all
omissions or oversight in executing this automatic transfer of
funds; . . .3
xxx xxx xxx
On December 12, 1983, petitioners, through Librada Moran, drew a check

(Citytrust No. 041960) for P50,576.00 payable to Petrophil
Corporation.4 The next day, December 13, 1983, petitioners, again through
Librada Moran, issued another check (Citytrust No. 041962) in the amount of
P56,090.00 in favor of the same corporation.5 The total sum of the two checks
was P106,666.00.
On December 14, 1983, Petrophil Corporation deposited the two aforementioned

checks to its account with the Pandacan branch of the Philippine National Bank
(PNB), the collecting bank. In turn, PNB, Pandacan branch presented them for
clearing with the Philippine Clearing House Corporation in the afternoon of the
same day. The records show that on December 14, 1983, Current Account No.
37-00066-7 had a zero balance, while Savings Account No. 1037001372
(covered by the PAT) had an available balance of P26,104.306 and Savings
Account No. 1037002387 had an available balance of P43,268.39.7
At about ten o'clock in the morning of the following day, December 15, 1983,
petitioner George Moran went to the bank, as was his regular practice, to
personally oversee their daily transactions with the bank. He deposited in their
Savings Account No. 1037002387 the amounts of P10,874.58 and
P6,754.25,8 and he likewise deposited in their Savings Account No. 1037001372
the amounts of P5,900.00, P35,100.00 and 30.00.9 The amount of P40,000.00
was then transferred by him from Saving Account No. 1037002387 to their
current account by means of a pro forma withdrawal form (a debit memorandum),
which was provided by the bank, authorizing the latter to make the necessary
transfer. At the same time, the amount of P66,666.00 was transferred from

Savings Account No. 1037001372 to the same current account through the pre-
authorized transfer (PAT) agreement. 10
Sometime on December 15 or 16, 1983 George Moran was informed by his wife
Librada, that Petrophil refused to deliver their orders on a credit basis because
the two checks they had previously issued were dishonored upon presentment
for payment. Apparently, the bank dishonored the checks due to "insufficiency of
funds." 11 The non-delivery of gasoline forced petitioners to temporarily stop
business operations, allegedly causing them to suffer loss of earnings. In
addition, Petrophil cancelled their credit accommodation, forcing them to pay for
their purchases in cash. 12 George Moran, furious and upset, demanded an
explanation from Raul Diaz, the branch manager. Failing to get a sufficient
explanation, he talked to a certain Villareal, a bank officer, who allegedly told him
that Amy Belen Ragodo, the customer service officer, had committed a "grave
error". 13
On December 16 or 17, 1983, Diaz went to the Moran residence to get the
signatures of the petitioners on an application for a manager's check so that the
dishonored checks could be redeemed. Diaz then went to Petrophil to personally
present the checks in payment for the two dishonored checks. 14
In a chance meeting around May or June, 1984, George Moran learned from one
Constancio Magno, credit manager of Petrophil, that the latter received from
Citytrust, through Diaz, a letter dated December 16, 1983, notifying them that the
two aforementioned checks were "inadvertently dishonored . . . due to
operational error." Said letter was received by Petrophil on January 4, 1984. 15
On July 24, 1984, or a little over six months after the incident, petitioners, through
counsel, wrote Citytrust claiming that the bank's dishonor of the checks caused
them besmirched business and personal reputation, shame and anxiety, hence
they were contemplating the filing of the necessary legal actions unless the bank
issued a certification clearing their name and paid them P1,000,000.00 as moral
damages. 16
The bank did not act favorably on their demands, hence petitioners filed a
complaint for damages on September 8, 1984, with the Regional Trial Court,
Branch 159 at Pasig, Metro Manila, which was docketed therein as Civil Case
No. 51549. In turn, Citytrust filed a counterclaim for damages, alleging that the
case filed against it was unfounded and unjust.
After trial, a decision dated October 9, 1989 was rendered by the trial court
dismissing both the complaint and the counterclaim. 17 On appeal, the Court of

Appeals rendered judgment in CA-G.R. CV No. 25009 on October 9, 1989
affirming the decision of the trial court. 18
We start some basic and accepted rules, statutory and doctrinal. A check is a bill
of exchange drawn on a bank payable on demand. 19 Thus, a check is a written
order addressed to a bank or persons carrying on the business of banking, by a
party having money in their hands, requesting them to pay on presentment, to a
person named therein or to bearer or order, a named sum of money. 20
Fixed savings and current deposits of money in banks and similar institutions
shall be governed by the provisions concerning simple loan. 21 In other words,
the relationship between the bank and the depositor is that of a debtor and
creditor. 22 By virtue of the contract of deposit between the banker and its
depositor, the banker agrees to pay checks drawn by the depositor provided that
said depositor has money in the hands of the bank. 23
Hence, where the bank possesses funds of a depositor, it is bound to honor his
checks to the extent of the amount of his deposits. The failure of a bank to pay
the check of a merchant or a trader, when the deposit is sufficient, entitles the
drawer to substantial damages without any proof of actual
damages. 24
Conversely, a bank is not liable for its refusal to pay a check on account of
insufficient funds, notwithstanding the fact that a deposit may be made later in
the day. 25 Before a bank depositor may maintain a suit to recover a specific
amount from his bank, he must first show that he had on deposit sufficient funds
to meet his demand. 26
The present action for damages accordingly hinges on the resolution of the
inquiry as to whether or not petitioners had sufficient funds in their accounts
when the bank dishonored the checks in question. In view of the factual findings
of the two lower courts the correctness of which are challenged by what appear
to be plausible, arguments, we feel that the same should properly be resolved by
us. This would necessarily require us to inquire into both the savings and current
accounts of petitioners in relation to the PAT arrangement.
On December 14, 1983, when PNB, Pandacan branch, presented the checks for
collection, the available balance for Savings Account No. 1037001372 was
P26,104.30 while Current Account No. 37-00066-7 expectedly had a zero
balance. On December 15, 1983, at approximately ten o'clock in the morning,
petitioners, through George Moran, learned that P66,666.00 from Saving
Account No. 1037001372 was transferred to their current account. Another

P40,000.00 was transferred from Saving Accounts No. 1037002387 to the
current account. Considering that the transfers were by then sufficient to cover
the two checks, it is asserted by petitioners that such fact should have prevented
the dishonor of the checks. It appears, however, that it was not so.
As explained by respondent court in its decision, Gerard E. Rionisto, head of the

centralized clearing unit of Citytrust, detailed on the witness stand the standard
clearing procedure adopted by respondent bank and the Philippine Clearing
House Corporation, to wit:.
Q: Let me again re-phase the question. Most of

(sic) these two checks issued by Mrs. Librada
Moran under the accounts of the plaintiffs with
Citytrust Banking Corporation were drawn dated
December 12, 1983 and December 13, 1983(and)
these two (2) checks were made payable to
Petrophil Corporation. On record, Petrophil
Corporation presented these two (2) checks for
clearing with PNB Pandacan Branch on December
14, 1983. Now in accordance with the bank, what
would happen with these checks drawn with (sic)
PNB on December 14, 1983?.
A: So these checks will now be presented by PNB

with the Philippine Clearing House on December
14, and then the Philippine Clearing House will
process it until midnight of December 14. Citytrust
will send a clearing representative to the Philippine
Clearing House at around 2:00 o'clock in the
morning of December 15 and then get the checks.
The checks will now be processed at the Citytrust
Computer at around 3:00 o'clock in the morning of
December 14 (sic)but it will be processed for
balance of Citytrust as of December 14 because for
one, we have not opened on December 15 at 3:00
o'clock. Under the clearing house rules, we are
supposed to process it on the date it was presented
for clearing. (tsn, September 9, 1988, pp. 9-10). 27
Considering the clearing process adopted, as explained in the aforequoted

testimony, it is clear that the available balance on December 14, 1983 was used
by the bank in determining whether or not there was sufficient cash deposited to

fund the two checks, although what was stamped on the dorsal side of the two
checks in question was "DAIF/12-15-83," since December 15, 1983 was the
actual date when the checks were processed. As earlier stated, when petitioners'
checks were dishonored due to insufficiency of funds, the available balance of
Savings Account No. 1037001372, which was the subject of the PAT agreement,
was not enough to cover either of the two checks. On December 14, 1983, when
PNB, Pandacan branch presented the checks for collection, the available
balance for Savings Account No. 1037001372, to repeat, was only P26,104.30
while Current Account No. 37-0006-7 had no available balance. It was only on
December 15, 1983 at around ten o'clock in the morning that the necessary
funds were deposited, which unfortunately was too late to prevent the dishonor of
the checks.
Petitioners argue that public respondent, by relying heavily on Rionisto's

testimony, failed to consider the fact that the witness himself admitted that he
had no personal knowledge surrounding the dishonor of the two checks in
question. Thus, although he knew the standard clearing procedure, it does not
necessarily mean that the same procedure was adopted with regard to the two
checks.
We do not agree. Section 3(q), Rule 131 of the Rules of Court provides a
disputable presumption in law that the ordinary course of business has been
followed. In the absence of a contrary showing, it is presumed that the acts in
question were in conformity with the usual conduct of business. In the case at
bar, petitioners failed to present countervailing evidence to rebut the presumption
that the checks involved underwent the same regular process for clearing of
checks followed by the bank since 1983.
Petitioner had no reason to complain, for they alone were at fault. A drawer must
remember his responsibilities every time he issues a check. He must personally
keep track of his available balance in the bank and not rely on the bank to notify
him of the necessity to fund certain check she previously issued. A check, as
distinguished from an ordinary bill of exchange, is supposed to be drawn against
a previous deposit of funds for it is ordinarily intended for immediately
payment. 28
Moreover, between the time of the issuance of said checks on December 12 and
13 and the time of their presentment on December 14, petitioners had, at the
very least, twenty-four hours to replenish their balance in the bank.
As previously noted, it was only during business hours in the morning of

December 15, 1983, that P66,666.00 was automatically transferred from Savings

Account No. 1037001372 to Current Account No. 37-00066-7, and another
P40,000.00 was transferred from Savings Account No. 1037002387 to the same
current by a debit memorandum. Petitioners argue that if indeed the checks were
dishonored in the early morning of December 15, 1983, the bank would not have
automatically transferred P66,666.00 to said current account. They theorize that
the checks having already been dishonored, there was no necessity to put into
effect the pre-authorized transfer agreement.
That theory is incorrect. When the transfer from both savings accounts to the
current account were made, they were done in the hope that the checks may be
retrieved, thus preventing their dishonor. Unfortunately, respondent bank did not
succeed in effectuating its good intentions. The transfers were made to preserve
its relations with petitioners whom it knew were valued clients, hence it wanted to
prevent the dishonor of their checks, if the same was at all possible. Although not
admitting fault, it tried its best to make sure that the checks would not bounce.
Under similar circumstances, it was held in Whitman vs. First National

Bank 29 that a bank performs its full duty where, upon the receipt of a check
drawn against an account in which there are insufficient funds to pay it in full, it
endeavors to induce the drawer to make good his account so that the check can
be paid, and failing in this, it protests the check on the following morning and
notifies its correspondent bank by the telegraph of the protest. It cannot,
therefore, be held liable to the payee and holder of the check for not protesting it
upon the day when it was received. In fact, the court added that the bank did
more that it was required to do by making an effort to induce the drawer to
deposit sufficient money to make the check good, and by notifying its
correspondent of the dishonor of the check by telegram.
Petitioners maintain that at the time the checks were dishonored, they had
already deposited sufficient funds to cover said checks. To prove their point,
petitioners quoted in their petition the following testimony of said witness
Rionisto, to wit:
Q: Now according to you, you would receive the

checks from (being deposited to) the collecting
bank which in this particular example was the
Pandacan Branch of PNB which in turn will deliver
it to the Philippine Clearing House and the
Philippine Clearing House will deliver it to your
office around 12:00 o'clock of December . . . ?

A: Around 2:00 o'clock of December 15. We sent a
clearing representative.
Q: And the checks will be processed in accordance

with the balance available as of December 14?
A: Yes, sir.
Q: And naturally you will place there "drawn against

insufficient funds, December 14, 1983"?
A: Yes, sir.
Q: Are you sure about that?
A: Yes, sir . . . (tsn, September 9, 1988, p. 14) 30
Obviously witness Rionisto was merely confused as to the dates (December 14

and 15) because it did not jibe with his previous testimony, wherein he
categorically stated that "the checks will now be processed as the Citytrust
Computer at around 3:00 in the morning of December 14 (sic) but it will be
processed for balance of Citytrust as of December 14 because for one, we have
not opened on December 15 at 3:00 o'clock. Under the clearing house rules, we
are supposed to process it on the date it was presented for
clearing." 31 Analyzing the procedure he had previously explained, and analyzing
his testimony in its entirety and not in truncated portions, it would logically and
ineluctably appear that he actually meant December 15, and not December 14.
In the early morning of every business day, prior to banking hours, the various
branches of Citytrust would receive a computer printout called the "rejected
transactions" report from the head office. The report contains, among others, a
listing of "checks to be funded." When Citytrust, Shaw Boulevard branch,
received said report in the early morning of December 15, 1983, the two checks
involved were included in the "checks to be funded." That report was used by the
bank as its basis in dishonoring the two checks in question. Petitioner contends
that the bank erred when it did so because on previous occasions, the report was
merely used by the bank as a basis for determining whether or not it was
necessary to notify them of the need to deposit certain amounts in their accounts.
Amy Belen Rogado, a bank employee, testified that she would normally copy the
details stated in the report and transfer in on a "pink slip." These pink slips were

then given to George Moran. In turn, George Moran testified that he would
deposit the necessary funds stated in the pink slips. As a matter of fact, so
petitioner asseverated, not a single check written on the notices was ever
dishonored after he had funded said checks with the bank. Thus, petitioner
argues, the checks were not yet dishonored after the bank received the report in
the early morning of December 15, 1983.
Said argument does not persuade. If ever petitioners on previous occasions were
given notices every time a check was presented for clearing and payment and
there were no adequate funds in their accounts, these were, at most, mere
accommodations on the part of respondent bank. It was not a requirement or a
general banking practice, hence non-compliance therewith could not lay the bank
open to blame or rebuke. Legally, the bank had all the right to dishonor the
checks because there were no sufficient funds to speak of in the first place. If the
demand is by check, a drawer must have to his credit enough to cover the
demand. If his credit with the bank is less than the amount on the face of the
check, the bank may lawfully refuse payment. 32
Pursuing this matter further, the bank could also not be faulted for not accepting
either of the two checks. The first check issued was in the amount of P50,576.00,
while the second one was for P56,090.00. Savings Account No. 1307001372
then had a balance of only P26,104.30. This being the case, Citytrust could not
be expected to accept for payment either one of the two checks nor partially
honor one check.
A bank is under no obligation to make part payment on a check, up to only the

amount of the drawer's funds, where the check is drawn for an amount larger
than what the drawer has on deposit. Such a practice of paying checks in part
has never existed. Upon partial payment, the check holder could not be called
upon to surrender the check, and the bank would be without a voucher affording
a certain means of showing the payment. The rule is based on commercial
convenience, and any rule that would work such manifest inconvenience should
not be recognized. A check is intended not only to transfer a right to the amount
named in it, but to serve the further purpose of affording evidence for the bank of
the payment of such amount when the check is taken up. 33
On the other hand, assuming arguendo that Savings Account No. 1037002387,
which is not covered by a pre-arranged automatic transfer agreement, had
enough amount deposited to cover both checks (which is not so in this case), the
bank still had no obligation to honor said checks as there was then no authority
given to it to make the transfer of funds. Where a depositor has two accounts
with a bank, an open account and a savings account, and draws a check upon

the open account for more money than the account contains, the bank may
rightfully refuse to pay the check, and is under no duty to make up the deficiency
from the savings account. 34
We are agree with respondent Court of Appeals in its assessment and

interpretation of the nature of the letter of Citytrust to Petrophil, dated December
16, 1983. As aptly and correctly stated by said court, ". . . the letter is not an
admission of liability as it was written merely to maintain the goodwill and
continued patronage of plaintiff-appellants. (This) cannot be characterized as
baseless, considering the totality of the circumstances surrounding its writing." 35
In the present case, the actions taken by the bank after the incident clearly show
that there was neither malice nor bad faith, but rather a clear intent to mollify an
obviously agitated client. Raul Diaz, the branch manager, even went for this
purpose to the Moran residence to facilitate their application for a manager's
check. Later, he went to the Petrophil Corporation to personally redeem the
checks. Still later, the letter was sent by respondent bank to Petrophil explaining
that the dishonor of the checks was due to "operational error." However, we
reiterate, it would be a mistake to construe that letter as an admission of guilt on
the part of the bank. It knew that it was confronted with a client who obviously
was not willing to admit any fault on his part, although the facts show otherwise.
Thus, respondent bank ran the risk of losing the business of an important and
influential member of the financial community if it did not do anything to assuage
the feelings of petitioners.
It will be recalled that the credit standing of the Morans with Petrophil Corporation
was involved, which fact, more than anything, displeased them, to say the least.
On demand of petitioners that their names be cleared, the bank considered it
more prudent to send the letter. It never realized that it would thereafter be used
by petitioners as one of the bases of their legal action. It will be noted that there
was no reason for the bank to send the letter to Petrophil Corporation since the
latter was not a client nor was it demanding any explanation. Clearly, therefore,
the letter was merely intended to accommodate the request of the Morans and
was part of the series of damage-control measures taken by the bank to placate
petitioners.
Respondent Court of Appeals perceptively observed that "all these somehow

pacified plaintiffs-appellants (herein petitioners) for they did not thereafter take
immediate punitive action against the defendant-appellee (herein private
respondent). As pointed out by the court a quo, it took plaintiffs-appellants about
six (6) months after the dishonor of the checks to demand that defendant-
appellee pay them P1,000,000.00 as damages. At that time, plaintiffs-appellants

had discovered the letter of Mr. Diaz attributing the dishonor of their checks to
'operational error'. The attempt to unduly ride on the letter of Mr. Diaz speaks for
itself." 36
On the above premises which irresistibly commend themselves to our

acceptance, we find no cogent and sufficient to award actual, moral, or
exemplary damages to petitioners. Although we take judicial notice of the fact
that there is a fiduciary relationship between a bank and its depositors, as well as
the extent of diligence expected of it in handling the accounts entrusted to its
care, 37 the bank may not be held responsible for such damages in the absence
of fraud, bad faith, malice, or wanton attitude. 38
WHEREFORE, finding no reversible error in the judgment appealed from, the

same is hereby AFFIRMED, with costs against petitioners.
SO ORDERED.

SECOND DIVISION
G.R. No. 97753 August 10, 1992
CALTEX (PHILIPPINES), INC., petitioner,

vs.
COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents.
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);
CTDCTD
DatesSerial Nos.QuantityAmount
22 Feb. 82 90101 to 90120 20 P80,000

26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
——— ————

Total 280 P1,120,000
===== ========
2. Angel dela Cruz delivered the said certificates of time (CTDs) to

herein plaintiff in connection with his purchased of fuel products
from the latter (Original Record, p. 208).
3. Sometime in March 1982, Angel dela Cruz informed Mr.

Timoteo Tiangco, the Sucat Branch Manger, that he lost all the
certificates of time deposit in dispute. Mr. Tiangco advised said
depositor to execute and submit a notarized Affidavit of Loss, as
required by defendant bank's procedure, if he desired replacement
of said lost CTDs (TSN, February 9, 1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed and delivered to

defendant bank the required Affidavit of Loss (Defendant's Exhibit
281). On the basis of said affidavit of loss, 280 replacement CTDs
were issued in favor of said depositor (Defendant's Exhibits 282-
561).
5. On March 25, 1982, Angel dela Cruz negotiated and obtained a

loan from defendant bank in the amount of Eight Hundred Seventy
Five Thousand Pesos (P875,000.00). On the same date, said
depositor executed a notarized Deed of Assignment of Time
Deposit (Exhibit 562) which stated, among others, that he (de la
Cruz) surrenders to defendant bank "full control of the indicated
time deposits from and after date" of the assignment and further
authorizes said bank to pre-terminate, set-off and "apply the said
time deposits to the payment of whatever amount or amounts may
be due" on the loan upon its maturity (TSN, February 9, 1987, pp.
60-62).
6. Sometime in November, 1982, Mr. Aranas, Credit Manager of

plaintiff Caltex (Phils.) Inc., went to the defendant bank's Sucat
branch and presented for verification the CTDs declared lost by
Angel dela Cruz alleging that the same were delivered to herein
plaintiff "as security for purchases made with Caltex Philippines,
Inc." by said depositor (TSN, February 9, 1987, pp. 54-68).
7. On November 26, 1982, defendant received a letter

(Defendant's Exhibit 563) from herein plaintiff formally informing it

of its possession of the CTDs in question and of its decision to
pre-terminate the same.
8. On December 8, 1982, plaintiff was requested by herein

defendant to furnish the former "a copy of the document
evidencing the guarantee agreement with Mr. Angel dela Cruz" as
well as "the details of Mr. Angel dela Cruz" obligation against
which plaintiff proposed to apply the time deposits (Defendant's
Exhibit 564).
9. No copy of the requested documents was furnished herein

defendant.
10. Accordingly, defendant bank rejected the plaintiff's demand

and claim for payment of the value of the CTDs in a letter dated
February 7, 1983 (Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the defendant
bank matured and fell due and on August 5, 1983, the latter set-off
and applied the time deposits in question to the payment of the
matured loan (TSN, February 9, 1987, pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant complaint,

praying that defendant bank be ordered to pay it the aggregate
value of the certificates of time deposit of P1,120,000.00 plus
accrued interest and compounded interest therein at 16% per
annum, moral and exemplary damages as well as attorney's fees.
After trial, the court a quo rendered its decision dismissing the
instant complaint. 3
On appeal, as earlier stated, respondent court affirmed the lower court's

dismissal of the complaint, hence this petition wherein petitioner faults
respondent court in ruling (1) that the subject certificates of deposit are non-
negotiable despite being clearly negotiable instruments; (2) that petitioner did not
become a holder in due course of the said certificates of deposit; and (3) in
disregarding the pertinent provisions of the Code of Commerce relating to lost
instruments payable to bearer. 4
The instant petition is bereft of merit.

A sample text of the certificates of time deposit is reproduced below to provide a
better understanding of the issues involved in this recourse.
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in

this Bank the sum of PESOS: FOUR THOUSAND
ONLY, SECURITY BANK SUCAT OFFICE P4,000
& 00 CTS Pesos, Philippine Currency, repayable to
said depositor 731 days. after date, upon
presentation and surrender of this certificate, with
interest at the rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)
—————————— ———————————
AUTHORIZED SIGNATURES 5
Respondent court ruled that the CTDs in question are non-negotiable

instruments, nationalizing as follows:
. . . While it may be true that the word "bearer" appears rather

boldly in the CTDs issued, it is important to note that after the
word "BEARER" stamped on the space provided supposedly for
the name of the depositor, the words "has deposited" a certain
amount follows. The document further provides that the amount
deposited shall be "repayable to said depositor" on the period
indicated. Therefore, the text of the instrument(s) themselves
manifest with clarity that they are payable, not to whoever purports
to be the "bearer" but only to the specified person indicated
therein, the depositor. In effect, the appellee bank acknowledges
its depositor Angel dela Cruz as the person who made the deposit

and further engages itself to pay said depositor the amount
indicated thereon at the stipulated date. 6
We disagree with these findings and conclusions, and hereby hold that the CTDs
in question are negotiable instruments. Section 1 Act No. 2031, otherwise known
as the Negotiable Instruments Law, enumerates the requisites for an instrument
to become negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum

certain in money;
(c) Must be payable on demand, or at a fixed or determinable

future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be

named or otherwise indicated therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for
negotiability. The parties' bone of contention is with regard to requisite (d) set
forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's Branch
Manager way back in 1982, testified in open court that the depositor reffered to in
the CTDs is no other than Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are saying that

per books of the bank, the depositor referred (sic)
in these certificates states that it was Angel dela
Cruz?
witness:
a Yes, your Honor, and we have the record to show

that Angel dela Cruz was the one who cause (sic)
the amount.

Atty. Calida:
q And no other person or entity or company, Mr.

Witness?
witness:
a None, your Honor. 7
xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor identified in all

of these certificates of time deposit insofar as the
bank is concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability of an

instrument is determined from the writing, that is, from the face of the instrument
itself.9 In the construction of a bill or note, the intention of the parties is to control,
if it can be legally ascertained. 10 While the writing may be read in the light of
surrounding circumstances in order to more perfectly understand the intent and
meaning of the parties, yet as they have constituted the writing to be the only
outward and visible expression of their meaning, no other words are to be added
to it or substituted in its stead. The duty of the court in such case is to ascertain,
not what the parties may have secretly intended as contradistinguished from
what their words express, but what is the meaning of the words they have used.
What the parties meant must be determined by what they said. 11
Contrary to what respondent court held, the CTDs are negotiable instruments.
The documents provide that the amounts deposited shall be repayable to the
depositor. And who, according to the document, is the depositor? It is the
"bearer." The documents do not say that the depositor is Angel de la Cruz and
that the amounts deposited are repayable specifically to him. Rather, the

amounts are to be repayable to the bearer of the documents or, for that matter,
whosoever may be the bearer at the time of presentment.
If it was really the intention of respondent bank to pay the amount to Angel de la
Cruz only, it could have with facility so expressed that fact in clear and
categorical terms in the documents, instead of having the word "BEARER"
stamped on the space provided for the name of the depositor in each CTD. On
the wordings of the documents, therefore, the amounts deposited are repayable
to whoever may be the bearer thereof. Thus, petitioner's aforesaid witness
merely declared that Angel de la Cruz is the depositor "insofar as the bank is
concerned," but obviously other parties not privy to the transaction between them
would not be in a position to know that the depositor is not the bearer stated in
the CTDs. Hence, the situation would require any party dealing with the CTDs to
go behind the plain import of what is written thereon to unravel the agreement of
the parties thereto through facts aliunde. This need for resort to extrinsic
evidence is what is sought to be avoided by the Negotiable Instruments Law and
calls for the application of the elementary rule that the interpretation of obscure
words or stipulations in a contract shall not favor the party who caused the
obscurity. 12
The next query is whether petitioner can rightfully recover on the CTDs. This
time, the answer is in the negative. The records reveal that Angel de la Cruz,
whom petitioner chose not to implead in this suit for reasons of its own, delivered
the CTDs amounting to P1,120,000.00 to petitioner without informing respondent
bank thereof at any time. Unfortunately for petitioner, although the CTDs are
bearer instruments, a valid negotiation thereof for the true purpose and
agreement between it and De la Cruz, as ultimately ascertained, requires both
delivery and indorsement. For, although petitioner seeks to deflect this fact, the
CTDs were in reality delivered to it as a security for De la Cruz' purchases of its
fuel products. Any doubt as to whether the CTDs were delivered as payment for
the fuel products or as a security has been dissipated and resolved in favor of the
latter by petitioner's own authorized and responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank,

J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These certificates of deposit
were negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel
products" (Emphasis ours.) 13 This admission is conclusive upon petitioner, its
protestations notwithstanding. Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it, and cannot be
denied or disproved as against the person relying thereon. 14 A party may not go
back on his own acts and representations to the prejudice of the other party who
relied upon them. 15 In the law of evidence, whenever a party has, by his own

declaration, act, or omission, intentionally and deliberately led another to believe
a particular thing true, and to act upon such belief, he cannot, in any litigation
arising out of such declaration, act, or omission, be permitted to falsify it. 16
If it were true that the CTDs were delivered as payment and not as security,
petitioner's credit manager could have easily said so, instead of using the words
"to guarantee" in the letter aforequoted. Besides, when respondent bank, as
defendant in the court below, moved for a bill of particularity therein 17 praying,
among others, that petitioner, as plaintiff, be required to aver with sufficient
definiteness or particularity (a) the due date or dates of payment of the alleged
indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a
receipt showing that the CTDs were delivered to it by De la Cruz as payment of
the latter's alleged indebtedness to it, plaintiff corporation opposed the
motion. 18 Had it produced the receipt prayed for, it could have proved, if such
truly was the fact, that the CTDs were delivered as payment and not as security.
Having opposed the motion, petitioner now labors under the presumption that
evidence willfully suppressed would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated Realty

Corporation, et al. vs. Philippine National Bank, et al. 20 is apropos:
. . . Adverting again to the Court's pronouncements in Lopez,

supra, we quote therefrom:
The character of the transaction between the

parties is to be determined by their intention,
regardless of what language was used or what the
form of the transfer was. If it was intended to
secure the payment of money, it must be construed
as a pledge; but if there was some other intention, it
is not a pledge. However, even though a transfer, if
regarded by itself, appears to have been absolute,
its object and character might still be qualified and
explained by contemporaneous writing declaring it
to have been a deposit of the property as collateral
security. It has been said that a transfer of property
by the debtor to a creditor, even if sufficient on its
face to make an absolute conveyance, should be
treated as a pledge if the debt continues in
inexistence and is not discharged by the transfer,
and that accordingly the use of the terms ordinarily
importing conveyance of absolute ownership will

not be given that effect in such a transaction if they
are also commonly used in pledges and mortgages
and therefore do not unqualifiedly indicate a
transfer of absolute ownership, in the absence of
clear and unambiguous language or other
circumstances excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question.
Under the Negotiable Instruments Law, an instrument is negotiated when it is
transferred from one person to another in such a manner as to constitute the
transferee the holder thereof, 21 and a holder may be the payee or indorsee of a
bill or note, who is in possession of it, or the bearer thereof. 22 In the present
case, however, there was no negotiation in the sense of a transfer of the legal
title to the CTDs in favor of petitioner in which situation, for obvious reasons,
mere delivery of the bearer CTDs would have sufficed. Here, the delivery thereof
only as security for the purchases of Angel de la Cruz (and we even disregard
the fact that the amount involved was not disclosed) could at the most constitute
petitioner only as a holder for value by reason of his lien. Accordingly, a
negotiation for such purpose cannot be effected by mere delivery of the
instrument since, necessarily, the terms thereof and the subsequent disposition
of such security, in the event of non-payment of the principal obligation, must be
contractually provided for.
The pertinent law on this point is that where the holder has a lien on the
instrument arising from contract, he is deemed a holder for value to the extent of
his lien. 23 As such holder of collateral security, he would be a pledgee but the
requirements therefor and the effects thereof, not being provided for by the
Negotiable Instruments Law, shall be governed by the Civil Code provisions on
pledge of incorporeal rights, 24 which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments,

. . . may also be pledged. The instrument proving the right pledged
shall be delivered to the creditor, and if negotiable, must be
indorsed.
Art. 2096. A pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do not
appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the
factual findings of respondent court quoted at the start of this opinion show that
petitioner failed to produce any document evidencing any contract of pledge or

guarantee agreement between it and Angel de la Cruz. 25 Consequently, the
mere delivery of the CTDs did not legally vest in petitioner any right effective
against and binding upon respondent bank. The requirement under Article 2096
aforementioned is not a mere rule of adjective law prescribing the mode whereby
proof may be made of the date of a pledge contract, but a rule of substantive law
prescribing a condition without which the execution of a pledge contract cannot
affect third persons adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la Cruz in
favor of respondent bank was embodied in a public instrument. 27 With regard to
this other mode of transfer, the Civil Code specifically declares:
Art. 1625. An assignment of credit, right or action shall produce no

effect as against third persons, unless it appears in a public
instrument, or the instrument is recorded in the Registry of
Property in case the assignment involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily,

petitioner, whether as purchaser, assignee or lien holder of the CTDs, neither
proved the amount of its credit or the extent of its lien nor the execution of any
public instrument which could affect or bind private respondent. Necessarily,
therefore, as between petitioner and respondent bank, the latter has definitely the
better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question of
whether or not private respondent observed the requirements of the law in the
case of lost negotiable instruments and the issuance of replacement certificates
therefor, on the ground that petitioner failed to raised that issue in the lower
court. 28
On this matter, we uphold respondent court's finding that the aspect of alleged
negligence of private respondent was not included in the stipulation of the parties
and in the statement of issues submitted by them to the trial court. 29 The issues
agreed upon by them for resolution in this case are:
1. Whether or not the CTDs as worded are negotiable

instruments.
2. Whether or not defendant could legally apply the amount

covered by the CTDs against the depositor's loan by virtue of the
assignment (Annex "C").

3. Whether or not there was legal compensation or set off
involving the amount covered by the CTDs and the depositor's
outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to preterminate

the CTDs before the maturity date provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney's

fees and litigation expenses from each other.
As respondent court correctly observed, with appropriate citation of some

doctrinal authorities, the foregoing enumeration does not include the issue of
negligence on the part of respondent bank. An issue raised for the first time on
appeal and not raised timely in the proceedings in the lower court is barred by
estoppel. 30 Questions raised on appeal must be within the issues framed by the
parties and, consequently, issues not raised in the trial court cannot be raised for
the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to the
disposition of a case are properly raised. Thus, to obviate the element of
surprise, parties are expected to disclose at a pre-trial conference all issues of
law and fact which they intend to raise at the trial, except such as may involve
privileged or impeaching matters. The determination of issues at a pre-trial
conference bars the consideration of other questions on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed negligence

may be considered encompassed by the issues on its right to preterminate and
receive the proceeds of the CTDs would be tantamount to saying that petitioner
could raise on appeal any issue. We agree with private respondent that the broad
ultimate issue of petitioner's entitlement to the proceeds of the questioned
certificates can be premised on a multitude of other legal reasons and causes of
action, of which respondent bank's supposed negligence is only one. Hence,
petitioner's submission, if accepted, would render a pre-trial delimitation of issues
a useless exercise. 33
Still, even assuming arguendo that said issue of negligence was raised in the
court below, petitioner still cannot have the odds in its favor. A close scrutiny of
the provisions of the Code of Commerce laying down the rules to be followed in
case of lost instruments payable to bearer, which it invokes, will reveal that said

provisions, even assuming their applicability to the CTDs in the case at bar, are
merely permissive and not mandatory. The very first article cited by petitioner
speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it may
be, may apply to the judge or court of competent jurisdiction,
asking that the principal, interest or dividends due or about to
become due, be not paid a third person, as well as in order to
prevent the ownership of the instrument that a duplicate be issued
him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory but
discretionary on the part of the "dispossessed owner" to apply to the judge or
court of competent jurisdiction for the issuance of a duplicate of the lost
instrument. Where the provision reads "may," this word shows that it is not
mandatory but discretional. 34 The word "may" is usually permissive, not
mandatory. 35 It is an auxiliary verb indicating liberty, opportunity, permission and
possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of

the Code of Commerce, on which petitioner seeks to anchor respondent bank's
supposed negligence, merely established, on the one hand, a right of recourse in
favor of a dispossessed owner or holder of a bearer instrument so that he may
obtain a duplicate of the same, and, on the other, an option in favor of the party
liable thereon who, for some valid ground, may elect to refuse to issue a
replacement of the instrument. Significantly, none of the provisions cited by
petitioner categorically restricts or prohibits the issuance a duplicate or
replacement instrument sans compliance with the procedure outlined therein,
and none establishes a mandatory precedent requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is

DENIED and the appealed decision is hereby AFFIRMED.
SO ORDERED.

SECOND DIVISION
G.R. No. L-40824 February 23, 1989
GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner,

vs.
COURT OF APPEALS and MR. & MRS. ISABELO R. RACHO, respondents.
REGALADO , J.:
Private respondents, Mr. and Mrs. Isabelo R. Racho, together with the spouses
Mr. and Mrs Flaviano Lagasca, executed a deed of mortgage, dated November
13, 1957, in favor of petitioner Government Service Insurance System
(hereinafter referred to as GSIS) and subsequently, another deed of mortgage,
dated April 14, 1958, in connection with two loans granted by the latter in the
sums of P 11,500.00 and P 3,000.00, respectively. 1 A parcel of land covered by
Transfer Certificate of Title No. 38989 of the Register of Deed of Quezon City,
co-owned by said mortgagor spouses, was given as security under the aforesaid
two deeds. 2 They also executed a 'promissory note" which states in part:
... for value received, we the undersigned ... JOINTLY,

SEVERALLY and SOLIDARILY, promise to pay the
GOVERNMENT SERVICE INSURANCE SYSTEM the sum of . . .
(P 11,500.00) Philippine Currency, with interest at the rate of six
(6%) per centum compounded monthly payable in . . . (120)equal
monthly installments of . . . (P 127.65) each. 3
On July 11, 1961, the Lagasca spouses executed an instrument denominated

"Assumption of Mortgage" under which they obligated themselves to assume the
aforesaid obligation to the GSIS and to secure the release of the mortgage
covering that portion of the land belonging to herein private respondents and
which was mortgaged to the GSIS. 4 This undertaking was not fulfilled. 5
Upon failure of the mortgagors to comply with the conditions of the mortgage,
particularly the payment of the amortizations due, GSIS extrajudicially foreclosed
the mortgage and caused the mortgaged property to be sold at public auction on
December 3, 1962. 6

More than two years thereafter, or on August 23, 1965, herein private
respondents filed a complaint against the petitioner and the Lagasca spouses in
the former Court of
First Instance of Quezon City, 7 praying that the extrajudicial foreclosure "made
on, their property and all other documents executed in relation thereto in favor of
the Government Service Insurance System" be declared null and void. It was
further prayed that they be allowed to recover said property, and/or the GSIS be
ordered to pay them the value thereof, and/or they be allowed to repurchase the
land. Additionally, they asked for actual and moral damages and attorney's fees.
In their aforesaid complaint, private respondents alleged that they signed the
mortgage contracts not as sureties or guarantors for the Lagasca spouses but
they merely gave their common property to the said co-owners who were solely
benefited by the loans from the GSIS.
The trial court rendered judgment on February 25, 1968 dismissing the complaint
for failure to establish a cause of action. 8
Said decision was reversed by the respondent Court of Appeals 9 which held
that:
... although formally they are co-mortgagors, they are so only for
accomodation (sic) in that the GSIS required their consent to the
mortgage of the entire parcel of land which was covered with only
one certificate of title, with full knowledge that the loans secured
thereby were solely for the benefit of the appellant (sic) spouses
who alone applied for the loan.
xxxx
'It is, therefore, clear that as against the GSIS, appellants have a
valid cause for having foreclosed the mortgage without having
given sufficient notice to them as required either as to their
delinquency in the payment of amortization or as to the
subsequent foreclosure of the mortgage by reason of any default
in such payment. The notice published in the newspaper, 'Daily
Record (Exh. 12) and posted pursuant to Sec 3 of Act 3135 is not
the notice to which the mortgagor is entitled upon the application
being made for an extrajudicial foreclosure. ... 10

On the foregoing findings, the respondent court consequently decreed that-
In view of all the foregoing, the judgment appealed from is hereby

reversed, and another one entered (1) declaring the foreclosure of
the mortgage void insofar as it affects the share of the appellants;
(2) directing the GSIS to reconvey to appellants their share of the
mortgaged property, or the value thereof if already sold to third
party, in the sum of P 35,000.00, and (3) ordering the appellees
Flaviano Lagasca and Esther Lagasca to pay the appellants the
sum of P 10,00.00 as moral damages, P 5,000.00 as attorney's
fees, and costs. 11
The case is now before us in this petition for review.
In submitting their case to this Court, both parties relied on the provisions of
Section 29 of Act No. 2031, otherwise known as the Negotiable Instruments Law,
which provide that an accommodation party is one who has signed an instrument
as maker, drawer, acceptor of indorser without receiving value therefor, but is
held liable on the instrument to a holder for value although the latter knew him to
be only an accommodation party.
This approach of both parties appears to be misdirected and their reliance

misplaced. The promissory note hereinbefore quoted, as well as the mortgage
deeds subject of this case, are clearly not negotiable instruments. These
documents do not comply with the fourth requisite to be considered as such
under Section 1 of Act No. 2031 because they are neither payable to order nor to
bearer. The note is payable to a specified party, the GSIS. Absent the aforesaid
requisite, the provisions of Act No. 2031 would not apply; governance shall be
afforded, instead, by the provisions of the Civil Code and special laws on
mortgages.
As earlier indicated, the factual findings of respondent court are that private
respondents signed the documents "only to give their consent to the mortgage as
required by GSIS", with the latter having full knowledge that the loans secured
thereby were solely for the benefit of the Lagasca spouses. 12 This appears to be
duly supported by sufficient evidence on record. Indeed, it would be unusual for
the GSIS to arrange for and deduct the monthly amortizations on the loans from
the salary as an army officer of Flaviano Lagasca without likewise affecting
deductions from the salary of Isabelo Racho who was also an army sergeant.
Then there is also the undisputed fact, as already stated, that the Lagasca
spouses executed a so-called "Assumption of Mortgage" promising to exclude
private respondents and their share of the mortgaged property from liability to the

mortgagee. There is no intimation that the former executed such instrument for a
consideration, thus confirming that they did so pursuant to their original
agreement.
The parol evidence rule 13 cannot be used by petitioner as a shield in this case
for it is clear that there was no objection in the court below regarding the
admissibility of the testimony and documents that were presented to prove that
the private respondents signed the mortgage papers just to accommodate their
co-owners, the Lagasca spouses. Besides, the introduction of such evidence falls
under the exception to said rule, there being allegations in the complaint of
private respondents in the court below regarding the failure of the mortgage
contracts to express the true agreement of the parties. 14
However, contrary to the holding of the respondent court, it cannot be said that
private respondents are without liability under the aforesaid mortgage contracts.
The factual context of this case is precisely what is contemplated in the last
paragraph of Article 2085 of the Civil Code to the effect that third persons who
are not parties to the principal obligation may secure the latter by pledging or
mortgaging their own property
So long as valid consent was given, the fact that the loans were solely for the
benefit of the Lagasca spouses would not invalidate the mortgage with respect to
private respondents' share in the property. In consenting thereto, even assuming
that private respondents may not be assuming personal liability for the debt, their
share in the property shall nevertheless secure and respond for the performance
of the principal obligation. The parties to the mortgage could not have intended
that the same would apply only to the aliquot portion of the Lagasca spouses in
the property, otherwise the consent of the private respondents would not have
been required.
The supposed requirement of prior demand on the private respondents would not
be in point here since the mortgage contracts created obligations with specific
terms for the compliance thereof. The facts further show that the private
respondents expressly bound themselves as solidary debtors in the promissory
note hereinbefore quoted.
Coming now to the extrajudicial foreclosure effected by GSIS, We cannot agree

with the ruling of respondent court that lack of notice to the private respondents
of the extrajudicial foreclosure sale impairs the validity thereof. In Bonnevie, et al.
vs. Court of appeals, et al., 15 the Court ruled that Act No. 3135, as amended,
does not require personal notice on the mortgagor, quoting the requirement on
notice in such cases as follows:

Section 3. Notice shall be given by posting notices of sale for not
less than twenty days in at least three public places of the
municipality where the property is situated, and if such property is
worth more than four hundred pesos, such notice shall also be
published once a week for at least three consecutive weeks in a
newspaper of general circulation in the municipality or city.
There is no showing that the foregoing requirement on notice was not complied
with in the foreclosure sale complained of .
The respondent court, therefore, erred in annulling the mortgage insofar as it

affected the share of private respondents or in directing reconveyance of their
property or the payment of the value thereof Indubitably, whether or not private
respondents herein benefited from the loan, the mortgage and the extrajudicial
foreclosure proceedings were valid.
WHEREFORE, judgment is hereby rendered REVERSING the decision of the

respondent Court of Appeals and REINSTATING the decision of the court a
quo in Civil Case No. Q-9418 thereof.
SO ORDERED.

THIRD DIVISION
G.R. No. 76788 January 22, 1990
JUANITA SALAS, petitioner,

vs.
HON. COURT OF APPEALS and FIRST FINANCE & LEASING
Assailed in this petition for review on certiorari is the decision of the Court of
Appeals in C.A.-G.R. CV No. 00757 entitled "Filinvest Finance & Leasing
Corporation v. Salas", which modified the decision of the Regional Trial Court of
San Fernando, Pampanga in Civil Case No. 5915, a collection suit between the
same parties.
Records disclose that on February 6, 1980, Juanita Salas (hereinafter referred to

as petitioner) bought a motor vehicle from the Violago Motor Sales Corporation
(VMS for brevity) for P58,138.20 as evidenced by a promissory note. This note
was subsequently endorsed to Filinvest Finance & Leasing Corporation
(hereinafter referred to as private respondent) which financed the purchase.
Petitioner defaulted in her installments beginning May 21, 1980 allegedly due to
a discrepancy in the engine and chassis numbers of the vehicle delivered to her
and those indicated in the sales invoice, certificate of registration and deed of
chattel mortgage, which fact she discovered when the vehicle figured in an
accident on 9 May 1980.
This failure to pay prompted private respondent to initiate Civil Case No. 5915 for
a sum of money against petitioner before the Regional Trial Court of San
Fernando, Pampanga.
In its decision dated September 10, 1982, the trial court held, thus:
WHEREFORE, and in view of all the foregoing, judgment is hereby

rendered ordering the defendant to pay the plaintiff the sum of
P28,414.40 with interest thereon at the rate of 14% from October 2, 1980
until the said sum is fully paid; and the further amount of P1,000.00 as
attorney's fees.
The counterclaim of defendant is dismissed.

With costs against defendant. 1
Both petitioner and private respondent appealed the aforesaid decision to the
Court of Appeals.
Imputing fraud, bad faith and misrepresentation against VMS for having delivered
a different vehicle to petitioner, the latter prayed for a reversal of the trial court's
decision so that she may be absolved from the obligation under the contract.
On October 27, 1986, the Court of Appeals rendered its assailed decision, the
pertinent portion of which is quoted hereunder:
The allegations, statements, or admissions contained in a pleading are

conclusive as against the pleader. A party cannot subsequently take a
position contradictory of, or inconsistent with his pleadings (Cunanan vs.
Amparo, 80 Phil. 227). Admissions made by the parties in the pleadings,
or in the course of the trial or other proceedings, do not require proof and
cannot be contradicted unless previously shown to have been made
through palpable mistake (Sec. 2, Rule 129, Revised Rules of Court; Sta.
Ana vs. Maliwat, L-23023, Aug. 31, 1968, 24 SCRA 1018).
When an action or defense is founded upon a written instrument, copied

in or attached to the corresponding pleading as provided in the preceding
section, the genuineness and due execution of the instrument shall be
deemed admitted unless the adverse party, under oath, specifically
denied them, and sets forth what he claims to be the facts (Sec. 8, Rule
8, Revised Rules of Court; Hibbered vs. Rohde and McMillian, 32 Phil.
476).
A perusal of the evidence shows that the amount of P58,138.20 stated in

the promissory note is the amount assumed by the plaintiff in financing
the purchase of defendant's motor vehicle from the Violago Motor Sales
Corp., the monthly amortization of winch is Pl,614.95 for 36 months.
Considering that the defendant was able to pay twice (as admitted by the
plaintiff, defendant's account became delinquent only beginning May,
1980) or in the total sum of P3,229.90, she is therefore liable to pay the
remaining balance of P54,908.30 at l4% per annum from October 2, 1980
until full payment.
WHEREFORE, considering the foregoing, the appealed decision is

hereby modified ordering the defendant to pay the plaintiff the sum of

P54,908.30 at 14% per annum from October 2, 1980 until full payment.
The decision is AFFIRMED in all other respects. With costs to
defendant. 2
Petitioner's motion for reconsideration was denied; hence, the present recourse.
In the petition before us, petitioner assigns twelve (12) errors which focus on the
alleged fraud, bad faith and misrepresentation of Violago Motor Sales
Corporation in the conduct of its business and which fraud, bad faith and
misrepresentation supposedly released petitioner from any liability to private
respondent who should instead proceed against VMS. 3
Petitioner argues that in the light of the provision of the law on sales by
description 4 which she alleges is applicable here, no contract ever existed
between her and VMS and therefore none had been assigned in favor of private
respondent.
She contends that it is not necessary, as opined by the appellate court, to

implead VMS as a party to the case before it can be made to answer for
damages because VMS was earlier sued by her for "breach of contract with
damages" before the Regional Trial Court of Olongapo City, Branch LXXII,
docketed as Civil Case No. 2916-0. She cites as authority the decision therein
where the court originally ordered petitioner to pay the remaining balance of the
motor vehicle installments in the amount of P31,644.30 representing the
difference between the agreed consideration of P49,000.00 as shown in the
sales invoice and petitioner's initial downpayment of P17,855.70 allegedly
evidenced by a receipt. Said decision was however reversed later on, with the
same court ordering defendant VMS instead to return to petitioner the sum of
P17,855.70. Parenthetically, said decision is still pending consideration by the
First Civil Case Division of the Court of Appeals, upon an appeal by VMS,
docketed as AC-G.R. No. 02922. 5
Private respondent in its comment, prays for the dismissal of the petition and
counters that the issues raised and the allegations adduced therein are a mere
rehash of those presented and already passed upon in the court below, and that
the judgment in the "breach of contract" suit cannot be invoked as an authority as
the same is still pending determination in the appellate court.
We see no cogent reason to disturb the challenged decision.

The pivotal issue in this case is whether the promissory note in question is a
negotiable instrument which will bar completely all the available defenses of the
petitioner against private respondent.
Petitioner's liability on the promissory note, the due execution and genuineness
of which she never denied under oath is, under the foregoing factual milieu, as
inevitable as it is clearly established.
The records reveal that involved herein is not a simple case of assignment of
credit as petitioner would have it appear, where the assignee merely steps into
the shoes of, is open to all defenses available against and can enforce payment
only to the same extent as, the assignor-vendor.
Recently, in the case of Consolidated Plywood Industries Inc. v. IFC Leasing and
Acceptance Corp., 6 this Court had the occasion to clearly distinguish between a
negotiable and a non-negotiable instrument.
Among others, the instrument in order to be considered negotiable must contain

the so-called "words of negotiability — i.e., must be payable to "order" or
"bearer"". Under Section 8 of the Negotiable Instruments Law, there are only two
ways by which an instrument may be made payable to order. There must always
be a specified person named in the instrument and the bill or note is to be paid to
the person designated in the instrument or to any person to whom he has
indorsed and delivered the same. Without the words "or order or "to the order of",
the instrument is payable only to the person designated therein and is therefore
non-negotiable. Any subsequent purchaser thereof will not enjoy the advantages
of being a holder of a negotiable instrument, but will merely "step into the shoes"
of the person designated in the instrument and will thus be open to all defenses
available against the latter. Such being the situation in the above-cited case, it
was held that therein private respondent is not a holder in due course but a mere
assignee against whom all defenses available to the assignor may be raised. 7
In the case at bar, however, the situation is different. Indubitably, the basis of
private respondent's claim against petitioner is a promissory note which bears all
the earmarks of negotiability.
The pertinent portion of the note reads:
PROMISSORY NOTE
(MONTHLY)

P58,138.20
San Fernando, Pampanga, Philippines
Feb. 11, 1980
For value received, I/We jointly and severally, promise to pay Violago
Motor Sales Corporation or order, at its office in San
Fernando, Pampanga, the sum of FIFTY EIGHT THOUSAND ONE
HUNDRED THIRTY EIGHT & 201/100 ONLY (P58,138.20) Philippine
currency, which amount includes interest at 14% per annum based on the
diminishing balance, the said principal sum, to be payable, without need
of notice or demand, in installments of the amounts following and at the
dates hereinafter set forth, to wit: P1,614.95 monthly for "36" months due
and payable on the 21st day of each month starting March 21, 1980 thru
and inclusive of February 21, 1983. P_________ monthly for ______
months due and payable on the ______ day of each month starting
_____198__ thru and inclusive of _____, 198________ provided that
interest at 14% per annum shall be added on each unpaid installment
from maturity hereof until fully paid.
xxx xxx xxx
Maker; Co-Maker:
(SIGNED) JUANITA SALAS _________________
Address:
____________________ ____________________
WITNESSES
SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE

TAN # TAN #
PAY TO THE ORDER OF

FILINVEST FINANCE AND LEASING CORPORATION
VIOLAGO MOTOR SALES CORPORATION

BY: (SIGNED) GENEVEVA V. BALTAZAR
Cash Manager 8

A careful study of the questioned promissory note shows that it is a negotiable
instrument, having complied with the requisites under the law as follows: [a] it is
in writing and signed by the maker Juanita Salas; [b] it contains an unconditional
promise to pay the amount of P58,138.20; [c] it is payable at a fixed or
determinable future time which is "P1,614.95 monthly for 36 months due and
payable on the 21 st day of each month starting March 21, 1980 thru and
inclusive of Feb. 21, 1983;" [d] it is payable to Violago Motor Sales
Corporation, or order and as such, [e] the drawee is named or indicated with
certainty. 9
It was negotiated by indorsement in writing on the instrument itself payable to the

Order of Filinvest Finance and Leasing Corporation 10 and it is an indorsement of
the entire instrument. 11
Under the circumstances, there appears to be no question that Filinvest is a

holder in due course, having taken the instrument under the following conditions:
[a] it is complete and regular upon its face; [b] it became the holder thereof
before it was overdue, and without notice that it had previously been dishonored;
[c] it took the same in good faith and for value; and [d] when it was negotiated to
Filinvest, the latter had no notice of any infirmity in the instrument or defect in the
title of VMS Corporation. 12
Accordingly, respondent corporation holds the instrument free from any defect of
title of prior parties, and free from defenses available to prior parties among
themselves, and may enforce payment of the instrument for the full amount
thereof. 13 This being so, petitioner cannot set up against respondent the defense
of nullity of the contract of sale between her and VMS.
Even assuming for the sake of argument that there is an iota of truth in
petitioner's allegation that there was in fact deception made upon her in that the
vehicle she purchased was different from that actually delivered to her, this
matter cannot be passed upon in the case before us, where the VMS was never
impleaded as a party.
Whatever issue is raised or claim presented against VMS must be resolved in the
"breach of contract" case.
Hence, we reach a similar opinion as did respondent court when it held:
We can only extend our sympathies to the defendant (herein petitioner) in

this unfortunate incident. Indeed, there is nothing We can do as far as the

Violago Motor Sales Corporation is concerned since it is not a party in this
case. To even discuss the issue as to whether or not the Violago Motor
Sales Corporation is liable in the transaction in question would amount, to
denial of due process, hence, improper and unconstitutional. She should
have impleaded Violago Motor Sales.14
IN VIEW OF THE FOREGOING, the assailed decision is hereby AFFIRMED.

With costs against petitioner.
SO ORDERED.

SECOND DIVISION
G.R. No. 72593 April 30, 1987
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and

RODOLFO T. VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.
This is a petition for certiorari under Rule 45 of the Rules of Court which assails
on questions of law a decision of the Intermediate Appellate Court in AC-G.R. CV
No. 68609 dated July 17, 1985, as well as its resolution dated October 17, 1985,
denying the motion for reconsideration.
The antecedent facts culled from the petition are as follows:
The petitioner is a corporation engaged in the logging business. It had for its
program of logging activities for the year 1978 the opening of additional roads,
and simultaneous logging operations along the route of said roads, in its logging
concession area at Baganga, Manay, and Caraga, Davao Oriental. For this
purpose, it needed two (2) additional units of tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific

Company of Manila, through its sister company and marketing arm, Industrial
Products Marketing (the "seller-assignor"), a corporation dealing in tractors and
other heavy equipment business, offered to sell to petitioner-corporation two (2)
"Used" Allis Crawler Tractors, one (1) an HDD-21-B and the other an HDD-16-B.
In order to ascertain the extent of work to which the tractors were to be exposed,
(t.s.n., May 28, 1980, p. 44) and to determine the capability of the "Used" tractors
being offered, petitioner-corporation requested the seller-assignor to inspect the
job site. After conducting said inspection, the seller-assignor assured petitioner-
corporation that the "Used" Allis Crawler Tractors which were being offered were
fit for the job, and gave the corresponding warranty of ninety (90) days
performance of the machines and availability of parts. (t.s.n., May 28, 1980, pp.
59-66).
With said assurance and warranty, and relying on the seller-assignor's skill and
judgment, petitioner-corporation through petitioners Wee and Vergara, president
and vice- president, respectively, agreed to purchase on installment said two (2)

units of "Used" Allis Crawler Tractors. It also paid the down payment of Two
Hundred Ten Thousand Pesos (P210,000.00).
On April 5, 1978, the seller-assignor issued the sales invoice for the two 2) units
of tractors (Exh. "3-A"). At the same time, the deed of sale with chattel mortgage
with promissory note was executed (Exh. "2").
Simultaneously with the execution of the deed of sale with chattel mortgage with
promissory note, the seller-assignor, by means of a deed of assignment (E exh. "
1 "), assigned its rights and interest in the chattel mortgage in favor of the
respondent.
Immediately thereafter, the seller-assignor delivered said two (2) units of "Used"
tractors to the petitioner-corporation's job site and as agreed, the seller-assignor
stationed its own mechanics to supervise the operations of the machines.
Barely fourteen (14) days had elapsed after their delivery when one of the
tractors broke down and after another nine (9) days, the other tractor likewise
broke down (t.s.n., May 28, 1980, pp. 68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-
assignor of the fact that the tractors broke down and requested for the seller-
assignor's usual prompt attention under the warranty (E exh. " 5 ").
In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the
seller-assignor sent to the job site its mechanics to conduct the necessary repairs
(Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6-E"), but the tractors did not
come out to be what they should be after the repairs were undertaken because
the units were no longer serviceable (t. s. n., May 28, 1980, p. 78).
Because of the breaking down of the tractors, the road building and simultaneous
logging operations of petitioner-corporation were delayed and petitioner Vergara
advised the seller-assignor that the payments of the installments as listed in the
promissory note would likewise be delayed until the seller-assignor completely
fulfills its obligation under its warranty (t.s.n, May 28, 1980, p. 79).
Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee
asked the seller-assignor to pull out the units and have them reconditioned, and
thereafter to offer them for sale. The proceeds were to be given to the
respondent and the excess, if any, to be divided between the seller-assignor and

petitioner-corporation which offered to bear one-half (1/2) of the reconditioning
cost (E exh. " 7 ").
No response to this letter, Exhibit "7," was received by the petitioner-corporation

and despite several follow-up calls, the seller-assignor did nothing with regard to
the request, until the complaint in this case was filed by the respondent against
the petitioners, the corporation, Wee, and Vergara.
The complaint was filed by the respondent against the petitioners for the
recovery of the principal sum of One Million Ninety Three Thousand Seven
Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71), accrued interest of One
Hundred Fifty One Thousand Six Hundred Eighteen Pesos & 86/100
(P151,618.86) as of August 15, 1979, accruing interest thereafter at the rate of
twelve (12%) percent per annum, attorney's fees of Two Hundred Forty Nine
Thousand Eighty One Pesos & 71/100 (P249,081.7 1) and costs of suit.
The petitioners filed their amended answer praying for the dismissal of the
complaint and asking the trial court to order the respondent to pay the petitioners
damages in an amount at the sound discretion of the court, Twenty Thousand
Pesos (P20,000.00) as and for attorney's fees, and Five Thousand Pesos
(P5,000.00) for expenses of litigation. The petitioners likewise prayed for such
other and further relief as would be just under the premises.
In a decision dated April 20, 1981, the trial court rendered the following judgment:
WHEREFORE, judgment is hereby rendered:
1. ordering defendants to pay jointly and severally in their official

and personal capacities the principal sum of ONE MILLION
NINETY THREE THOUSAND SEVEN HUNDRED NINETY EIGHT
PESOS & 71/100 (P1,093,798.71) with accrued interest of ONE
HUNDRED FIFTY ONE THOUSAND SIX HUNDRED EIGHTEEN
PESOS & 86/100 (P151,618.,86) as of August 15, 1979 and
accruing interest thereafter at the rate of 12% per annum;
2. ordering defendants to pay jointly and severally attorney's fees

equivalent to ten percent (10%) of the principal and to pay the
costs of the suit.
Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)

On June 8, 1981, the trial court issued an order denying the motion for
reconsideration filed by the petitioners.
Thus, the petitioners appealed to the Intermediate Appellate Court and assigned
therein the following errors:
THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER

ATLANTIC GULF AND PACIFIC COMPANY OF MANILA DID NOT APPROVE
DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.
II
THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF-

APPELLEE IS A HOLDER IN DUE COURSE OF THE PROMISSORY NOTE
AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the challenged
decision affirming in toto the decision of the trial court. The pertinent portions of
the decision are as follows:
xxx xxx xxx
From the evidence presented by the parties on the issue of

warranty, We are of the considered opinion that aside from the
fact that no provision of warranty appears or is provided in the
Deed of Sale of the tractors and even admitting that in a contract
of sale unless a contrary intention appears, there is an implied
warranty, the defense of breach of warranty, if there is any, as in
this case, does not lie in favor of the appellants and against the
plaintiff-appellee who is the assignee of the promissory note and a
holder of the same in due course. Warranty lies in this case only
between Industrial Products Marketing and Consolidated Plywood
Industries, Inc. The plaintiff-appellant herein upon application by
appellant corporation granted financing for the purchase of the
questioned units of Fiat-Allis Crawler,Tractors.
xxx xxx xxx

Holding that breach of warranty if any, is not a defense available
to appellants either to withdraw from the contract and/or demand a
proportionate reduction of the price with damages in either case
(Art. 1567, New Civil Code). We now come to the issue as to
whether the plaintiff-appellee is a holder in due course of the
promissory note.
To begin with, it is beyond arguments that the plaintiff-appellee is

a financing corporation engaged in financing and receivable
discounting extending credit facilities to consumers and industrial,
commercial or agricultural enterprises by discounting or factoring
commercial papers or accounts receivable duly authorized
pursuant to R.A. 5980 otherwise known as the Financing Act.
A study of the questioned promissory note reveals that it is a

negotiable instrument which was discounted or sold to the IFC
Leasing and Acceptance Corporation for P800,000.00 (Exh. "A")
considering the following. it is in writing and signed by the maker;
it contains an unconditional promise to pay a certain sum of
money payable at a fixed or determinable future time; it is payable
to order (Sec. 1, NIL); the promissory note was negotiated when it
was transferred and delivered by IPM to the appellee and duly
endorsed to the latter (Sec. 30, NIL); it was taken in the conditions
that the note was complete and regular upon its face before the
same was overdue and without notice, that it had been previously
dishonored and that the note is in good faith and for value without
notice of any infirmity or defect in the title of IPM (Sec. 52, NIL);
that IFC Leasing and Acceptance Corporation held the instrument
free from any defect of title of prior parties and free from defenses
available to prior parties among themselves and may enforce
payment of the instrument for the full amount thereof against all
parties liable thereon (Sec. 57, NIL); the appellants engaged that
they would pay the note according to its tenor, and admit the
existence of the payee IPM and its capacity to endorse (Sec. 60,
NIL).
In view of the essential elements found in the questioned

promissory note, We opine that the same is legally and
conclusively enforceable against the defendants-appellants.
WHEREFORE, finding the decision appealed from according to

law and evidence, We find the appeal without merit and thus

affirm the decision in toto. With costs against the appellants. (pp.
50-55, Rollo)
The petitioners' motion for reconsideration of the decision of July 17, 1985 was
denied by the Intermediate Appellate Court in its resolution dated October 17,
1985, a copy of which was received by the petitioners on October 21, 1985.
Hence, this petition was filed on the following grounds:
I.
ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE

INSTRUMENT AS DEFINED UNDER THE LAW SINCE IT IS NEITHER
PAYABLE TO ORDER NOR TO BEARER.
II
THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A

MERE ASSIGNEE OF THE SUBJECT PROMISSORY NOTE.
III.
SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT

AND THE TRANSFER OF RIGHTS WAS THROUGH A MERE ASSIGNMENT,
THE PETITIONERS MAY RAISE AGAINST THE RESPONDENT ALL
DEFENSES THAT ARE AVAILABLE TO IT AS AGAINST THE SELLER-
ASSIGNOR, INDUSTRIAL PRODUCTS MARKETING.
IV.
THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE

PROMISSORY NOTE BECAUSE:
A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER

THE LAW;
B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE

SELLER-ASSIGNOR OF THE PROMISSORY NOTE.
V.

THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER-
ASSIGNOR IN FAVOR OF THE RESPONDENT DOES NOT CHANGE THE
NATURE OF THE TRANSACTION FROM BEING A SALE ON INSTALLMENTS
TO A PURE LOAN.
VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE

IN ANY COURT BECAUSE THE REQUISITE DOCUMENTARY STAMPS HAVE
NOT BEEN AFFIXED THEREON OR CANCELLED.
The petitioners prayed that judgment be rendered setting aside the decision
dated July 17, 1985, as well as the resolution dated October 17, 1985 and
dismissing the complaint but granting petitioners' counterclaims before the court
of origin.
On the other hand, the respondent corporation in its comment to the petition filed
on February 20, 1986, contended that the petition was filed out of time; that the
promissory note is a negotiable instrument and respondent a holder in due
course; that respondent is not liable for any breach of warranty; and finally, that
the promissory note is admissible in evidence.
The core issue herein is whether or not the promissory note in question is a
negotiable instrument so as to bar completely all the available defenses of the
petitioner against the respondent-assignee.
Preliminarily, it must be established at the outset that we consider the instant

petition to have been filed on time because the petitioners' motion for
reconsideration actually raised new issues. It cannot, therefore, be considered
pro- formal.
The petition is impressed with merit.
First, there is no question that the seller-assignor breached its express 90-day
warranty because the findings of the trial court, adopted by the respondent
appellate court, that "14 days after delivery, the first tractor broke down and 9
days, thereafter, the second tractor became inoperable" are sustained by the
records. The petitioner was clearly a victim of a warranty not honored by the
maker.
The Civil Code provides that:

ART. 1561. The vendor shall be responsible for warranty against
the hidden defects which the thing sold may have, should they
render it unfit for the use for which it is intended, or should they
diminish its fitness for such use to such an extent that, had the
vendee been aware thereof, he would not have acquired it or
would have given a lower price for it; but said vendor shall not be
answerable for patent defects or those which may be visible, or for
those which are not visible if the vendee is an expert who, by
reason of his trade or profession, should have known them.
ART. 1562. In a sale of goods, there is an implied warranty or

condition as to the quality or fitness of the goods, as follows:
(1) Where the buyer, expressly or by implication makes known to

the seller the particular purpose for which the goods are acquired,
and it appears that the buyer relies on the sellers skill or judge
judgment (whether he be the grower or manufacturer or not), there
is an implied warranty that the goods shall be reasonably fit for
such purpose;
xxx xxx xxx
ART. 1564. An implied warranty or condition as to the quality or

fitness for a particular purpose may be annexed by the usage of
trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to the vendee for any

hidden faults or defects in the thing sold even though he was not
aware thereof.
This provision shall not apply if the contrary has been stipulated,
and the vendor was not aware of the hidden faults or defects in
the thing sold. (Emphasis supplied).
It is patent then, that the seller-assignor is liable for its breach of warranty against
the petitioner. This liability as a general rule, extends to the corporation to whom
it assigned its rights and interests unless the assignee is a holder in due course
of the promissory note in question, assuming the note is negotiable, in which

case the latter's rights are based on the negotiable instrument and assuming
further that the petitioner's defenses may not prevail against it.
Secondly, it likewise cannot be denied that as soon as the tractors broke down,
the petitioner-corporation notified the seller-assignor's sister company, AG & P,
about the breakdown based on the seller-assignor's express 90-day warranty,
with which the latter complied by sending its mechanics. However, due to the
seller-assignor's delay and its failure to comply with its warranty, the tractors
became totally unserviceable and useless for the purpose for which they were
purchased.
Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its contract

with the seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:
ART. 1191. The power to rescind obligations is implied in

reciprocal ones, in case one of the obligors should not comply with
what is incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation with the payment of damages in either
case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
xxx xxx xxx
ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and
1566, the vendee may elect between withdrawing from the
contract and demanding a proportionate reduction of the price,
with damages in either case. (Emphasis supplied)
Petitioner, having unilaterally and extrajudicially rescinded its contract with the
seller-assignor, necessarily can no longer sue the seller-assignor except by way
of counterclaim if the seller-assignor sues it because of the rescission.
In the case of the University of the Philippines v. De los Angeles (35 SCRA 102)
we held:
In other words, the party who deems the contract violated may
consider it resolved or rescinded, and act accordingly, without

previous court action, but it proceeds at its own risk. For it is only
the final judgment of the corresponding court that will conclusively
and finally settle whether the action taken was or was not correct
in law. But the law definitely does not require that the contracting
party who believes itself injured must first file suit and wait for
adjudgement before taking extrajudicial steps to protect its
interest. Otherwise, the party injured by the other's breach will
have to passively sit and watch its damages accumulate during
the pendency of the suit until the final judgment of rescission is
rendered when the law itself requires that he should exercise due
diligence to minimize its own damages (Civil Code, Article
2203). (Emphasis supplied)
Going back to the core issue, we rule that the promissory note in question is not
a negotiable instrument.
The pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we jointly and severally promise to pay

to the INDUSTRIAL PRODUCTS MARKETING, the sum of ONE
MILLION NINETY THREE THOUSAND SEVEN HUNDRED
EIGHTY NINE PESOS & 71/100 only (P 1,093,789.71), Philippine
Currency, the said principal sum, to be payable in 24 monthly
installments starting July 15, 1978 and every 15th of the month
thereafter until fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable Instruments Law

requires that a promissory note "must be payable to order or bearer, " it cannot
be denied that the promissory note in question is not a negotiable instrument.
The instrument in order to be considered negotiablility-i.e. must

contain the so-called 'words of negotiable, must be payable to
'order' or 'bearer'. These words serve as an expression of consent
that the instrument may be transferred. This consent is
indispensable since a maker assumes greater risk under a
negotiable instrument than under a non-negotiable one. ...
xxx xxx xxx
When instrument is payable to order.

SEC. 8. WHEN PAYABLE TO ORDER. — The instrument is
payable to order where it is drawn payable to the order of a
specified person or to him or his order. . . .
xxx xxx xxx
These are the only two ways by which an instrument may be

made payable to order. There must always be a specified person
named in the instrument. It means that the bill or note is to be paid
to the person designated in the instrument or to any person to
whom he has indorsed and delivered the same. Without the words
"or order" or"to the order of, "the instrument is payable only to the
person designated therein and is therefore non-negotiable. Any
subsequent purchaser thereof will not enjoy the advantages of
being a holder of a negotiable instrument but will merely "step into
the shoes" of the person designated in the instrument and will thus
be open to all defenses available against the latter." (Campos and
Campos, Notes and Selected Cases on Negotiable Instruments
Law, Third Edition, page 38). (Emphasis supplied)
Therefore, considering that the subject promissory note is not a negotiable

instrument, it follows that the respondent can never be a holder in due course but
remains a mere assignee of the note in question. Thus, the petitioner may raise
against the respondent all defenses available to it as against the seller-assignor
Industrial Products Marketing.
This being so, there was no need for the petitioner to implied the seller-assignor
when it was sued by the respondent-assignee because the petitioner's defenses
apply to both or either of either of them. Actually, the records show that even the
respondent itself admitted to being a mere assignee of the promissory note in
question, to wit:
ATTY. PALACA:
Did we get it right from the counsel that what is

being assigned is the Deed of Sale with Chattel
Mortgage with the promissory note which is as
testified to by the witness was indorsed? (Counsel
for Plaintiff nodding his head.) Then we have no
further questions on cross,

COURT:
You confirm his manifestation? You are nodding

your head? Do you confirm that?
ATTY. ILAGAN:
The Deed of Sale cannot be assigned. A deed of

sale is a transaction between two persons; what is
assigned are rights, the rights of the mortgagee
were assigned to the IFC Leasing & Acceptance
Corporation.
COURT:
He puts it in a simple way as one-deed of sale and

chattel mortgage were assigned; . . . you want to
make a distinction, one is an assignment of
mortgage right and the other one is indorsement of
the promissory note. What counsel for defendants
wants is that you stipulate that it is contained in one
single transaction?
ATTY. ILAGAN:
We stipulate it is one single transaction. (pp. 27-29,

TSN., February 13, 1980).
Secondly, even conceding for purposes of discussion that the promissory note in
question is a negotiable instrument, the respondent cannot be a holder in due
course for a more significant reason.
The evidence presented in the instant case shows that prior to the sale on
installment of the tractors, there was an arrangement between the seller-
assignor, Industrial Products Marketing, and the respondent whereby the latter
would pay the seller-assignor the entire purchase price and the seller-assignor, in
turn, would assign its rights to the respondent which acquired the right to collect
the price from the buyer, herein petitioner Consolidated Plywood Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note,
the Deed of Assignment and the Disclosure of Loan/Credit Transaction shows

that said documents evidencing the sale on installment of the tractors were all
executed on the same day by and among the buyer, which is herein petitioner
Consolidated Plywood Industries, Inc.; the seller-assignor which is the Industrial
Products Marketing; and the assignee-financing company, which is the
respondent. Therefore, the respondent had actual knowledge of the fact that the
seller-assignor's right to collect the purchase price was not unconditional, and
that it was subject to the condition that the tractors -sold were not defective. The
respondent knew that when the tractors turned out to be defective, it would be
subject to the defense of failure of consideration and cannot recover the
purchase price from the petitioners. Even assuming for the sake of argument that
the promissory note is negotiable, the respondent, which took the same with
actual knowledge of the foregoing facts so that its action in taking the instrument
amounted to bad faith, is not a holder in due course. As such, the respondent is
subject to all defenses which the petitioners may raise against the seller-
assignor. Any other interpretation would be most inequitous to the unfortunate
buyer who is not only saddled with two useless tractors but must also face a
lawsuit from the assignee for the entire purchase price and all its incidents
without being able to raise valid defenses available as against the assignor.
Lastly, the respondent failed to present any evidence to prove that it had no
knowledge of any fact, which would justify its act of taking the promissory note as
not amounting to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law provide that: negotiating

it.
xxx xxx xxx
SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE.

— A holder in due course is a holder who has taken the
instrument under the following conditions:
xxx xxx xxx
xxx xxx xxx
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had no notice of any
infirmity in the instrument of deffect in the title of the person
negotiating it

xxx xxx xxx
SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — To

constitute notice of an infirmity in the instrument or defect in the
title of the person negotiating the same, the person to whom it is
negotiated must have had actual knowledge of the infirmity or
defect, or knowledge of such facts that his action in taking the
instrument amounts to bad faith. (Emphasis supplied)
We subscribe to the view of Campos and Campos that a financing company is

not a holder in good faith as to the buyer, to wit:
In installment sales, the buyer usually issues a note payable to the

seller to cover the purchase price. Many times, in pursuance of a
previous arrangement with the seller, a finance company pays the
full price and the note is indorsed to it, subrogating it to the right to
collect the price from the buyer, with interest. With the increasing
frequency of installment buying in this country, it is most probable
that the tendency of the courts in the United States to protect the
buyer against the finance company will , the finance company will
be subject to the defense of failure of consideration and cannot
recover the purchase price from the buyer. As against the
argument that such a rule would seriously affect "a certain mode
of transacting business adopted throughout the State," a court in
one case stated:
It may be that our holding here will require some

changes in business methods and will impose a
greater burden on the finance companies. We think
the buyer-Mr. & Mrs. General Public-should have
some protection somewhere along the line. We
believe the finance company is better able to bear
the risk of the dealer's insolvency than the buyer
and in a far better position to protect his interests
against unscrupulous and insolvent dealers. . . .
If this opinion imposes great burdens on finance

companies it is a potent argument in favor of a rule
which win afford public protection to the general
buying public against unscrupulous dealers in
personal property. . . . (Mutual Finance Co. v.
Martin, 63 So. 2d 649, 44 ALR 2d 1 [1953])

(Campos and Campos, Notes and Selected Cases
on Negotiable Instruments Law, Third Edition, p.
128).
In the case of Commercial Credit Corporation v. Orange Country Machine

Works (34 Cal. 2d 766) involving similar facts, it was held that in a very real
sense, the finance company was a moving force in the transaction from its very
inception and acted as a party to it. When a finance company actively
participates in a transaction of this type from its inception, it cannot be regarded
as a holder in due course of the note given in the transaction.
In like manner, therefore, even assuming that the subject promissory note is
negotiable, the respondent, a financing company which actively participated in
the sale on installment of the subject two Allis Crawler tractors, cannot be
regarded as a holder in due course of said note. It follows that the respondent's
rights under the promissory note involved in this case are subject to all defenses
that the petitioners have against the seller-assignor, Industrial Products
Marketing. For Section 58 of the Negotiable Instruments Law provides that "in the
hands of any holder other than a holder in due course, a negotiable instrument is
subject to the same defenses as if it were non-negotiable. ... "
Prescinding from the foregoing and setting aside other peripheral issues, we find
that both the trial and respondent appellate court erred in holding the promissory
note in question to be negotiable. Such a ruling does not only violate the law and
applicable jurisprudence, but would result in unjust enrichment on the part of both
the assigner- assignor and respondent assignee at the expense of the petitioner-
corporation which rightfully rescinded an inequitable contract. We note, however,
that since the seller-assignor has not been impleaded herein, there is no obstacle
for the respondent to file a civil Suit and litigate its claims against the seller-
assignor in the rather unlikely possibility that it so desires,
WHEREFORE, in view of the foregoing, the decision of the respondent appellate

court dated July 17, 1985, as well as its resolution dated October 17, 1986, are
hereby ANNULLED and SET ASIDE. The complaint against the petitioner before
the trial court is DISMISSED.
SO ORDERED.

SECOND DIVISION
G.R. No. 74451 May 25, 1988
EQUITABLE BANKING CORPORATION, petitioner,

vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT and THE EDWARD
J. NELL CO., respondents.
In this Petition for Review on certiorari petitioner, Equitable Banking Corporation,

prays that the adverse judgment against it rendered by respondent Appellate
Court, 1 dated 4 October 1985, and its majority Resolution, dated 28 April 1986,
denying petitioner's Motion for Reconsideration, 2 be annulled and set aside.
The facts pertinent to this Petition, as summarized by the Trial Court and adopted
by reference by Respondent Appellate Court, emanated from the case entitled
"Edward J. Nell Co. vs. Liberato V. Casals, Casville Enterprises, Inc., and
Equitable Banking Corporation" of the Court of First Instance of Rizal (Civil Case
No. 25112), and read:
From the evidence submitted by the parties, the Court finds that
sometime in 1975 defendant Liberato Casals went to plaintiff
Edward J. Nell Company and told its senior sales engineer,
Amado Claustro that he was interested in buying one of the
plaintiff's garrett skidders. Plaintiff was a dealer of machineries,
equipment and supplies. Defendant Casals represented himself
as the majority stockholder, president and general manager of
Casville Enterprises, Inc., a firm engaged in the large scale
production, procurement and processing of logs and lumber
products, which had a plywood plant in Sta. Ana, Metro Manila.
After defendant Casals talked with plaintiff's sales engineer, he

was referred to plaintiffs executive vice-president, Apolonio Javier,
for negotiation in connection with the manner of payment. When
Javier asked for cash payment for the skidders, defendant Casals
informed him that his corporation, defendant Casville Enterprises,
Inc., had a credit line with defendant Equitable Banking
Corporation. Apparently, impressed with this assertion, Javier
agreed to have the skidders paid by way of a domestic letter of
credit which defendant Casals promised to open in plaintiffs favor,
in lieu of cash payment. Accordingly, on December 22, 1975,

defendant Casville, through its president, defendant Casals,
ordered from plaintiff two units of garrett skidders ...
The purchase order for the garrett skidders bearing No. 0051 and
dated December 22, 1975 (Exhibit "A") contained the following
terms and conditions:
Two (2) units GARRETT Skidders Model 30A complete as

basically described in the bulletin
PRICE: F.O.B. dock
Manila P485,000.00/unit
For two (2) units P970,000.00
SHIPMENT: We will inform you the date and name of the vessel
as soon as arranged.
TERMS: By irrevocable domestic letter of credit to be issued in

favor of THE EDWARD J. NELL CO. or ORDER payable in thirty
six (36) months and will be opened within ninety (90) days after
date of shipment. at first installment will be due one hundred
eighty (180) days after date of shipment. Interest-14% per annum
(Exhibit A)
xxx xxx xxx
... in a letter dated April 21, 1976, defendants Casals and Casville
requested from plaintiff the delivery of one (1) unit of the bidders,
complete with tools and cables, to Cagayan de Oro, on or before
Saturday, April 24,1976, on board a Lorenzo shipping vessel, with
the information that an irrevocable Domestic Letter of Credit would
be opened in plaintiff's favor on or before June 30, 1976 under the
terms and conditions agreed upon (Exhibit "B")
On May 3, 1976, in compliance with defendant Casvile's

recognition request, plaintiff shipped to Cagayan de Oro City a
Garrett skidder. Plaintiff paid the shipping cost in the amount of
P10,640.00 because of the verbal assurance of defendant

Casville that it would be covered by the letter of credit soon to be
opened.
xxx xxx xxx
On July 15, 1976, defendant Casals handed to plaintiff a check in

the amount of P300,000.00 postdated August 4, 1976, which was
followed by another check of same date. Plaintiff considered these
checks either as partial payment for the skidder that was already
delivered to Cagayan de Oro or as reimbursement for the
marginal deposit that plaintiff was supposed to pay.
In a letter dated August 3, 1976 (Exhibit "C"), defendants Casville

informed the plaintiff that their application for a letter of credit for
the payment of the Garrett skidders had been approved by the
Equitable Banking Corporation. However, the defendants said that
they would need the sum of P300,000.00 to stand as collateral or
marginal deposit in favor of Equitable Banking Corporation and an
additional amount of P100,000.00, also in favor of Equitable
Banking Corporation, to clear the title of the Estrada property
belonging to defendant Casals which had been approved as
security for the trust receipts to be issued by the bank, covering
the above-mentioned equipment.
Although the marginal deposit was supposed to be produced by

defendant Casville Enterprises, plaintiff agreed to advance the
necessary amount in order to facilitate the transaction.
Accordingly, on August 5,1976, plaintiff issued a check in the
amount of P400,000.00 (Exhibit "2") drawn against the First
National City Bank and made payable to the order of Equitable
Banking Corporation and with the following notation or
memorandum:
a/c of Casville Enterprises Inc. for Marginal deposit

and payment of balance on Estrada Property to be
used as security for trust receipt for opening L/C of
Garrett Skidders in favor of the Edward J. Nell Co."
Said check together with the cash disbursement
voucher (Exhibit "2-A") containing the explanation:
Payment for marginal deposit and other expenses

re opening of L/C for account of Casville Ent..

A covering letter (Exhibit "3") was also sent and when the three
documents were presented to Severino Santos, executive vice
president of defendant bank, Santos did not accept them because
the terms and conditions required by the bank for the opening of
the letter of credit had not yet been agreed on.
On August 9, 1976, defendant Casville wrote the bank applying for

two letters of credit to cover its purchase from plaintiff of two
Garrett skidders, under the following terms and conditions:
a) On sight Letter of Credit for P485,000.00; b) One 36 months

Letter of Credit for P606,000.00; c) P300,000.00 CASH marginal
deposit1 d) Real Estate Collateral to secure the Trust Receipts; e)
We shall chattel mortgage the equipments purchased even after
payment of the first L/C as additional security for the balance of
the second L/C and f) Other conditions you deem necessary to
protect the interest of the bank."
In a letter dated August 11, 1976 (Exhibit "D-l"), defendant bank

replied stating that it was ready to open the letters of credit upon
defendant's compliance of the following terms and conditions:
c) 30% cash margin deposit; d) Acceptable Real Estate Collateral

to secure the Trust Receipts; e) Chattel Mortgage on the
equipment; and Ashville f) Other terms and conditions that our
bank may impose.
Defendant Casville sent a copy of the foregoing letter to the

plaintiff enclosing three postdated checks. In said letter, plaintiff
was informed of the requirements imposed by the defendant bank
pointing out that the "cash marginal required under paragraph (c)
is 30% of Pl,091,000.00 or P327,300.00 plus another P100,000.00
to clean up the Estrada property or a total of P427,300.00" and
that the check covering said amount should be made payable "to
the Order of EQUITABLE BANKING CORPORATION for the
account of Casville Enterprises Inc." Defendant Casville also
stated that the three (3) enclosed postdated checks were intended
as replacement of the checks that were previously issued to
plaintiff to secure the sum of P427,300.00 that plaintiff would
advance to defendant bank for the account of defendant Casville.
All the new checks were postdated November 19, 1976 and drawn

in the sum of Pl45,500.00 (Exhibit "F"), P181,800.00 (Exhibit "G")
and P100,000.00 (Exhibit "H").
On the same occasion, defendant Casals delivered to plaintiff TCT

No. 11891 of the Register of Deeds of Quezon City and TCT No.
50851 of the Register of Deeds of Rizal covering two pieces of
real estate properties.
Subsequently, Cesar Umali, plaintiffs credit and collection

manager, accompanied by a representative of defendant Casville,
went to see Severino Santos to find out the status of the credit line
being sought by defendant Casville. Santos assured Umali that
the letters of credit would be opened as soon as the requirements
imposed by defendant bank in its letter dated August 11, 1976 had
been complied with by defendant Casville.
On August 16, 1976, plaintiff issued a check for P427,300.00,

payable to the "order of EQUITABLE BANKING CORPORATION
A/C CASVILLE ENTERPRISES, INC." and drawn against the first
National City Bank (Exhibit "E-l"). The check did not contain the
notation found in the previous check issued by the plaintiff (Exhibit
"2") but the substance of said notation was reproduced in a
covering letter dated August 16,1976 that went with the check
(Exhibit "E").<äre||anº•1àw> Both the check and the covering
letter were sent to defendant bank through defendant Casals.
Plaintiff entrusted the delivery of the check and the latter to
defendant Casals because it believed that no one, including
defendant Casals, could encash the same as it was made payable
to the defendant bank alone. Besides, defendant Casals was
known to the bank as the one following up the application for the
letters of credit.
Upon receiving the check for P427,300.00 entrusted to him by

plaintiff defendant Casals immediately deposited it with the
defendant bank and the bank teller accepted the same for deposit
in defendant Casville's checking account. After depositing said
check, defendant Casville, acting through defendant Casals, then
withdrew all the amount deposited.
Meanwhile, upon their presentation for encashment, plaintiff

discovered that the three checks (Exhibits "F, "G" and "H") in the
total amount of P427,300.00, that were issued by defendant

Casville as collateral were all dishonored for having been drawn
against a closed account.
As defendant Casville failed to pay its obligation to defendant

bank, the latter foreclosed the mortgage executed by defendant
Casville on the Estrada property which was sold in a public
auction sale to a third party.
Plaintiff allowed some time before following up the application for

the letters of credit knowing that it took time to process the same.
However, when the three checks issued to it by defendant Casville
were dishonored, plaintiff became apprehensive and sent Umali
on November 29, 1976, to inquire about the status of the
application for the letters of credit. When plaintiff was informed
that no letters of credit were opened by the defendant bank in its
favor and then discovered that defendant Casville had in the
meanwhile withdrawn the entire amount of P427,300.00, without
paying its obligation to the bank plaintiff filed the instant action.
While the the instant case was being tried, defendants Casals and
Casville assigned the garrett skidder to plaintiff which credited in
favor of defendants the amount of P450,000.00, as partial
satisfaction of plaintiff's claim against them.
Defendants Casals and Casville hardly disputed their liability to

plaintiff. Not only did they show lack of interest in disputing
plaintiff's claim by not appearing in most of the hearings, but they
also assigned to plaintiff the garrett skidder which is an action of
clear recognition of their liability.
What is left for the Court to determine, therefore, is only the

liability of defendant bank to plaintiff.
xxx xxx xxx
Resolving that issue, the Trial Court rendered judgment, affirmed by Respondent
Court in toto, the pertinent portion of which reads:
xxx xxx xxx

Defendants Casals and Casville Enterprises and Equitable
Banking Corporation are ordered to pay plaintiff, jointly and
severally, the sum of P427,300.00, representing the amount of
plaintiff's check which defendant bank erroneously credited to the
account of defendant Casville and which defendants Casal and
Casville misappropriated, with 12% interest thereon from April 5,
1977, until the said sum is fully paid.
Defendant Equitable Banking Corporation is ordered to pay

plaintiff attorney's fees in the sum of P25,000.00 .
Proportionate cost against all the defendants.
SO ORDERED.
The crucial issue to resolve is whether or not petitioner Equitable Banking

Corporation (briefly, the Bank) is liable to private respondent Edward J. Nell Co.
(NELL, for short) for the value of the second check issued by NELL, Exhibit "E-l,"
which was made payable
to the order of EQUITABLE Ashville BANIUNG CORPORATION

A/C OF CASVILLE ENTERPRISES INC.
and which the Bank teller credited to the account of Casville.
The Trial Court found that the amount of the second check had been erroneously
credited to the Casville account; held the Bank liable for the mistake of its
employees; and ordered the Bank to pay NELL the value of the check in the sum
of P427,300.00, with legal interest. Explained the Trial Court:
The Court finds that the check in question was payable only to the
defendant bank and to no one else. Although the words "A/C OF
CASVILLE ENTERPRISES INC. "appear on the face of the check
after or under the name of defendant bank, the payee was still the
latter. The addition of said words did not in any way make Casville
Enterprises, Inc. the Payee of the instrument for the words merely
indicated for whose account or in connection with what account
the check was issued by the plaintiff.
Indeed, the bank teller who received it was fully aware that the
check was not negotiable since he stamped thereon the words

"NON-NEGOTIABLE For Payee's Account Only" and "NON-
NEGOTIABLE TELLER NO. 4, August 17,1976 EQUITABLE
BANKING CORPORATION.
But said teller should have exercised more prudence in the

handling of Id check because it was not made out in the usual
manner. The addition of the words A/C OF CASVILLE
ENTERPRISES INC." should have placed the teller on guard and
he should have clarified the matter with his superiors. Instead of
doing so, however, the teller decided to rely on his own judgment
and at the risk of making a wrong decision, credited the entire
amount in the name of defendant Casville although the latter was
not the payee named in the check. Such mistake was crucial and
was, without doubt, the proximate cause of plaintiffs defraudation.
xxx xxx xxx
Respondent Appellate Court upheld the above conclusions stating in addition:
1) The appellee made the subject check payable to appellant's

order, for the account of Casville Enterprises, Inc. In the light of
the other facts, the directive was for the appellant bank to apply
the value of the check as payment for the letter of credit which
Casville Enterprises, Inc. had previously applied for in favor of the
appellee (Exhibit D-1, p. 5). The issuance of the subject check
was precisely to meet the bank's prior requirement of payment
before issuing the letter of credit previously applied for by Casville
Enterprises in favor of the appellee;
xxx xxx xxx
We disagree.
1) The subject check was equivocal and patently ambiguous. By making the
check read:
Pay to the EQUITABLE BANKING CORPORATION Order of A/C

OF CASVILLE ENTERPRISES, INC.
the payee ceased to be indicated with reasonable certainty in contravention of

Section 8 of the Negotiable Instruments Law. 3 As worded, it could be accepted

as deposit to the account of the party named after the symbols "A/C," or payable
to the Bank as trustee, or as an agent, for Casville Enterprises, Inc., with the
latter being the ultimate beneficiary. That ambiguity is to be
taken contra proferentem that is, construed against NELL who caused the
ambiguity and could have also avoided it by the exercise of a little more care.
Thus, Article 1377 of the Civil Code, provides:
Art. 1377. The interpretation of obscure words or stipulations in a

contract shall not favor the party who caused the obscurity.
2) Contrary to the finding of respondent Appellate Court, the subject check was,
initially, not non-negotiable. Neither was it a crossed check. The rubber-stamping
transversall on the face of the subject check of the words "Non-negotiable for
Payee's Account Only" between two (2) parallel lines, and "Non-negotiable,
Teller- No. 4, August 17, 1976," separately boxed, was made only by the Bank
teller in accordance with customary bank practice, and not by NELL as the
drawer of the check, and simply meant that thereafter the same check could no
longer be negotiated.
3) NELL's own acts and omissions in connection with the drawing, issuance and
delivery of the 16 August 1976 check, Exhibit "E-l," and its implicit trust in Casals,
were the proximate cause of its own defraudation: (a) The original check of 5
August 1976, Exhibit "2," was payable to the order solely of "Equitable Banking
Corporation." NELL changed the payee in the subject check, Exhibit "E",
however, to "Equitable Banking Corporation, A/C of Casville Enterprises Inc.,"
upon Casals request. NELL also eliminated both the cash disbursement voucher
accompanying the check which read:
Payment for marginal deposit and other expense re opening of

L/C for account of Casville Enterprises.
and the memorandum:
a/c of Casville Enterprises Inc. for Marginal deposit and payment

of balance on Estrada Property to be used as security for trust
receipt for opening L/C of Garrett Skidders in favor of the Edward
Ashville J Nell Co.
Evidencing the real nature of the transaction was merely a separate covering
letter, dated 16 August 1976, which Casals, sinisterly enough, suppressed from
the Bank officials and teller.

(b) NELL entrusted the subject check and its covering letter, Exhibit "E," to
Casals who, obviously, had his own antagonistic interests to promote. Thus it
was that Casals did not purposely present the subject check to the Executive
Vice-President of the Bank, who was aware of the negotiations regarding the
Letter of Credit, and who had rejected the previous check, Exhibit "2," including
its three documents because the terms and conditions required by the Bank for
the opening of the Letter of Credit had not yet been agreed on.
(c) NELL was extremely accommodating to Casals. Thus, to facilitate the sales
transaction, NELL even advanced the marginal deposit for the garrett skidder. It
is, indeed, abnormal for the seller of goods, the price of which is to be covered by
a letter of credit, to advance the marginal deposit for the same.
(d) NELL had received three (3) postdated checks all dated 16 November, 1976
from Casvine to secure the subject check and had accepted the deposit with it of
two (2) titles of real properties as collateral for said postdated checks. Thus,
NELL was erroneously confident that its interests were sufficiently protected.
Never had it suspected that those postdated checks would be dishonored, nor
that the subject check would be utilized by Casals for a purpose other than for
opening the letter of credit.
In the last analysis, it was NELL's own acts, which put it into the power of Casals
and Casville Enterprises to perpetuate the fraud against it and, consequently, it
must bear the loss (Blondeau, et al., vs. Nano, et al., 61 Phil. 625 [1935]; Sta.
Maria vs. Hongkong and Shanghai Banking Corporation, 89 Phil. 780 [1951];
Republic of the Philippines vs. Equitable Banking Corporation, L-15895, January
30,1964, 10 SCRA 8).
... As between two innocent persons, one of whom must suffer the
consequence of a breach of trust, the one who made it possible by
his act of confidence must bear the loss.
WHEREFORE, the Petition is granted and the Decision of respondent Appellate

Court, dated 4 October 1985, and its majority Resolution, dated 28 April 1986,
denying petitioner's Motion for Reconsideration, are hereby SET ASIDE. The
Decision of the then Court of First Instance of Rizal, Branch XI. is modified in that
petitioner Equitable Banking Corporation is absolved from any and all liabilities to
the private respondent, Edward J. Nell Company, and the Amended Complaint
against petitioner bank is hereby ordered dismissed. No costs.
SO ORDERED.

SECOND DIVISION
G.R. No. 93397 March 3, 1997
TRADERS ROYAL BANK, petitioner,

vs.
COURT OF APPEALS, FILRITERS GUARANTY ASSURANCE
CORPORATION and CENTRAL BANK of the PHILIPPINES, respondents.
Assailed in this Petition for Review on Certiorari is the Decision of the respondent
Court of Appeals dated January 29, 1990,1 affirming the nullity of the transfer of
Central Bank Certificate of Indebtedness (CBCI) No. D891, 2 with a face value of
P500,000.00, from the Philippine Underwriters Finance Corporation (Philfinance)
to the petitioner Trader's Royal Bank (TRB), under a Repurchase
Agreement3 dated February 4, 1981, and a Detached Assignment4dated April 27,
1981.
Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila,
Branch 32, the action was originally filed as a Petition for Mandamus5 under Rule
65 of the Rules of Court, to compel the Central Bank of the Philippines to register
the transfer of the subject CBCI to petitioner Traders Royal Bank (TRB).
In the said petition, TRB stated that:
3. On November 27, 1979, Filriters Guaranty Assurance

Corporation (Filriters) executed a "Detached Assignment" . . .,
whereby Filriters, as registered owner, sold, transferred, assigned
and delivered unto Philippine Underwriters Finance Corporation
(Philfinance) all its rights and title to Central Bank Certificates of
Indebtedness of PESOS: FIVE HUNDRED THOUSAND
(P500,000) and having an aggregate value of PESOS: THREE
MILLION FIVE HUNDRED THOUSAND (P3,500,000.00);
4. The aforesaid Detached Assignment (Annex "A") contains an

express authorization executed by the transferor intended to
complete the assignment through the registration of the transfer in
the name of PhilFinance, which authorization is specifically
phrased as follows: '(Filriters) hereby irrevocably authorized the
said issuer (Central Bank) to transfer the said bond/certificates on
the books of its fiscal agent;

5. On February 4, 1981, petitioner entered into a Repurchase
Agreement with PhilFinance . . ., whereby, for and in consideration
of the sum of PESOS: FIVE HUNDRED THOUSAND
(P500,000.00), PhilFinance sold, transferred and delivered to
petitioner CBCI 4-year, 8th series, Serial No. D891 with a face
value of P500,000.00 . . ., which CBCI was among those
previously acquired by PhilFinance from Filriters as averred in
paragraph 3 of the Petition;
6. Pursuant to the aforesaid Repurchase Agreement (Annex "B"),

Philfinance agreed to repurchase CBCI Serial No. D891 (Annex
"C"), at the stipulated price of PESOS: FIVE HUNDRED
NINETEEN THOUSAND THREE HUNDRED SIXTY-ONE &
11/100 (P519,361.11) on April 27, 1981;
7. PhilFinance failed to repurchase the CBCI on the agreed date

of maturity, April 27, 1981, when the checks it issued in favor of
petitioner were dishonored for insufficient funds;
8. Owing to the default of PhilFinance, it executed a Detached

Assignment in favor of the Petitioner to enable the latter to have
its title completed and registered in the books of the respondent.
And by means of said Detachment, Philfinance transferred and
assigned all, its rights and title in the said CBCI (Annex "C") to
petitioner and, furthermore, it did thereby "irrevocably authorize
the said issuer (respondent herein) to transfer the said
bond/certificate on the books of its fiscal agent." . . .
9. Petitioner presented the CBCI (Annex "C"), together with the

two (2) aforementioned Detached Assignments (Annexes "B" and
"D"), to the Securities Servicing Department of the respondent,
and requested the latter to effect the transfer of the CBCI on its
books and to issue a new certificate in the name of petitioner as
absolute owner thereof;
10. Respondent failed and refused to register the transfer as

requested, and continues to do so notwithstanding petitioner's
valid and just title over the same and despite repeated demands in
writing, the latest of which is hereto attached as Annex "E" and
made an integral part hereof;

11. The express provisions governing the transfer of the CBCI
were substantially complied with the petitioner's request for
registration, to wit:
"No transfer thereof shall be valid unless made at

said office (where the Certificate has been
registered) by the registered owner hereof, in
person or by his attorney duly authorized in writing,
and similarly noted hereon, and upon payment of a
nominal transfer fee which may be required, a new
Certificate shall be issued to the transferee of the
registered holder thereof."
and, without a doubt, the Detached Assignments presented to

respondent were sufficient authorizations in writing executed by
the registered owner, Filriters, and its transferee, PhilFinance, as
required by the above-quoted provision;
12. Upon such compliance with the aforesaid requirements, the

ministerial duties of registering a transfer of ownership over the
CBCI and issuing a new certificate to the transferee devolves
upon the respondent;
Upon these assertions, TRB prayed for the registration by the Central Bank of
the subject CBCI in its name.
On December 4, 1984, the Regional Trial Court the case took cognizance of the
defendant Central Bank of the Philippines' Motion for Admission of Amended
Answer with Counter Claim for Interpleader6 thereby calling to fore the
respondent Filriters Guaranty Assurance Corporation (Filriters), the registered
owner of the subject CBCI as respondent.
For its part, Filriters interjected as Special Defenses the following:
11. Respondent is the registered owner of CBCI No. 891;
12. The CBCI constitutes part of the reserve investment against

liabilities required of respondent as an insurance company under
the Insurance Code;

13. Without any consideration or benefit whatsoever to Filriters, in
violation of law and the trust fund doctrine and to the prejudice of
policyholders and to all who have present or future claim against
policies issued by Filriters, Alfredo Banaria, then Senior Vice-
President-Treasury of Filriters, without any board resolution,
knowledge or consent of the board of directors of Filriters, and
without any clearance or authorization from the Insurance
Commissioner, executed a detached assignment purportedly
assigning CBCI No. 891 to Philfinance;
xxx xxx xxx
14. Subsequently, Alberto Fabella, Senior Vice-President-

Comptroller are Pilar Jacobe, Vice-President-Treasury of Filriters
(both of whom were holding the same positions in Philfinance),
without any consideration or benefit redounding to Filriters and to
the grave prejudice of Filriters, its policy holders and all who have
present or future claims against its policies, executed similar
detached assignment forms transferring the CBCI to plaintiff;
xxx xxx xxx
15. The detached assignment is patently void and inoperative

because the assignment is without the knowledge and consent of
directors of Filriters, and not duly authorized in writing by the
Board, as requiring by Article V, Section 3 of CB Circular No. 769;
16. The assignment of the CBCI to Philfinance is a personal act of

Alfredo Banaria and not the corporate act of Filriters and such null
and void;
a) The assignment was executed without consideration and for

that reason, the assignment is void from the beginning (Article
1409, Civil Code);
b) The assignment was executed without any knowledge and

consent of the board of directors of Filriters;
c) The CBCI constitutes reserve investment of Filriters against

liabilities, which is a requirement under the Insurance Code for its
existence as an insurance company and the pursuit of its business

operations. The assignment of the CBCI is illegal act in the sense
of malum in se or malum prohibitum, for anyone to make, either as
corporate or personal act;
d) The transfer of dimunition of reserve investments of Filriters is

expressly prohibited by law, is immoral and against public policy;
e) The assignment of the CBCI has resulted in the capital

impairment and in the solvency deficiency of Filriters (and has in
fact helped in placing Filriters under conservatorship), an
inevitable result known to the officer who executed assignment.
17. Plaintiff had acted in bad faith and with knowledge of the
illegality and invalidity of the assignment.
a) The CBCI No. 891 is not a negotiable instrument and as a

certificate of indebtedness is not payable to bearer but is a
registered in the name of Filriters;
b) The provision on transfer of the CBCIs provides that the Central

Bank shall treat the registered owner as the absolute owner and
that the value of the registered certificates shall be payable only to
the registered owner; a sufficient notice to plaintiff that the
assignments do not give them the registered owner's right as
absolute owner of the CBCI's;
c) CB Circular 769, Series of 1980 (Rules and Regulations

Governing CBCIs) provides that the registered certificates are
payable only to the registered owner (Article II, Section 1).
18. Plaintiff knew full well that the assignment by Philfinance of

CBCI No. 891 by Filriters is not a regular transaction made in the
usual of ordinary course of business;
a) The CBCI constitutes part of the reserve investments of Filriters

against liabilities requires by the Insurance Code and its
assignment or transfer is expressly prohibited by law. There was
no attempt to get any clearance or authorization from the
Insurance Commissioner;

b) The assignment by Filriters of the CBCI is clearly not a
transaction in the usual or regular course of its business;
c) The CBCI involved substantial amount and its assignment

clearly constitutes disposition of "all or substantially all" of the
assets of Filriters, which requires the affirmative action of the
stockholders (Section 40, Corporation [sic] Code.7
In its Decision8 dated April 29, 1988, the Regional Trial Court of Manila, Branch
XXXIII found the assignment of CBCI No. D891 in favor of Philfinance, and the
subsequent assignment of the same CBCI by Philfinance in favor of Traders
Royal Bank null and void and of no force and effect. The dispositive portion of the
decision reads:
ACCORDINGLY, judgment is hereby rendered in favor of the

respondent Filriters Guaranty Assurance Corporation and against
the plaintiff Traders Royal Bank:
(a) Declaring the assignment of CBCI No. 891 in favor of

PhilFinance, and the subsequent assignment of CBCI by
PhilFinance in favor of the plaintiff Traders Royal Bank as null and
void and of no force and effect;
(b) Ordering the respondent Central Bank of the Philippines to

disregard the said assignment and to pay the value of the
proceeds of the CBCI No. D891 to the Filriters Guaranty
Assurance Corporation;
(c) Ordering the plaintiff Traders Royal Bank to pay respondent

Filriters Guaranty Assurance Corp. The sum of P10,000 as
attorney's fees; and
(d) to pay the costs.
SO ORDERED.9
The petitioner assailed the decision of the trial court in the Court of Appeals 10,
but their appeals likewise failed. The findings of the fact of the said court are
hereby reproduced:

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

for mandamus against the Central Bank in the Regional Trial
Court of Manila. The suit, however, was subsequently treated by
the lower court as a case of interpleader when CB prayed in its
amended answer that Filriters be impleaded as a respondent and
the court adjudge which of them is entitled to the ownership of
CBCI No. D891. Failing to get a favorable judgment. TRB now
comes to this Court on appeal. 11
In the appellate court, petitioner argued that the subject CBCI was a negotiable
instrument, and having acquired the said certificate from Philfinance as a holder
in due course, its possession of the same is thus free fro any defect of title of
prior parties and from any defense available to prior parties among themselves,
and it may thus, enforce payment of the instrument for the full amount thereof
against all parties liable thereon. 12
In ignoring said argument, the appellate court that the CBCI is not a negotiable
instrument, since the instrument clearly stated that it was payable to Filriters, the
registered owner, whose name was inscribed thereon, and that the certificate
lacked the words of negotiability which serve as an expression of consent that
the instrument may be transferred by negotiation.

Obviously, the assignment of the certificate from Filriters to Philfinance was
fictitious, having made without consideration, and did not conform to Central
Bank Circular No. 769, series of 1980, better known as the "Rules and
Regulations Governing Central Bank Certificates of Indebtedness", which
provided that any "assignment of registered certificates shall not be valid unless
made . . . by the registered owner thereof in person or by his representative duly
authorized in writing."
Petitioner's claimed interest has no basis, since it was derived from Philfinance
whose interest was inexistent, having acquired the certificate through simulation.
What happened was Philfinance merely borrowed CBCI No. D891 from Filriters,
a sister corporation, to guarantee its financing operations.
Said the Court:
In the case at bar, Alfredo O. Banaria, who signed the deed of

assignment purportedly for and on behalf of Filriters, did not have
the necessary written authorization from the Board of Directors of
Filriters to act for the latter. For lack of such authority, the
assignment did not therefore bind Filriters and violated as the
same time Central Bank Circular No. 769 which has the force and
effect of a law, resulting in the nullity of the transfer (People v.
Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner
of Internal Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI No.

D891 which it could assign or transfer to Traders Royal Bank and
which the latter can register with the Central Bank.
WHEREFORE, the judgment appealed from is AFFIRMED, with

costs against plaintiff-appellant.
SO ORDERED. 13
Petitioner's present position rests solely on the argument that Philfinance owns
90% of Filriters equity and the two corporations have identical corporate officers,
thus demanding the application of the doctrine or piercing the veil of corporate
fiction, as to give validity to the transfer of the CBCI from registered owner to
petitioner TRB. 14 This renders the payment by TRB to Philfinance of CBCI, as
actual payment to Filriters. Thus, there is no merit to the lower court's ruling that

the transfer of the CBCI from Filriters to Philfinance was null and void for lack of
consideration.
Admittedly, the subject CBCI is not a negotiable instrument in the absence of

words of negotiability within the meaning of the negotiable instruments law (Act
2031).
The pertinent portions of the subject CBCI read:
xxx xxx xxx
The Central Bank of the Philippines (the Bank) for value received,
hereby promises to pay bearer, of if this Certificate of
indebtedness be registered, to FILRITERS GUARANTY
ASSURANCE CORPORATION, the registered owner hereof, the
principal sum of FIVE HUNDRED THOUSAND PESOS.
xxx xxx xxx
Properly understood, a certificate of indebtedness pertains to certificates for the

creation and maintenance of a permanent improvement revolving fund, is similar
to a "bond," (82 Minn. 202). Being equivalent to a bond, it is properly understood
as acknowledgment of an obligation to pay a fixed sum of money. It is usually
used for the purpose of long term loans.
The appellate court ruled that the subject CBCI is not a negotiable instrument,
stating that:
As worded, the instrument provides a promise "to pay Filriters

Guaranty Assurance Corporation, the registered owner hereof."
Very clearly, the instrument is payable only to Filriters, the
registered owner, whose name is inscribed thereon. It lacks the
words of negotiability which should have served as an expression
of consent that the instrument may be transferred by negotiation. 15
A reading of the subject CBCI indicates that the same is payable to FILRITERS
GUARANTY ASSURANCE CORPORATION, and to no one else, thus,
discounting the petitioner's submission that the same is a negotiable instrument,
and that it is a holder in due course of the certificate.

The language of negotiability which characterize a negotiable paper as a credit
instrument is its freedom to circulate as a substitute for money. Hence, freedom
of negotiability is the touchtone relating to the protection of holders in due course,
and the freedom of negotiability is the foundation for the protection which the law
throws around a holder in due course (11 Am. Jur. 2d, 32). This freedom in
negotiability is totally absent in a certificate indebtedness as it merely to pay a
sum of money to a specified person or entity for a period of time.
As held in Caltex (Philippines), Inc. v. Court of Appeals, 16:
The accepted rule is that the negotiability or non-negotiability of an

instrument is determined from the writing, that is, from the face of
the instrument itself. In the construction of a bill or note, the
intention of the parties is to control, if it can be legally ascertained.
While the writing may be read in the light of surrounding
circumstance in order to more perfectly understand the intent and
meaning of the parties, yet as they have constituted the writing to
be the only outward and visible expression of their meaning, no
other words are to be added to it or substituted in its stead. The
duty of the court in such case is to ascertain, not what the parties
may have secretly intended as contradistinguished from what their
words express, but what is the meaning of the words they have
used. What the parties meant must be determined by what they
said.
Thus, the transfer of the instrument from Philfinance to TRB was merely an
assignment, and is not governed by the negotiable instruments law. The
pertinent question then is, was the transfer of the CBCI from Filriters to
Philfinance and subsequently from Philfinance to TRB, in accord with existing
law, so as to entitle TRB to have the CBCI registered in its name with the Central
Bank?
The following are the appellate court's pronouncements on the matter:
Clearly shown in the record is the fact that Philfinance's title over
CBCI No. D891 is defective since it acquired the instrument from
Filriters fictitiously. Although the deed of assignment stated that
the transfer was for "value received", there was really no
consideration involved. What happened was Philfinance merely
borrowed CBCI No. D891 from Filriters, a sister corporation. Thus,
for lack of any consideration, the assignment made is a complete
nullity.

What is more, We find that the transfer made by Filriters to
Philfinance did not conform to Central Bank Circular No. 769,
series of 1980, otherwise known as the "Rules and Regulations
Governing Central Bank Certificates of Indebtedness", under
which the note was issued. Published in the Official Gazette on
November 19, 1980, Section 3 thereof provides that any
assignment of registered certificates shall not be valid unless
made . . . by the registered owner thereof in person or by his
representative duly authorized in writing.
In the case at bar, Alfredo O. Banaria, who signed the deed of

assignment purportedly for and on behalf of Filriters, did not have
the necessary written authorization from the Board of Directors of
Filriters to act for the latter. For lack of such authority, the
assignment did not therefore bind Filriters and violated at the
same time Central Bank Circular No. 769 which has the force and
effect of a law, resulting in the nullity of the transfer (People vs.
Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner
of Internal Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI No.

D891 which it could assign or transfer to Traders Royal Bank and
which the latter can register with the Central Bank
Petitioner now argues that the transfer of the subject CBCI to TRB must upheld,
as the respondent Filriters and Philfinance, though separate corporate entities on
paper, have used their corporate fiction to defraud TRB into purchasing the
subject CBCI, which purchase now is refused registration by the Central Bank.
Says the petitioner;
Since Philfinance own about 90% of Filriters and the two

companies have the same corporate officers, if the principle of
piercing the veil of corporate entity were to be applied in this case,
then TRB's payment to Philfinance for the CBCI purchased by it
could just as well be considered a payment to Filriters, the
registered owner of the CBCI as to bar the latter from claiming, as
it has, that it never received any payment for that CBCI sold and
that said CBCI was sold without its authority.
xxx xxx xxx

We respectfully submit that, considering that the Court of Appeals
has held that the CBCI was merely borrowed by Philfinance from
Filriters, a sister corporation, to guarantee its (Philfinance's)
financing operations, if it were to be consistent therewith, on the
issued raised by TRB that there was a piercing a veil of corporate
entity, the Court of Appeals should have ruled that such veil of
corporate entity was, in fact, pierced, and the payment by TRB to
Philfinance should be construed as payment to Filriters. 17
We disagree with Petitioner.
Petitioner cannot put up the excuse of piercing the veil of corporate entity, as this
merely an equitable remedy, and may be awarded only in cases when the
corporate fiction is used to defeat public convenience, justify wrong, protect fraud
or defend crime or where a corporation is a mere alter ego or business conduit of
a person. 18
Peiercing the veil of corporate entity requires the court to see through the
protective shroud which exempts its stockholders from liabilities that ordinarily,
they could be subject to, or distinguished one corporation from a seemingly
separate one, were it not for the existing corporate fiction. But to do this, the
court must be sure that the corporate fiction was misused, to such an extent that
injustice, fraud, or crime was committed upon another, disregarding, thus, his,
her, or its rights. It is the protection of the interests of innocent third persons
dealing with the corporate entity which the law aims to protect by this doctrine.
The corporate separateness between Filriters and Philfinance remains, despite

the petitioners insistence on the contrary. For one, other than the allegation that
Filriters is 90% owned by Philfinance, and the identity of one shall be maintained
as to the other, there is nothing else which could lead the court under
circumstance to disregard their corporate personalities.
Though it is true that when valid reasons exist, the legal fiction that a corporation
is an entity with a juridical personality separate from its stockholders and from
other corporations may be disregarded, 19 in the absence of such grounds, the
general rule must upheld. The fact that Filfinance owns majority shares in Filriters
is not by itself a ground to disregard the independent corporate status of Filriters.
In Liddel & Co., Inc. vs. Collector of Internal Revenue, 20 the mere ownership by
a single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not of itself a sufficient reason for disregarding the fiction
of separate corporate personalities.

In the case at bar, there is sufficient showing that the petitioner was not
defrauded at all when it acquired the subject certificate of indebtedness from
Philfinance.
On its face the subject certificates states that it is registered in the name of
Filriters. This should have put the petitioner on notice, and prompted it to inquire
from Filriters as to Philfinance's title over the same or its authority to assign the
certificate. As it is, there is no showing to the effect that petitioner had any
dealings whatsoever with Filriters, nor did it make inquiries as to the ownership of
the certificate.
The terms of the CBCI No. D891 contain a provision on its TRANSFER. Thus:
TRANSFER. This Certificate shall pass by delivery unless it is

registered in the owner's name at any office of the Bank or any
agency duly authorized by the Bank, and such registration is
noted hereon. After such registration no transfer thereof shall be
valid unless made at said office (where the Certificates has been
registered) by the registered owner hereof, in person, or by his
attorney, duly authorized in writing and similarly noted hereon and
upon payment of a nominal transfer fee which may be required, a
new Certificate shall be issued to the transferee of the registered
owner thereof. The bank or any agency duly authorized by the
Bank may deem and treat the bearer of this Certificate, or if this
Certificate is registered as herein authorized, the person in whose
name the same is registered as the absolute owner of this
Certificate, for the purpose of receiving payment hereof, or on
account hereof, and for all other purpose whether or not this
Certificate shall be overdue.
This is notice to petitioner to secure from Filriters a written authorization for the
transfer or to require Philfinance to submit such an authorization from Filriters.
Petitioner knew that Philfinance is not registered owner of the CBCI No. D891.
The fact that a non-owner was disposing of the registered CBCI owned by
another entity was a good reason for petitioner to verify of inquire as to the title
Philfinance to dispose to the CBCI.
Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1990 21,
known as the Rules and Regulations Governing Central Bank Certificates of
Indebtedness, Section 3, Article V of which provides that:

Sec. 3. Assignment of Registered Certificates. — Assignment of
registered certificates shall not be valid unless made at the office
where the same have been issued and registered or at the
Securities Servicing Department, Central Bank of the Philippines,
and by the registered owner thereof, in person or by his
representative, duly authorized in writing. For this purpose, the
transferee may be designated as the representative of the
registered owner.
Petitioner, being a commercial bank, cannot feign ignorance of Central Bank

Circular 769, and its requirements. An entity which deals with corporate agents
within circumstances showing that the agents are acting in excess of corporate
authority, may not hold the corporation liable. 22 This is only fair, as everyone
must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith. 23
The transfer made by Filriters to Philfinance did not conform to the said. Central
Bank Circular, which for all intents, is considered part of the law. As found by the
courts a quo, Alfredo O. Banaria, who had signed the deed of assignment from
Filriters to Philfinance, purportedly for and in favor of Filriters, did not have the
necessary written authorization from the Board of Directors of Filriters to act for
the latter. As it is, the sale from Filriters to Philfinance was fictitious, and
therefore void and inexistent, as there was no consideration for the same. This is
fatal to the petitioner's cause, for then, Philfinance had no title over the subject
certificate to convey the Traders Royal Bank. Nemo potest nisi quod de jure
potest — no man can do anything except what he can do lawfully.
Concededly, the subject CBCI was acquired by Filriters to form part of its legal
and capital reserves, which are required by law 24 to be maintained at a
mandated level. This was pointed out by Elias Garcia, Manager-in-Charge of
respondent Filriters, in his testimony given before the court on May 30, 1986.
Q Do you know this Central Bank Certificate of

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

A Well, this was CBCI of the company sought to be
examined by the Insurance Commission sometime
in early 1981 and this CBCI No. 891 was among
the CBCI's that were found to be missing.
Q Let me take you back further before 1981. Did

you have the knowledge of this CBCI No. 891
before 1981?
A Yes, sir. This CBCI is an investment of Filriters

required by the Insurance Commission as legal
reserve of the company.
Q Legal reserve for the purpose of what?
A Well, you see, the Insurance companies are

required to put up legal reserves under Section 213
of the Insurance Code equivalent to 40 percent of
the premiums receipt and further, the Insurance
Commission requires this reserve to be invested
preferably in government securities or government
binds. This is how this CBCI came to be purchased
by the company.
It cannot, therefore, be taken out of the said funds, without violating the
requirements of the law. Thus, the anauthorized use or distribution of the same
by a corporate officer of Filriters cannot bind the said corporation, not without the
approval of its Board of Directors, and the maintenance of the required reserve
fund.
Consequently, the title of Filriters over the subject certificate of indebtedness

must be upheld over the claimed interest of Traders Royal Bank.
ACCORDINGLY, the petition is DISMISSED and the decision appealed from

dated January 29, 1990 is hereby AFFIRMED.
SO ORDERED.

SECOND DIVISION
G.R. No. L-62943 July 14, 1986
METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner,

vs.
COURT OF APPEALS (Now INTERMEDIATE APPELLATE COURT) and THE
PHILIPPINE NATIONAL BANK, respondents.
This petition for review asks us to set aside the October 29, 1982 decision of the
respondent Court of Appeals, now Intermediate Appellate Court which reversed
the decision of the Court of First Instance of Manila, Branch XL, and dismissed
the plaintiff's complaint, the third party complaint, as well as the defendant's
counterclaim.
The background facts which led to the filing of the instant petition are
summarized in the decision of the respondent Court of Appeals:
Metropolitan Waterworks and Sewerage System (hereinafter

referred to as MWSS) is a government owned and controlled
corporation created under Republic Act No. 6234 as the
successor-in- interest of the defunct NWSA. The Philippine
National Bank (PNB for short), on the other hand, is the depository
bank of MWSS and its predecessor-in-interest NWSA. Among the
several accounts of NWSA with PNB is NWSA Account No. 6,
otherwise known as Account No. 381-777 and which is presently
allocated No. 010-500281. The authorized signature for said
Account No. 6 were those of MWSS treasurer Jose Sanchez, its
auditor Pedro Aguilar, and its acting General Manager Victor L.
Recio. Their respective specimen signatures were submitted by
the MWSS to and on file with the PNB. By special arrangement
with the PNB, the MWSS used personalized checks in drawing
from this account. These checks were printed for MWSS by its
printer, F. Mesina Enterprises, located at 1775 Rizal Extension,
Caloocan City.
During the months of March, April and May 1969, twenty-three

(23) checks were prepared, processed, issued and released by
NWSA, all of which were paid and cleared by PNB and debited by
PNB against NWSA Account No. 6, to wit:

Check No. Date Payee Amount Date Paid
By PNB
1. 59546 8-21-69 Deogracias P 3,187.79 4-2-69
Estrella
2. 59548 3-31-69 Natividad 2,848.86 4-23 69
Rosario
3. 59547 3-31-69 Pangilinan 195.00 Unreleased
Enterprises
4. 59549 3-31-69 Natividad 3,239.88 4-23-69
Rosario
5. 59552 4-1-69 Villarama 987.59 5-6-69
& Sons
6. 59554 4-1-69 Gascom 6,057.60 4-16 69
Engineering
7. 59558 4-2-69 The Evening 112.00 Unreleased
News
8. 59544 3-27-69 Progressive 18,391.20 4-18 69
Const.
9. 59564 4-2-69 Ind. Insp. 594.06 4-18 69
Int. Inc.

10. 59568 4-7-69 Roberto 800.00 4-22-69
Marsan
11. 59570 4-7-69 Paz Andres 200.00 4-22-69
12. 59574 4-8-69 Florentino 100,000.00 4-11-69
Santos
13. 59578 4-8-69 Mla. Daily 95.00 Unreleased
Bulletin
14. 59580 4-8-69 Phil. Herald 100.00 5-9-69
15. 59582 4-8-69 Galauran 7,729.09 5-6-69
& Pilar
16. 59581 4-8-69 Manila 110.00 5-12 69
Chronicle
17. 59588 4-8-69 Treago 21,583.00 4-11 69
Tunnel
18. 59587 4-8-69 Delfin 120,000.00 4-11-69
Santiago
19. 59589 4-10-69 Deogracias 1,257.49 4-16 69
Estrella
20. 59594 4-14-69 Philam Ac- 33.03 4-29 69
cident Inc.

21. 59577 4-8-69 Esla 9,429.78 4-29 69
22. 59601 4-16-69 Justino 20,000.00 4-18-69
Torres
23. 59595 4-14-69 Neris Phil. 4,274.00 5-20-69
Inc. --------------------
P 320,636.26
During the same months of March, April and May 1969, twenty-
three (23) checks bearing the same numbers as the
aforementioned NWSA checks were likewise paid and cleared by
PNB and debited against NWSA Account No. 6, to wit:
Check Date Payee Amount Date Paid
No. Issued By PNB
1. 59546 3-6-69 Raul Dizon P 84,401.00 3-16-69
2. 59548 3-11-69 Raul Dizon 104,790.00 4-1-69
3. 59547 3-14-69 Arturo Sison 56,903.00 4-11-69
4. 59549 3-20-69 Arturo Sison 48,903.00 4-15-69
5. 59552 3-24-69 Arturo Sison 63,845.00 4-16-69
6. 59544 3-26-69 Arturo Sison 98,450.00 4-17-69
7. 59558 3-28-69 Arturo Sison 114,840.00 4-21-69
8. 59544 3-16-69 Antonio 38,490.00 4-22-69 Mendoza
9. 59564 3-31-69 Arturo Sison 180,900.00 4-23-69
10.59568 4-2-69 Arturo Sison 134,940.00 4- 5-69

11.59570 4-1-69 Arturo Sison 64,550.00 4-28-69
12.59574 4-2-69 Arturo Sison 148,610.00 4-29-69
13.59578 4-10-69 Antonio 93,950.00 4-29-69

Mendoza
14.59580 4-8-69 Arturo Sison 160,000.00 5-2-69
15.59582 4-10-69 Arturo Sison 155,400.00 5-5-69
16.59581 4-8-69 Antonio 176,580.00 5-6-69
Mendoza
17.59588 4-16-69 Arturo Sison 176,000.00 5-8-69
18.59587 4-16-69 Arturo Sison 300,000.00 5-12-69
19.59589 4-18-69 Arturo Sison 122,000.00 5-14-69
20.59594 4-18-69 Arturo Sison 280,000.00 5-15-69
21.59577 4-14-69 Antonio 260,000.00 5-16-69
Mendoza
22.59601 4-18-69 Arturo Sison 400,000.00 5-19-69
23.59595 4-28-69 Arturo Sison 190,800.00 5-21-69
---------------
P3,457,903.00
The foregoing checks were deposited by the payees Raul Dizon,

Arturo Sison and Antonio Mendoza in their respective current
accounts with the Philippine Commercial and Industrial Bank
(PCIB) and Philippine Bank of Commerce (PBC) in the months of
March, April and May 1969. Thru the Central Bank Clearing, these

checks were presented for payment by PBC and PCIB to the
defendant PNB, and paid, also in the months of March, April and
May 1969. At the time of their presentation to PNB these checks
bear the standard indorsement which reads 'all prior indorsement
and/or lack of endorsement guaranteed.'
Subsequent investigation however, conducted by the NBI showed

that Raul Dizon, Arturo Sison and Antonio Mendoza were all
fictitious persons. The respective balances in their current account
with the PBC and/or PCIB stood as follows: Raul Dizon P3,455.00
as of April 30, 1969; Antonio Mendoza P18,182.00 as of May 23,
1969; and Arturo Sison Pl,398.92 as of June 30, 1969.
On June 11, 1969, NWSA addressed a letter to PNB requesting

the immediate restoration to its Account No. 6, of the total sum of
P3,457,903.00 corresponding to the total amount of these twenty-
three (23) checks claimed by NWSA to be forged and/or spurious
checks. "In view of the refusal of PNB to credit back to Account
No. 6 the said total sum of P3,457,903.00 MWSS filed the instant
complaint on November 10, 1972 before the Court of First
Instance of Manila and docketed thereat as Civil Case No. 88950.
In its answer, PNB contended among others, that the checks in

question were regular on its face in all respects, including the
genuineness of the signatures of authorized NWSA signing
officers and there was nothing on its face that could have aroused
any suspicion as to its genuineness and due execution and; that
NWSA was guilty of negligence which was the proximate cause of
the loss.
PNB also filed a third party complaint against the negotiating

banks PBC and PCIB on the ground that they failed to ascertain
the Identity of the payees and their title to the checks which were
deposited in the respective new accounts of the payees with them.
xxx xxx xxx
On February 6, 1976, the Court of First Instance of Manila rendered judgment in

favor of the MWSS. The dispositive portion of the decision reads:

WHEREFORE, on the COMPLAINT by a clear preponderance of
evidence and in accordance with Section 23 of the Negotiable
Instruments Law, the Court hereby renders judgment in favor of
the plaintiff Metropolitan Waterworks and Sewerage System
(MWSS) by ordering the defendant Philippine National Bank
(PNB) to restore the total sum of THREE MILLION FOUR
HUNDRED FIFTY SEVEN THOUSAND NINE HUNDRED THREE
PESOS (P3,457,903.00) to plaintiff's Account No. 6, otherwise
known as Account No. 010-50030-3, with legal interest thereon
computed from the date of the filing of the complaint and until as
restored in the said Account No. 6.
On the THIRD PARTY COMPLAINT, the Court, for lack of

evidence, hereby renders judgment in favor of the third party
defendants Philippine Bank of Commerce (PBC) and Philippine
Commercial and Industrial Bank (PCIB) by dismissing the Third
Party Complaint.
The counterclaims of the third party defendants are likewise

dismissed for lack of evidence.
No pronouncement as to costs.
As earlier stated, the respondent court reversed the decision of the Court of First
Instance of Manila and rendered judgment in favor of the respondent Philippine
National Bank.
A motion for reconsideration filed by the petitioner MWSS was denied by the
respondent court in a resolution dated January 3, 1983.
The petitioner now raises the following assignments of errors for the grant of this
petition:
I. IN NOT HOLDING THAT AS THE SIGNATURES ON THE

CHECKS WERE FORGED, THE DRAWEE BANK WAS LIABLE
FOR THE LOSS UNDER SECTION 23 OF THE NEGOTIABLE
INSTRUMENTS LAW.
II. IN FAILING TO CONSIDER THE PROXIMATE NEGLIGENCE

OF PNB IN ACCEPTING THE SPURIOUS CHECKS DESPITE
THE OBVIOUS IRREGULARITY OF TWO SETS OF CHECKS

BEARING IdENTICAL NUMBER BEING ENCASHED WITHIN
DAYS OF EACH OTHER.
III. IN NOT HOLDING THAT THE SIGNATURES OF THE

DRAWEE MWSS BEING CLEARLY FORGED, AND THE
CHECKS SPURIOUS, SAME ARE INOPERATIVE AS AGAINST
THE ALLEGED DRAWEE.
The appellate court applied Section 24 of the Negotiable Instruments Law which
provides:
Every negotiable instrument is deemed prima facie to have been

issued for valuable consideration and every person whose
signature appears thereon to have become a party thereto for
value.
The petitioner submits that the above provision does not apply to the facts of the
instant case because the questioned checks were not those of the MWSS and
neither were they drawn by its authorized signatories. The petitioner states that
granting that Section 24 of the Negotiable Instruments Law is applicable, the
same creates only a prima facie presumption which was overcome by the
following documents, to wit: (1) the NBI Report of November 2, 1970; (2) the NBI
Report of November 21, 1974; (3) the NBI Chemistry Report No. C-74891; (4)
the Memorandum of Mr. Juan Dino, 3rd Assistant Auditor of the respondent
drawee bank addressed to the Chief Auditor of the petitioner; (5) the admission
of the respondent bank's counsel in open court that the National Bureau of
Investigation found the signature on the twenty-three (23) checks in question to
be forgeries; and (6) the admission of the respondent bank's witness, Mr.
Faustino Mesina, Jr. that the checks in question were not printed by his printing
press. The petitioner contends that since the signatures of the checks were
forgeries, the respondent drawee bank must bear the loss under the rulings of
this Court.
A bank is bound to know the signatures of its customers; and if it

pays a forged check it must be considered as making the payment
out of its obligation funds, and cannot ordinarily charge the
amount so paid to the account of the depositor whose name was
forged.
xxx xxx xxx

The signatures to the checks being forged, under Section 23 of
the Negotiable Instruments Law they are not a charge against
plaintiff nor are the checks of any value to the defendant.
It must therefore be held that the proximate cause of loss was due
to the negligence of the Bank of the Philippine Islands in honoring
and cashing the two forged checks. (San Carlos Milling Co. v.
Bank of the P. I., 59 Phil. 59)
It is admitted that the Philippine National Bank cashed the check

upon a forged signature, and placed the money to the credit of
Maasim, who was the forger. That the Philippine National Bank
then endorsed the chock and forwarded it to the Shanghai Bank
by whom it was paid. The Philippine National Bank had no license
or authority to pay the money to Maasim or anyone else upon a
forged signature. It was its legal duty to know that Malicor's
endorsement was genuine before cashing the check. Its remedy is
against Maasim to whom it paid the money. (Great Eastern Life
Ins. Co. v. Hongkong & Shanghai Bank, 43 Phil. 678).
We have carefully reviewed the documents cited by the petitioner. There is no

express and categorical finding in these documents that the twenty-three (23)
questioned checks were indeed signed by persons other than the authorized
MWSS signatories. On the contrary, the findings of the National Bureau of
Investigation in its Report dated November 2, 1970 show that the MWSS fraud
was an "inside job" and that the petitioner's delay in the reconciliation of bank
statements and the laxity and loose records control in the printing of its
personalized checks facilitated the fraud. Likewise, the questioned Documents
Report No. 159-1074 dated November 21, 1974 of the National Bureau of
Investigation does not declare or prove that the signatures appearing on the
questioned checks are forgeries. The report merely mentions the alleged
differences in the type face, checkwriting, and printing characteristics appearing
in the standard or submitted models and the questioned typewritings. The NBI
Chemistry Report No. C-74-891 merely describes the inks and pens used in
writing the alleged forged signatures.
It is clear that these three (3) NBI Reports relied upon by the petitioner are
inadequate to sustain its allegations of forgery. These reports did not touch on
the inherent qualities of the signatures which are indispensable in the
determination of the existence of forgery. There must be conclusive findings that
there is a variance in the inherent characteristics of the signatures and that they
were written by two or more different persons.

Forgery cannot be presumed (Siasat, et al. v. Intermediate Appellate Court, et al,
139 SCRA 238). It must be established by clear, positive, and convincing
evidence. This was not done in the present case.
The cases of San Carlos Milling Co. Ltd. v. Bank of the Philippine Islands, et
al. (59 Phil. 59) and Great Eastern Life Ins., Co. v. Hongkong and Shanghai
Bank (43 Phil. 678) relied upon by the petitioner are inapplicable in this case
because the forgeries in those cases were either clearly established or admitted
while in the instant case, the allegations of forgery were not clearly established
during trial.
Considering the absence of sufficient security in the printing of the checks

coupled with the very close similarities between the genuine signatures and the
alleged forgeries, the twenty-three (23) checks in question could have been
presented to the petitioner's signatories without their knowing that they were
bogus checks. Indeed, the cashier of the petitioner whose signatures were
allegedly forged was unable to ten the difference between the allegedly forged
signature and his own genuine signature. On the other hand, the MWSS officials
admitted that these checks could easily be passed on as genuine.
The memorandum of Mr. A. T. Tolentino, no, Assistant Chief Accountant of the

drawee Philippine National Bank to Mr. E. Villatuya, Executive Vice-President of
the petitioner dated June 9, 1969 cites an instance where even the concerned
NWSA officials could not ten the differences between the genuine checks and
the alleged forged checks.
At about 12:00 o'clock on June 6, 1969, VP Maramag requested

me to see him in his office at the Cashier's Dept. where Messrs.
Jose M. Sanchez, treasurer of NAWASA and Romeo Oliva of the
same office were present. Upon my arrival I observed the
NAWASA officials questioning the issue of the NAWASA checks
appearing in their own list, xerox copy attached.
For verification purposes, therefore, the checks were taken from

our file. To everybody there present namely VIP Maramag, the
two abovementioned NAWASA officials, AVP, Buhain, Asst.
Cashier Castelo, Asst. Cashier Tejada and Messrs. A. Lopez and
L. Lechuga, both C/A bookkeepers, no one was able to point out
any difference on the signatures of the NAWASA officials
appearing on the checks compared to their official signatures on
file. In fact 3 checks, one of those under question, were presented
to the NAWASA treasurer for verification but he could not point out

which was his genuine signature. After intent comparison, he
pointed on the questioned check as bearing his correct signature.
xxx xxx xxx
Moreover, the petitioner is barred from setting up the defense of forgery under
Section 23 of the Negotiable Instruments Law which provides that:
SEC. 23. FORGED SIGNATURE; EFFECT OF.- When the

signature is forged or made without authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to
retain the instrument, or to give a discharge therefor, or to enforce
payment thereof against any party thereto can be acquired
through or under such signature unless the party against whom it
is sought to enforce such right is precluded from setting up the
forgery or want of authority.
because it was guilty of negligence not only before the questioned checks were
negotiated but even after the same had already been negotiated. (See Republic
v. Equitable Banking Corporation, 10 SCRA 8) The records show that at the time
the twenty-three (23) checks were prepared, negotiated, and encashed, the
petitioner was using its own personalized checks, instead of the official PNB
Commercial blank checks. In the exercise of this special privilege, however, the
petitioner failed to provide the needed security measures. That there was gross
negligence in the printing of its personalized checks is shown by the following
uncontroverted facts, to wit:
(1) The petitioner failed to give its printer, Mesina Enterprises, specific
instructions relative to the safekeeping and disposition of excess forms, check
vouchers, and safety papers;
(2) The petitioner failed to retrieve from its printer all spoiled check forms;
(3) The petitioner failed to provide any control regarding the paper used in the
printing of said checks;
(4) The petitioner failed to furnish the respondent drawee bank with samples of
typewriting, cheek writing, and print used by its printer in the printing of its checks
and of the inks and pens used in signing the same; and

(5) The petitioner failed to send a representative to the printing office during the
printing of said checks.
This gross negligence of the petitioner is very evident from the sworn statement
dated June 19, 1969 of Faustino Mesina, Jr., the owner of the printing press
which printed the petitioner's personalized checks:
xxx xxx xxx
7. Q: Do you have any business transaction with

the National Waterworks and Sewerage Authority
(NAWASA)?
A: Yes, sir. I have a contract with the NAWASA in

printing NAWASA Forms such as NAWASA Check
xxx xxx xxx
15. Q: Were you given any ingtruction by the

NAWASA in connection with the printing of these
check vouchers?
A: There is none, sir. No instruction whatsoever

was given to me.
16. Q: Were you not advised as to what kind of

paper would be used in the check vouchers?
A: Only as per sample, sir.
xxx xxx xxx
20. Q: Where did you buy this Hammermill Safety

check paper?
A: From Tan Chiong, a paper dealer with store

located at Juan Luna, Binondo, Manila. (In front of
the Metropolitan Bank).
xxx xxx xxx

24. Q: Were all these check vouchers printed by
you submitted to NAWASA?
A: Not all, sir. Because we have to make

reservations or allowances for spoilage.
25. Q: Out of these vouchers printed by you, how

many were spoiled and how many were the excess
printed check vouchers?
A: Approximately four hundred (400) sheets, sir. I

cannot determine the proportion of the excess and
spoiled because the final act of perforating these
check vouchers has not yet been done and
spoilage can only be determined after this final act
of printing.
26. Q: What did you do with these excess check

vouchers?
A: I keep it under lock and key in my firing cabinet.
xxx xxx xxx
28. Q: Were you not instructed by the NAWASA

authorities to bum these excess check vouchers?
A: No, sir. I was not instructed.
29. Q: What do you intend to do with these excess

printed check vouchers?
A: I intend to use them for future orders from the
xxx xxx xxx
32. Q: In the process of printing the check vouchers

ordered by the NAWASA, how many sheets were
actually spoiled?

A: I cannot approximate, sir. But there are spoilage
in the process of printing and perforating.
33. Q: What did you do with these spoilages?
A: Spoiled printed materials are usually thrown out,

in the garbage can.
34. Q: Was there any representative of the

NAWASA to supervise the printing or watch the
printing of these check vouchers?
A: None, sir.
xxx xxx xxx
39. Q: During the period of printing after the days

work, what measures do you undertake to
safeguard the mold and other paraphernalia used
in the printing of these particular orders of
NAWASA?
A: Inasmuch as I have an employee who sleeps in

the printing shop and at the same time do the
guarding, we just leave the mold attached to the
machine and the other finished or unfinished work
check vouchers are left in the rack so that the work
could be continued the following day.
The National Bureau of Investigation Report dated November 2, 1970 is even

more explicit. Thus—
xxx xxx xxx
60. We observed also that there is some laxity and

loose control in the printing of NAWASA 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.
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.

SECOND DIVISION
G.R. No. 107382/G.R. No. 107612 January 31, 1996
ASSOCIATED BANK, petitioner,

vs.
HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE
NATIONAL BANK, respondents.
xxxxxxxxxxxxxxxxxxxxx
G.R. No. 107612 January 31, 1996
PHILIPPINE NATIONAL BANK, petitioner,

vs.
HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and
ASSOCIATED BANK, respondents.
DECISION
ROMERO, J.:
Where thirty checks bearing forged endorsements are paid, who bears the loss,
the drawer, the drawee bank or the collecting bank?
This is the main issue in these consolidated petitions for review assailing the
decision of the Court of Appeals in "Province of Tarlac v. Philippine National
Bank v. Associated Bank v. Fausto Pangilinan, et. al." (CA-G.R. No. CV No.
17962). 1
The facts of the case are as follows:
The Province of Tarlac maintains a current account with the Philippine National
Bank (PNB) Tarlac Branch where the provincial funds are deposited. Checks
issued by the Province are signed by the Provincial Treasurer and countersigned
by the Provincial Auditor or the Secretary of the Sangguniang Bayan.
A portion of the funds of the province is allocated to the Concepcion Emergency

Hospital. 2 The allotment checks for said government hospital are drawn to the
order of "Concepcion Emergency Hospital, Concepcion, Tarlac" or "The Chief,
Concepcion Emergency Hospital, Concepcion, Tarlac." The checks are released

by the Office of the Provincial Treasurer and received for the hospital by its
administrative officer and cashier.
In January 1981, the books of account of the Provincial Treasurer were post-
audited by the Provincial Auditor. It was then discovered that the hospital did not
receive several allotment checks drawn by the Province.
On February 19, 1981, the Provincial Treasurer requested the manager of the
PNB to return all of its cleared checks which were issued from 1977 to 1980 in
order to verify the regularity of their encashment. After the checks were
examined, the Provincial Treasurer learned that 30 checks amounting to
P203,300.00 were encashed by one Fausto Pangilinan, with the Associated
Bank acting as collecting bank.
It turned out that Fausto Pangilinan, who was the administrative officer and
cashier of payee hospital until his retirement on February 28, 1978, collected the
questioned checks from the office of the Provincial Treasurer. He claimed to be
assisting or helping the hospital follow up the release of the checks and had
official receipts. 3Pangilinan sought to encash the first check 4 with Associated
Bank. However, the manager of Associated Bank refused and suggested that
Pangilinan deposit the check in his personal savings account with the same
bank. Pangilinan was able to withdraw the money when the check was cleared
and paid by the drawee bank, PNB.
After forging the signature of Dr. Adena Canlas who was chief of the payee
hospital, Pangilinan followed the same procedure for the second check, in the
amount of P5,000.00 and dated April 20, 1978, 5 as well as for twenty-eight other
checks of various amounts and on various dates. The last check negotiated by
Pangilinan was for f8,000.00 and dated February 10, 1981. 6 All the checks bore
the stamp of Associated Bank which reads "All prior endorsements guaranteed
ASSOCIATED BANK."
Jesus David, the manager of Associated Bank testified that Pangilinan made it
appear that the checks were paid to him for certain projects with the
hospital. 7 He did not find as irregular the fact that the checks were not payable to
Pangilinan but to the Concepcion Emergency Hospital. While he admitted that his
wife and Pangilinan's wife are first cousins, the manager denied having given
Pangilinan preferential treatment on this account. 8
On February 26, 1981, the Provincial Treasurer wrote the manager of the PNB
seeking the restoration of the various amounts debited from the current account
of the Province. 9

In turn, the PNB manager demanded reimbursement from the Associated Bank
on May 15, 1981. 10
As both banks resisted payment, the Province of Tarlac brought suit against PNB
which, in turn, impleaded Associated Bank as third-party defendant. The latter
then filed a fourth-party complaint against Adena Canlas and Fausto
Pangilinan. 11
After trial on the merits, the lower court rendered its decision on March 21, 1988,
disposing as follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered:
1. On the basic complaint, in favor of plaintiff Province of Tarlac and

against defendant Philippine National Bank (PNB), ordering the latter to
pay to the former, the sum of Two Hundred Three Thousand Three
Hundred (P203,300.00) Pesos with legal interest thereon from March 20,
1981 until fully paid;
2. On the third-party complaint, in favor of defendant/third-party plaintiff

Philippine National Bank (PNB) and against third-party defendant/fourth-
party plaintiff Associated Bank ordering the latter to reimburse to the
former the amount of Two Hundred Three Thousand Three Hundred
(P203,300.00) Pesos with legal interests thereon from March 20, 1981
until fully paid;.
3. On the fourth-party complaint, the same is hereby ordered dismissed

for lack of cause of action as against fourth-party defendant Adena
Canlas and lack of jurisdiction over the person of fourth-party defendant
Fausto Pangilinan as against the latter.
4. On the counterclaims on the complaint, third-party complaint and

fourth-party complaint, the same are hereby ordered dismissed for lack of
merit.
SO ORDERED. 12
PNB and Associated Bank appealed to the Court of Appeals. 13 Respondent court
affirmed the trial court's decision in toto on September 30, 1992.

Hence these consolidated petitions which seek a reversal of respondent
appellate court's decision.
PNB assigned two errors. First, the bank contends that respondent court erred in
exempting the Province of Tarlac from liability when, in fact, the latter was
negligent because it delivered and released the questioned checks to Fausto
Pangilinan who was then already retired as the hospital's cashier and
administrative officer. PNB also maintains its innocence and alleges that as
between two innocent persons, the one whose act was the cause of the loss, in
this case the Province of Tarlac, bears the loss.
Next, PNB asserts that it was error for the court to order it to pay the province
and then seek reimbursement from Associated Bank. According to petitioner
bank, respondent appellate Court should have directed Associated Bank to pay
the adjudged liability directly to the Province of Tarlac to avoid circuity. 14
Associated Bank, on the other hand, argues that the order of liability should be
totally reversed, with the drawee bank (PNB) solely and ultimately bearing the
loss.
Respondent court allegedly erred in applying Section 23 of the Philippine

Clearing House Rules instead of Central Bank Circular No. 580, which, being an
administrative regulation issued pursuant to law, has the force and effect of
law. 15 The PCHC Rules are merely contractual stipulations among and between
member-banks. As such, they cannot prevail over the aforesaid CB Circular.
It likewise contends that PNB, the drawee bank, is estopped from asserting the
defense of guarantee of prior indorsements against Associated Bank, the
collecting bank. In stamping the guarantee (for all prior indorsements), it merely
followed a mandatory requirement for clearing and had no choice but to place the
stamp of guarantee; otherwise, there would be no clearing. The bank will be in a
"no-win" situation and will always bear the loss as against the drawee bank. 16
Associated Bank also claims that since PNB already cleared and paid the value
of the forged checks in question, it is now estopped from asserting the defense
that Associated Bank guaranteed prior indorsements. The drawee bank allegedly
has the primary duty to verify the genuineness of payee's indorsement before
paying the check. 17

While both banks are innocent of the forgery, Associated Bank claims that PNB
was at fault and should solely bear the loss because it cleared and paid the
forged checks.
xxx xxx xxx
The case at bench concerns checks payable to the order of Concepcion

Emergency Hospital or its Chief. They were properly issued and bear the
genuine signatures of the drawer, the Province of Tarlac. The infirmity in the
questioned checks lies in the payee's (Concepcion Emergency Hospital)
indorsements which are forgeries. At the time of their indorsement, the checks
were order instruments.
Checks having forged indorsements should be differentiated from forged checks

or checks bearing the forged signature of the drawer.
Section 23 of the Negotiable Instruments Law (NIL) provides:
Sec. 23. FORGED SIGNATURE, EFFECT OF. — When a signature is

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

inoperative and no one can gain title to the instrument through it. A person whose
signature to an instrument was forged was never a party and never consented to
the contract which allegedly gave rise to such instrument. 18 Section 23 does not
avoid the instrument but only the forged signature. 19 Thus, a forged indorsement
does not operate as the payee's indorsement.
The exception to the general rule in Section 23 is where "a party against whom it
is sought to enforce a right is precluded from setting up the forgery or want of
authority." Parties who warrant or admit the genuineness of the signature in
question and those who, by their acts, silence or negligence are estopped from
setting up the defense of forgery, are precluded from using this defense.
Indorsers, persons negotiating by delivery and acceptors are warrantors of the
genuineness of the signatures on the instrument. 20

In bearer instruments, the signature of the payee or holder is unnecessary to
pass title to the instrument. Hence, when the indorsement is a forgery, only the
person whose signature is forged can raise the defense of forgery against a
holder in due course. 21
The checks involved in this case are order instruments, hence, the following
discussion is made with reference to the effects of a forged indorsement on an
instrument payable to order.
Where the instrument is payable to order at the time of the forgery, such as the
checks in this case, the signature of its rightful holder (here, the payee hospital)
is essential to transfer title to the same instrument. When the holder's
indorsement is forged, all parties prior to the forgery may raise the real defense
of forgery against all parties subsequent thereto. 22
An indorser of an order instrument warrants "that the instrument is genuine and

in all respects what it purports to be; that he has a good title to it; that all prior
parties had capacity to contract; and that the instrument is at the time of his
indorsement valid and subsisting." 23 He cannot interpose the defense that
signatures prior to him are forged.
A collecting bank where a check is deposited and which indorses the check upon
presentment with the drawee bank, is such an indorser. So even if the
indorsement on the check deposited by the banks's client is forged, the collecting
bank is bound by his warranties as an indorser and cannot set up the defense of
forgery as against the drawee bank.
The bank on which a check is drawn, known as the drawee bank, is under strict
liability to pay the check to the order of the payee. The drawer's instructions are
reflected on the face and by the terms of the check. Payment under a forged
indorsement is not to the drawer's order. When the drawee bank pays a person
other than the payee, it does not comply with the terms of the check and violates
its duty to charge its customer's (the drawer) account only for properly payable
items. Since the drawee bank did not pay a holder or other person entitled to
receive payment, it has no right to reimbursement from the drawer. 24 The
general rule then is that the drawee bank may not debit the drawer's account and
is not entitled to indemnification from the drawer. 25 The risk of loss must perforce
fall on the drawee bank.
However, if the drawee bank can prove a failure by the customer/drawer to

exercise ordinary care that substantially contributed to the making of the forged
signature, the drawer is precluded from asserting the forgery.

If at the same time the drawee bank was also negligent to the point of
substantially contributing to the loss, then such loss from the forgery can be
apportioned between the negligent drawer and the negligent bank. 26
In cases involving a forged check, where the drawer's signature is forged, the
drawer can recover from the drawee bank. No drawee bank has a right to pay a
forged check. If it does, it shall have to recredit the amount of the check to the
account of the drawer. The liability chain ends with the drawee bank whose
responsibility it is to know the drawer's signature since the latter is its
customer. 27
In cases involving checks with forged indorsements, such as the present petition,
the chain of liability does not end with the drawee bank. The drawee bank may
not debit the account of the drawer but may generally pass liability back through
the collection chain to the party who took from the forger and, of course, to the
forger himself, if available. 28 In other words, the drawee bank canseek
reimbursement or a return of the amount it paid from the presentor bank or
person. 29 Theoretically, the latter can demand reimbursement from the person
who indorsed the check to it and so on. The loss falls on the party who took the
check from the forger, or on the forger himself.
In this case, the checks were indorsed by the collecting bank (Associated Bank)
to the drawee bank (PNB). The former will necessarily be liable to the latter for
the checks bearing forged indorsements. If the forgery is that of the payee's or
holder's indorsement, the collecting bank is held liable, without prejudice to the
latter proceeding against the forger.
Since a forged indorsement is inoperative, the collecting bank had no right to be

paid by the drawee bank. The former must necessarily return the money paid by
the latter because it was paid wrongfully. 30
More importantly, by reason of the statutory warranty of a general indorser in

section 66 of the Negotiable Instruments Law, a collecting bank which indorses a
check bearing a forged indorsement and presents it to the drawee bank
guarantees all prior indorsements, including the forged indorsement. It warrants
that the instrument is genuine, and that it is valid and subsisting at the time of his
indorsement. Because the indorsement is a forgery, the collecting bank commits
a breach of this warranty and will be accountable to the drawee bank. This
liability scheme operates without regard to fault on the part of the
collecting/presenting bank. Even if the latter bank was not negligent, it would still
be liable to the drawee bank because of its indorsement.

The Court has consistently ruled that "the collecting bank or last endorser
generally suffers the loss because it has the duty to ascertain the genuineness of
all prior endorsements considering that the act of presenting the check for
payment to the drawee is an assertion that the party making the presentment has
done its duty to ascertain the genuineness of the endorsements." 31
The drawee bank is not similarly situated as the collecting bank because the
former makes no warranty as to the genuineness. of any indorsement. 32 The
drawee bank's duty is but to verify the genuineness of the drawer's signature and
not of the indorsement because the drawer is its client.
Moreover, the collecting bank is made liable because it is privy to the depositor
who negotiated the check. The bank knows him, his address and history because
he is a client. It has taken a risk on his deposit. The bank is also in a better
position to detect forgery, fraud or irregularity in the indorsement.
Hence, the drawee bank can recover the amount paid on the check bearing a
forged indorsement from the collecting bank. However, a drawee bank has the
duty to promptly inform the presentor of the forgery upon discovery. If the drawee
bank delays in informing the presentor of the forgery, thereby depriving said
presentor of the right to recover from the forger, the former is deemed negligent
and can no longer recover from the presentor. 33
Applying these rules to the case at bench, PNB, the drawee bank, cannot debit
the current account of the Province of Tarlac because it paid checks which bore
forged indorsements. However, if the Province of Tarlac as drawer was negligent
to the point of substantially contributing to the loss, then the drawee bank PNB
can charge its account. If both drawee bank-PNB and drawer-Province of Tarlac
were negligent, the loss should be properly apportioned between them.
The loss incurred by drawee bank-PNB can be passed on to the collecting bank-
Associated Bank which presented and indorsed the checks to it. Associated
Bank can, in turn, hold the forger, Fausto Pangilinan, liable.
If PNB negligently delayed in informing Associated Bank of the forgery, thus

depriving the latter of the opportunity to recover from the forger, it forfeits its right
to reimbursement and will be made to bear the loss.
After careful examination of the records, the Court finds that the Province of
Tarlac was equally negligent and should, therefore, share the burden of loss from
the checks bearing a forged indorsement.

The Province of Tarlac permitted Fausto Pangilinan to collect the checks when
the latter, having already retired from government service, was no longer
connected with the hospital. With the exception of the first check (dated January
17, 1978), all the checks were issued and released after Pangilinan's retirement
on February 28, 1978. After nearly three years, the Treasurer's office was still
releasing the checks to the retired cashier. In addition, some of the aid allotment
checks were released to Pangilinan and the others to Elizabeth Juco, the new
cashier. The fact that there were now two persons collecting the checks for the
hospital is an unmistakable sign of an irregularity which should have alerted
employees in the Treasurer's office of the fraud being committed. There is also
evidence indicating that the provincial employees were aware of Pangilinan's
retirement and consequent dissociation from the hospital. Jose Meru, the
Provincial Treasurer, testified:.
ATTY. MORGA:
Q Now, is it true that for a given month there were two releases of
checks, one went to Mr. Pangilinan and one went to Miss Juco?
JOSE MERU:
A Yes, sir.
Q Will you please tell us how at the time (sic) when the authorized
representative of Concepcion Emergency Hospital is and was supposed
to be Miss Juco?
A Well, as far as my investigation show (sic) the assistant cashier told me

that Pangilinan represented himself as also authorized to help in the
release of these checks and we were apparently misled because they
accepted the representation of Pangilinan that he was helping them in the
release of the checks and besides according to them they were,
Pangilinan, like the rest, was able to present an official receipt to
acknowledge these receipts and according to them since this is a
government check and believed that it will eventually go to the hospital
following the standard procedure of negotiating government checks, they
released the checks to Pangilinan aside from Miss Juco.34
The failure of the Province of Tarlac to exercise due care contributed to a

significant degree to the loss tantamount to negligence. Hence, the Province of

Tarlac should be liable for part of the total amount paid on the questioned
checks.
The drawee bank PNB also breached its duty to pay only according to the terms
of the check. Hence, it cannot escape liability and should also bear part of the
loss.
As earlier stated, PNB can recover from the collecting bank.
In the case of Associated Bank v. CA, 35 six crossed checks with forged
indorsements were deposited in the forger's account with the collecting bank and
were later paid by four different drawee banks. The Court found the collecting
bank (Associated) to be negligent and held:
The Bank should have first verified his right to endorse the crossed
checks, of which he was not the payee, and to deposit the proceeds of
the checks to his own account. The Bank was by reason of the nature of
the checks put upon notice that they were issued for deposit only to the
private respondent's account. . . .
The situation in the case at bench is analogous to the above case, for it was not
the payee who deposited the checks with the collecting bank. Here, the checks
were all payable to Concepcion Emergency Hospital but it was Fausto Pangilinan
who deposited the checks in his personal savings account.
Although Associated Bank claims that the guarantee stamped on the checks (All
prior and/or lack of endorsements guaranteed) is merely a requirement forced
upon it by clearing house rules, it cannot but remain liable. The stamp
guaranteeing prior indorsements is not an empty rubric which a bank must fulfill
for the sake of convenience. A bank is not required to accept all the checks
negotiated to it. It is within the bank's discretion to receive a check for no banking
institution would consciously or deliberately accept a check bearing a forged
indorsement. When a check is deposited with the collecting bank, it takes a risk
on its depositor. It is only logical that this bank be held accountable for checks
deposited by its customers.
A delay in informing the collecting bank (Associated Bank) of the forgery, which
deprives it of the opportunity to go after the forger, signifies negligence on the
part of the drawee bank (PNB) and will preclude it from claiming reimbursement.

It is here that Associated Bank's assignment of error concerning C.B. Circular
No. 580 and Section 23 of the Philippine Clearing House Corporation Rules
comes to fore. Under Section 4(c) of CB Circular No. 580, items bearing a forged
endorsement shall be returned within twenty-Sour (24) hours after discovery of
the forgery but in no event beyond the period fixed or provided by law for filing of
a legal action by the returning bank. Section 23 of the PCHC Rules deleted the
requirement that items bearing a forged endorsement should be returned within
twenty-four hours. Associated Bank now argues that the aforementioned Central
Bank Circular is applicable. Since PNB did not return the questioned checks
within twenty-four hours, but several days later, Associated Bank alleges that
PNB should be considered negligent and not entitled to reimbursement of the
amount it paid on the checks.
The Court deems it unnecessary to discuss Associated Bank's assertions that

CB Circular No. 580 is an administrative regulation issued pursuant to law and as
such, must prevail over the PCHC rule. The Central Bank circular was in force for
all banks until June 1980 when the Philippine Clearing House Corporation
(PCHC) was set up and commenced operations. Banks in Metro Manila were
covered by the PCHC while banks located elsewhere still had to go through
Central Bank Clearing. In any event, the twenty-four-hour return rule was
adopted by the PCHC until it was changed in 1982. The contending banks
herein, which are both branches in Tarlac province, are therefore not covered by
PCHC Rules but by CB Circular No. 580. Clearly then, the CB circular was
applicable when the forgery of the checks was discovered in 1981.
The rule mandates that the checks be returned within twenty-four hours after
discovery of the forgery but in no event beyond the period fixed by law for filing a
legal action. The rationale of the rule is to give the collecting bank (which
indorsed the check) adequate opportunity to proceed against the forger. If prompt
notice is not given, the collecting bank maybe prejudiced and lose the opportunity
to go after its depositor.
The Court finds that even if PNB did not return the questioned checks to
Associated Bank within twenty-four hours, as mandated by the rule, PNB did not
commit negligent delay. Under the circumstances, PNB gave prompt notice to
Associated Bank and the latter bank was not prejudiced in going after Fausto
Pangilinan. After the Province of Tarlac informed PNB of the forgeries, PNB
necessarily had to inspect the checks and conduct its own investigation.
Thereafter, it requested the Provincial Treasurer's office on March 31, 1981 to
return the checks for verification. The Province of Tarlac returned the checks only
on April 22, 1981. Two days later, Associated Bank received the checks from
PNB. 36

Associated Bank was also furnished a copy of the Province's letter of demand to
PNB dated March 20, 1981, thus giving it notice of the forgeries. At this time,
however, Pangilinan's account with Associated had only P24.63 in it. 37Had
Associated Bank decided to debit Pangilinan's account, it could not have
recovered the amounts paid on the questioned checks. In addition, while
Associated Bank filed a fourth-party complaint against Fausto Pangilinan, it did
not present evidence against Pangilinan and even presented him as its rebuttal
witness. 38 Hence, Associated Bank was not prejudiced by PNB's failure to
comply with the twenty-four-hour return rule.
Next, Associated Bank contends that PNB is estopped from requiring

reimbursement because the latter paid and cleared the checks. The Court finds
this contention unmeritorious. Even if PNB cleared and paid the checks, it can
still recover from Associated Bank. This is true even if the payee's Chief Officer
who was supposed to have indorsed the checks is also a customer of the drawee
bank. 39 PNB's duty was to verify the genuineness of the drawer's signature and
not the genuineness of payee's indorsement. Associated Bank, as the collecting
bank, is the entity with the duty to verify the genuineness of the payee's
indorsement.
PNB also avers that respondent court erred in adjudging circuitous liability by
directing PNB to return to the Province of Tarlac the amount of the checks and
then directing Associated Bank to reimburse PNB. The Court finds nothing wrong
with the mode of the award. The drawer, Province of Tarlac, is a clientor
customer of the PNB, not of Associated Bank. There is no privity of contract
between the drawer and the collecting bank.
The trial court made PNB and Associated Bank liable with legal interest from
March 20, 1981, the date of extrajudicial demand made by the Province of Tarlac
on PNB. The payments to be made in this case stem from the deposits of the
Province of Tarlac in its current account with the PNB. Bank deposits are
considered under the law as loans. 40 Central Bank Circular No. 416 prescribes a
twelve percent (12%) interest per annum for loans, forebearance of money,
goods or credits in the absence of express stipulation. Normally, current
accounts are likewise interest-bearing, by express contract, thus excluding them
from the coverage of CB Circular No. 416. In this case, however, the actual
interest rate, if any, for the current account opened by the Province of Tarlac with
PNB was not given in evidence. Hence, the Court deems it wise to affirm the trial
court's use of the legal interest rate, or six percent (6%) per annum. The interest
rate shall be computed from the date of default, or the date of judicial or
extrajudicial demand. 41 The trial court did not err in granting legal interest from
March 20, 1981, the date of extrajudicial demand.

The Court finds as reasonable, the proportionate sharing of fifty percent - fifty
percent (50%-50%). Due to the negligence of the Province of Tarlac in releasing
the checks to an unauthorized person (Fausto Pangilinan), in allowing the retired
hospital cashier to receive the checks for the payee hospital for a period close to
three years and in not properly ascertaining why the retired hospital cashier was
collecting checks for the payee hospital in addition to the hospital's real cashier,
respondent Province contributed to the loss amounting to P203,300.00 and shall
be liable to the PNB for fifty (50%) percent thereof. In effect, the Province of
Tarlac can only recover fifty percent (50%) of P203,300.00 from PNB.
The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%)
percent of P203,300.00. It is liable on its warranties as indorser of the checks
which were deposited by Fausto Pangilinan, having guaranteed the genuineness
of all prior indorsements, including that of the chief of the payee hospital, Dr.
Adena Canlas. Associated Bank was also remiss in its duty to ascertain the
genuineness of the payee's indorsement.
IN VIEW OF THE FOREGOING, the petition for review filed by the Philippine
National Bank (G.R. No. 107612) is hereby PARTIALLY GRANTED. The petition
for review filed by the Associated Bank (G.R. No. 107382) is hereby DENIED.
The decision of the trial court is MODIFIED. The Philippine National Bank shall
pay fifty percent (50%) of P203,300.00 to the Province of Tarlac, with legal
interest from March 20, 1981 until the payment thereof. Associated Bank shall
pay fifty percent (50%) of P203,300.00 to the Philippine National Bank, likewise,
with legal interest from March 20, 1981 until payment is made.
SO ORDERED.

FIRST DIVISION
G.R. No. 126696 January 21, 1999
SECURITY BANK & TRUST COMPANY, petitioner,

vs.
TRIUMPH LUMBER AND CONSTRUCTION CORPORATION, respondent.
DAVIDE, JR., C.J.:
In this petition for review on certiorari under Rule 45 of the Rules of Court the
petitioner asks this Court to reverse the decision 1 of 28 December 1995 and the
resolution 2 of 17 September 1996 of the Court of Appeals in CA-G.R. CV No,
33513. The former set aside the decision 3 of 14 November 1990 of the Regional
Trial Court (RTC) of Makati in Civil Case No. 16882 and ordered the petitioner to
reimburse the private respondent the value of the alleged forged checks drawn
against private respondent's account, plus interest and attorney's fees. The latter
denied petitioner's motion for reconsideration.
Petitioner and private respondent were the defendant and plaintiff respectively, in
Civil Case No. 16882.
The factual antecedents of this case were summarized by the trial court in its
decision in Civil Case No. 16882; thus:
Based on plaintiffs evidence, it appears that plaintiff is a depositor

in good standing of defendant bank's branch at Sucat, Parañaque,
under current checking account no. 210-0053-60. Plaintiff claims
that on March 23 and 24, 1987, three (3) checks all payable to
cash and all drawn against plaintiffs aforementioned current
account were presented for encashment at defendant's Sucat
Parañaque branch, to wit: Security Bank check nos. 466779 and
466777, both dated March 23, 1987 in the amount of P150,000.00
and P130,000.00, respectively; and Security Bank Check no.
466780 dated March 24, 1987 in the amount of P20,000.00.
(Exhs. A, A-1 to A-3, B, B-1 to B-3, C, C-1 to C-3) Plaintiff also
claims that due to defendant bank's gross negligence and

inexcusable negligence in exercising ordinary diligence in verifying
from plaintiff the encashment of plaintiff's checks whose amount
exceed P10,000.00 and in determining the forgery of drawer's
signatures, the aforesaid three (3) checks were encashed by
unauthorized persons to the damage and prejudice of the plaintiff
corporation. (Exhs, D, D-l, D-2) Plaintiff then requested the
defendant to credit back and restore to its account the value of the
checks which were wrongfully encashed in the amount of
P300,000.00 but despite due demand the defendant failed to pay
its liability. (Exhs. F, F-l, F-2) Finally, plaintiff claims that per
findings of the PC Crime Laboratory, the signatures of Co Yok
Teng and Yu Chun Kit, the authorized [signatories] of plaintiff were
forged. (Exhs.E, E-1, to E-4, G, G-1, G-2, H, I, I-1, I-2)
Upon the other hand, the defendant bank claims that on June 19,
1985 the plaintiff corporation opened savings account no. 3220-
0529-79 and current account no. 3210-0053-60 with defendant
bank's branch in Sucat, Parañaque, Metro Manila. In order to
make the said current and savings account operational, the
plaintiff herein provided the defendant with the requisite specimen
signature cards which in effect authorized defendant bank to
honor withdrawals on the basis of any two of three signatures
affixed thereon, specifically those of Mr. Dee Kong, Mr. Co Yok
Teng and Mr. Chun Yun Kit, the president, treasurer and general
manager, respectively, of plaintiff corporation. (Exhs. 3, 4)
Subsequently, plaintiff executed an automatic transfer agreement
authorizing defendant bank to transfer cleared funds from
plaintiff's savings account to its current account at any time
whenever funds in the current account are insufficient to meet
withdrawals therefrom or are below the stipulated minimum
balance. (Exhs. 5, 6, 6-A) Defendant also claims that the savings
account pass book and the check booklets were kept by the
plaintiff in its filing cabinet but on March 23, 1987 the plaintiff
herein discovered that the door of his office was forced open
including that of the filing cabinet where the check booklets and
other bank documents were being kept by the plaintiff. (pp. 32-33,
TSN of August 15, 1988) Defendant further claims that the
incident was not reported to the police authorities by the plaintiff
nor was there any advise given to defendant bank and that on the
same day of the discovery by plaintiff of the burglary, said plaintiff
nevertheless made three separate deposits in a total amount of
P374,554.10. (Exhs. 1, 1-A, 1-B, 2-A, 2-B) Defendant also claims

that immediately after the said deposit of P374,554.10 has been
made by the plaintiff, three checks namely: check no. 466779
dated March 23, 1987 in the amount of P130,000.00; check no.
466779 dated March 23, 1987 of P150,000.00 and check no.
466780 dated March 24, 1987 in the amount of P20,000.00 which
[were] all payable to cash were successively presented to
defendant bank for encashment which was given due course by
the latter after said checks have passed through the standard
bank procedure for verification the check signatures and the
regularity of the material particular of said checks. (pp. 6, 19, 20,
39, TSN of February 1, 1989, p. 21, TSN of August 15, 1988) 4
On the basis of such factual environment, the trial court found no preponderance
of evidence to support private respondent's complaint. The private respondent
failed to show that the signatures on the subject checks were forged. It did not
even present in court the originals of the checks. Neither did it bother to explain
its failure to do so. Thus, it could be presumed that the original checks were
willfully suppressed and would be adverse to private respondent's case if
produced. Moreover, the signatures on the checks were not compared with the
specimen signatures appearing on the specimen signatures cards provided by
the private respondent upon opening its current account with petitioner. Thus, the
opinion of the expert witness is not worthy of credit. Besides, the private
respondent failed to present Mr. Co Yok Teng, one of the signatories of the
checks in question, to deny the genuineness of the signatures.
The trial court was convinced that the petitioner bank had exercised due care
and diligence in determining the authenticity of the checks in question before
they were encashed. It was rather the private respondent that had been negligent
in the care and custody of the corporate checks. After the incident in question
occurred, the private respondent should have reported the matter to the police
authorities or to the bank in order that the latter could "undertake stringent
measure to counteract any attempt to forge the corporate checks." But private
respondent did not. Hence, private respondent should be the one to bear the
loss.
In view of such findings, the trial court is missed the complaint for lack of merit.
On appeal, the Court of Appeals reversed the decision of the trial court and
ordered the petitioner to reimburse the private respondent the sum of P300,000,
plus interest at the rate of 21/2 % per month from 24 March 1987 until full
payment thereof, as well as attorney's fees equivalent to 25% of the principal
obligation.

The Court of appeals held that it was not necessary for the private respondent to
prove that the signatures on the three checks in question were forged of the
following admissions set forth in petitioner's answer:
14. Plaintiff was guilty of negligence substantially contributing to

the unauthorized signatures or for forgery of the signatures on the
checks mentioned in the complaint.
xxx xxx xxx
15. The alleged forged signatures on the checks were sufficiently

adroit as to escape detection even under the officer's scrutiny.
xxx xxx xxx
20.3 Anna P. Naval and Roberto N. Gabutao verbally admitted

that the checks were forged.
xxx xxx xxx
21. Anna Naval and Roberto Gabutao are now facing charges for
estafa thru Falsification of Commercial Documents under Criminal
Case No. 30004 pending with the Regional Trial Court, National
Capital Judicial Region, sitting at Makati, Metro Manila.
According to the Court of Appeals, the expert witness, contrary to the trial court's
finding, was able to examine the signatures on the original checks and compared
them with the standard signatures of the signatories. The photographic
enlargements of the questioned checks, which she identified in court, were in fact
taken from the original checks. With the bank's admission in its answer, as well
as the unrebutted testimony of the expert witness and of Chun Yun Kit, there
could be no doubt that the signatures on the questioned checks were forged.
The Court of Appeals likewise held that the petitioner must be the one to bear the
consequences of its failure to detect the fogery. Besides, petitioner was "less
than prudent" in the treatment of private respondent's account. It did not observe
its arrangement with the private respondent that it would inform the latter
whenever a check of more than P10,000 would be presented for encashment.
Neither did it ask the payee to present an identification card or to bring someone
who could attest to identity of the payee.

After its motion for reconsideration was denied 5 by the Court of Appeals,
petitioner filed this petition contending that the Court of Appeals erred in holding
that
. . . THE SIGNATURES ON THE CHECKS IN QUESTION WERE

FORGED.
II
. . . WHETHER THE SIGNATURES WERE FORGED IS NO

LONGER AN ISSUE IN THE CASE CONSIDERING THE
AFFIRMATIVE DEFENSES SET FORT IN PETITIONER'S
ANSWER.
III
. . . THE PETITIONER ITSELF WAS NEGLIGENT AND THAT

RESPONDENT EXERCISED DUE CARE IN THE CUSTODY OF
ITS CHECKS AND OTHER RELATED DOCUMENTS.
IV
. . . RESPONDENT IS ENTITLED TO REIMBURSEMENT OF

P300,000.00 PLUS INTEREST THEREOF AS WELL AS
ATTORNEY'S FEES.
In the first assigned error, the petitioner alleges that the best evidence of the
forgery were the original checks bearing the alleged forged signatures of private
respondent's officers. In spite of the timely objection made by the petitioner, the
private respondent introduced in evidence mere photocopies of the questioned
checks. The failure to produce the originals of the checks was a fatal omission
inasmuch as there would be no evidentiary basis for the court to declare that the
instruments were forgeries. Likewise such failure amounted to a willful
suppression of evidence, which created a presumption that its production would
be unfavorable to respondent's case.6 It could also be presumed that "the checks
in question [were] genuine checks regularly issued by the respondent in the
course of its business, bearing the genuine signatures of the officers whom it
authorized to sign in its behalf." Also, an unfavorable inference could be drawn

from the unexplained failure of private respondent to call as its witness Mr. Co
Yok Teng, whose signature was among those allegedly forged.
Petitioner further contends that the opinion of private respondent's expert

witness, Crispina V. Tabo, Senior Document Examiner of the PC Crime
Laboratory, has no weight and deserves no consideration. Tabo did not use as
basis of her analytical study the standard signatures of Chun Yun Kit and Co Yok
Teng on the specimen signature cards provided by the private respondent upon
opening Current Account No. 3210-0523-60 with the petitioner. It was to be
against these standard signatures appearing on the specimen cards that
petitioner was to honor checks drawn against private respondent's account. What
Tabo utilized for comparisons were signatures that were not even authenticated
by Chun Yun Kit and Co Yok Teng. Neither was it proved that the supposed
standard signatures had been written "closely proximate" to the date of the
questioned checks. Moreover, the "requested signatures" on the long bond paper
written post litem motam could not be accepted as standards of comparison
"because of the ease with which they [could] be disguised to intentionally
differentiate them from those being challenged."8
As to the second assigned error, petitioner maintains that its Answer contained a
specific denial of private respondent's allegation of forgery. It could set in its
answer affirmative and negative defenses alternatively even if they were
inconsistent with each other.9
With respect to its third assigned error, petitioner asserts that it exercised due
care and diligence in the payment of private respondent's checks by first verifying
in accordance with standard bank practices and procedures the genuineness of
the signatures and endorsements. Upon the other hand, the private respondent,
in the management of its business affairs, fell short of the diligence and the
ordinary prudence required under the circumstances. It should have advised
petitioner of the alleged burglary that petitioner could have applied stricter rules
in the processing of checks drawn against private respondent's account, but it did
not bother to do so. Neither did it reconcile its account balances with the
petitioner in order to forestall the happening of the forgery.
In the last assigned error, the petitioner alleges that in view of the reasons it
stated in the first and third assigned errors the petitioner cannot be obliged to pay
the amount of P300,000 plus interest. On the contrary, petitioner is entitled to an
award of attorney's fees because private respondent's complaint was "insincere,
baseless, and intended to harass, annoy and defame [it]."10

Upon the other hand, the respondent claims that petitioner should have filed "a
petition for review by certiorari and not merely a petition for review." The
determination of negligence by the Court of Appeals is a question of fact that
cannot be disturbed on appeal. Even assuming that the instant case is an
exeption to the rule limiting the appellate jurisdiction of the Supreme Court to
reviewing errors of law nonetheless, the issue of forgery was adequately proved
by preponderance of evidence.
This appeal is meritorious.
Well settled is the rule that in the exercise of our power of review the findings of
facts of the Court of Appeals are conclusive and binding on this Court. However,
there are recognized exceptions, among which is when the factual findings of the
trial court and the appellate court are conflicting.11 The disagreement between
the trial court and the Court of Appeals in the factual conclusion, especially with
regard to the alleged forgery of the signatures on the questioned checks and the
negligence of the parties, has constrained us to examine the evidence submitted
by the parties.
On the issue of forgery, we are unable to agree with the finding of the Court of
Appeals that the petitioner admitted in its Answer12 to the complaint the forgery of
the signatures. Far from admitting the forgery, petitioner categorically denied that
the signatures on the questioned checks were forgeries. However, by way of an
alternative affirmative defense, petitioner contended that it had exercised
reasonable degree of diligence in detecting whether there was forgery Even
assuming that the signatures on the checks were forged, still petitioner could not
be held liable for the value of the checks because all the checks were complete
and regular on their face. The alleged forged signatures were "sufficiently adroit
as to escape detection even under the officer's scrutiny."
The Court of Appeals also erred in holding that forgery was duly established.
First, Section 3, Rule 130 of the Rules of Court was not complied with by private
respondent. The Section explicitly provides that when the subject of inquiry is the
contents of a document, no evidence shall be admissible other than the original
document itself. This is what is known as the "best evidence" rule. The
exceptions are as follows:
1. When the original has been lost or destroyed, or cannot be

produced in court, without bad faith on the part of the offeror;

2. When the original is in the custody or under the control of the
party against whom the evidence is offered, and the latter fails to
produce it after reasonable notice;
3. When the original consists of numerous accounts or other

documents which cannot be examined in court without great loss
of time, and the fact sought to be established from them is only
the general result of the whole; and
4. When the original is a public record in the custody of a public

officer or is recorded in a public office.
In this case, the originals of the alleged forged check has to be produced since it
was shown that any of these exceptions was present. What the private
respondent offered were mere photocopies of the checks in question marked as
Exhibits "A," "B," and "C,"13 It never explained the reason why it could not
produce the originals of the checks. Its expert witness Crispina Tabo admitted
though that the original checks were taken back by the investigating policeman,
Glen Ticson; thus:
ATTY. NARAG:
Q Do you have a copy, Madam Witness of the

checks which were submitted to you under
question?
A It was only a xerox copy, because the original

was withdrawn by the investigating policeman,
which is in (sic) the name of Glenn Ticzon, sir.
Q Do you want to impress the court that the

originals of these checks were submitted to you?
A Yes, sir.
Q Do you have a copy of the originals of the checks

under (sic) standards?
A Xerox copies only, because it was also withdrawn

by the investigating policeman, who is Mr. Glenn
Ticzon. 14

Yet, the said policeman was not presented to produce the original checks.
It is true that the photocopies of the questioned checks were all identified by
private respondent's witness Yu Chun Kit during his direct testimony 15 without
objection on the part of petitioner's counsel. The latter even cross-examined Yu
Chun Kit, 16 and, at the formal offer of said exhibits, he objected to their
admission solely on the grounds that they were "irrelevant, immaterial and self-
serving." 17 The photocopies of the checks may therefore be admitted for failure
of petitioner to tender an appropriate objection 18 to their admission.
Nevertheless, their probative value is nil. 19
Then, too, .the proper procedure in the investigation of a disputed handwriting

was not observed. The initial step in such investigation is the introduction of the
genuine handwriting of the party sought to be charged with the disputed writing,
which is to serve as a standard of comparison. 20 The standard or the exemplar
must therefore be proved to be genuine. 21 For the purpose of proving the
genuineness of a handwriting Section 22, Rule 132 of the Rules of Court
provides:
Sec. 22. How the genuineness of handwriting is proved. — The

handwriting of a person may be proved by any witness who
believes it to be the handwriting of such person because he has
seen the person write, or has seen writing purporting to be his
upon which the witness has acted or been charged, and has thus
acquired knowledge of the handwriting of such person. Evidence
respecting the handwriting may also be given by a comparison,
made by the witness or the court, with writings admitted or treated
as genuine by the party against whom the evidence is offered, or
proved to be genuine to the satisfaction of the judge.
In BA Finance v. Court of Appeals,22 we had the occasion to rule that the

genuineness of a standard writing may be established by any of the following: (1)
by the admission of the person sought to be charged with the disputed writing
made at or for the purposes of the trial, or by his testimony; (2) by witnesses who
saw the standards written or to whom or in whose hearing the person sought to
be charged acknowledged the writing thereof; (3) by evidence showing that the
reputed writer of the standard has acquiesced in or recognized the same, or that
it has been adopted and acted upon by him in his business transactions or other
concerns.
We find in the records only photocopies, not the originals, of the "long bond
papers" containing the alleged specimen signatures. 23 Nobody was presented to

prove that the specimen signatures were in fact signatures affixed by Yu Chun
Kit and Co Yok Teng. Although the former took the witness stand, he was never
called to identify or authenticate his signatures on the said photocopy. Clearly
then, Section 22 of Rule 132 of the Rules of Court and the guidelines set forth in
BA Finance v. Court of Appeals 24 were not complied with.
Moreover, the so-called specimen signatures on the bond paper were not directly
turned over to Tabo by those who purportedly wrote them. They, together with
the questioned checks, were first submitted to the Administration Branch of the
PC Crime Laboratory, then endorsed to the Questioned Document Branch. The
chief of the latter branch thereafter referred them to Tabo. Tabo never saw the
parties write the specimen signatures. She just presumed the specimen
signatures to be genuine signatures of the parties concerned. These facts were
disclosed by Tabo during her cross-examination; thus:
Q These question [sic] signatures and the

specimen or signatures or standard were just given
to you by the police of Parañaque?
A It was submitted to the Administrative Branch and

the Administrative Branch endorsed that to the
Question the Document Branch and the Chief of
the Document Branch assigned that case to me, sir
That is why I received it and examined it.
COURT:
Q How do you know that, that is the genuine

signatures?
A'ITY. REVILLA
Yes, how do you know that, that is the genuine

signatures when you were not able to see him
personally write his signature?
A Because I examined the genuine signatures of

Co Yok Teng which was submitted to the office by
the investigator and it said to be genuine, and I
compared the signature whether genuine or not.
And upon comparing, all the specimen signatures

were written by one, and also comparing all the
question [sic] signatures, this one (pointing to the
chart) are written by one so, they were written, the
question [sic] and specimen were written by two
different persons.
Q You did not ask the person to personally give his

signature in order that there will be basis of
comparison between standard signature and the
question [sic] signature?
A Your Honor, if the specimen signature is not

sufficient enough to arrive at a conclusion, we will
tell the investigator to let the person involved to
come to our office to write and sign his signature, if
it is not sufficient to arrive at a conclusion we let
him sign.
Q So, you do not normally demand his income tax

for example, the residence certificate or other
documents which contained this undisputed
signature?
A. We did not ask anymore additional specimen

because the submitted document is sufficient
enough to arrive at the conclusion.
ATTY. REVILLA:
Q So, you just relied on what were given to you by

the investigator as they informed you that these
were genuine and standard signature?
A Yes, sir.
Q And who was that person who gave you this

document?
A It was the Administrative Branch who [sic]

endorsed this document to the Documentation
Branch. I do not know the person who brought that.

Q You do not know the person who brought this
document to the Administrative branch?
A Yes, sir I do not know.
Q When you started making comparison and

analysis of` this question [sic] signatures and
standard signatures, you did not anymore require
the person, Mr. CO Yok Teng to appear personally
to you?
A I did not, sir. 25
ATIY. REVILLA
Q Mrs. Tabo, like the question [sic] signature of Mr.

Co Yok Teng, you also did not personally see or
observe how Mr. Co Yok Teng write this standard
signature?
A. Yes, sir
Q And this [sic] standard signatures were just

submitted to you?
A Yes, it was submitted to the office, sir.
Q And when you made the examination and

analysis of these documents the standard and the
question [sic] signature you did not require any
other signature from these two personalities except
those which were delivered to you?
A. Yes, sir.
COURT
Q When this standard signature were submitted to

you, you were just told that this is the genuine
signature of the person involved, you were just
told?

A Yes, your Honor. As stated in the request it is the
genuine signature.
Q So that was your basis in claiming that this is the

genuine signature of the persons involved?
A I examined first the specimen, all the specimen

whether it was written by....
Q What are those specimen submitted to you.
A The same checks, your Honor, and the written

standard.
Q Did you confront Co Yok Teng?
ATTY. REVILLA
A She said no, your Honor.
COURT
Q Did you confront Yu Chun Kit whether those

were actually his genuine signature?
A No, your Honor.
Q So you just relied on the claim of the person who

submitted to you that these are the genuine
signatures?
A Yes, your Honor.
Q And on the basis that you compare the

characteristic handwriting between the alleged
genuine and question [sic] signature?
A Yes, your Honor. 26 (Underscoring ours for

emphasis).

Our review of the testimony of private respondent's expert witness, Crispina V.
Tabo, fails to convince us that she was a credible document examiner, despite
petitioner's admission that she was. She was candid enough to admit to the court
that although she had testified more or less three hundred times as an expert,
her findings were sustained by the courts in more or less ten cases only. Thus:
Court:
Q How many times have you testified in Court?
A More or less three hundred (300) times, your

Honor.
Q How many were sustained by the Court?
A More or less ten (10), sir.
Q Out of 300?
A. Yes, your Honor. 27
Besides, under the circumstances obtaining in this case, Tabo could by

no yardstick be considered to have adequate knowledge of the genuine
signatures of the parties whose signatures on the questioned checks
were claimed to be forged. That knowledge could be obtained either by
(a) seeing the person write some other documents or signatures (ex visu
scriptionis); (b) seeing documents otherwise known to him to have been
written by the person in question (ex scriptis olim visis); or (c) examining,
in or out of court, for the express purpose of obtaining such knowledge,
the documents said to have been written by the person in question (ex
comparatione scriptorum). 28 Tabo could not be a witness under the first
and the second. She tried to be under the third. But under the third, it is
essential that (a) certain specimens of handwriting were seen and
considered by her and (b) they were genuinely written by the person in
question. 29 Now, as stated above, Tabo had no adequate basis for
concluding that the alleged specimen signatures in the long bond paper
were indeed the signatures of the parties whose signatures in the checks
were claimed to have been forged. Moreover, we do not think that the
alleged specimens before her were sufficient in number. 30

Given the fact that Mrs. Tabo's testimony cannot inspire a conclusion that she
was an expert, it was error to rely on her representation. It is settled that the
relative weight of the opinions of experts by and large depends on the value of
assistance and guidance they furnish the court in the determination of the issue
involved.31
On the issue of negligence, the Court of Appeals held:
[T]here is overwhelming evidence to show that appellee (petitioner

herein) was less than prudent in the treatment of appellant's
(private respondents') account. According to Chun Yun Kit, they
had an agreement with Appellee's Assistant branch manager,
Felicidad, Dimaano, that appellant should be informed whenever a
check for than P10,000.00 is presented for encashment. Dimaano
did not controvert Chun Kit's testimony on this point. Such an
arrangement was not observed by appellee with respect to the
payment of the checks in question.(Emphasis supplied).
We do not agree. During the hearing on 1 February 1989, Felicidad Dimaano

denied having such agreement with the private respondent. Rather, the
agreement was that "all encashments over the counter of P10,000.00 and above
should be accompanied by one of the signatories" of private respondent. But this
agreement was made only on 31 March 1987, or a few days after the
encashment of the checks in question,32
At any rate, since the questioned checks, which were payable to "cash,"
appeared regular on their face and the bank found nothing unusual in the
transaction, as the respondent usually issued checks in big amounts 33 made
payable to cash or to a particular person or to a company, 34 the petitioner cannot
be faulted in paying the value of the disputed checks.
Contrary to the finding of the Court of Appeals, the private respondent is the one
which stands to be blamed for its predicament. Chun Yun Kit testified that in the
morning of 23 March 1987, he and some employees found the doors of their
office and the filing cabinets containing the company's check booklet to have
been forcibly opened. They also found the documents in disarray. Under these
circumstances, a prudent and reasonable man would simply have to go over the
check booklet to find out whether a check was missing. But, apparently, private
respondent's officers and employees did not bother to do so. If they did examine
the booklet they could have readily discovered whether a check was taken. The
following testimony of Chun Yun Kit is apropos:

Q You said also during the last hearing that on the
morning of March 23, 1987 you found out in the
morning that the doors of the office were forced
opened?
A Yes, sir.
Q And you also testified during the last hearing that

the locked [sic] of the filing cabinet were also forced
opened?
A Yes, sir.
Q And you found out on that same time and date

on March 23, 1987 that the documents in the filing
cabinet were not in their proper position ?
A Yes, sir.
Q What did you do when you found out this [sic]

circumstances on March 23, 1987?
A We did not do anything because nothing was

lost.
Q Did it not occur to you Mr. witness, that

considering that burglary was committed in your
office, the doors of your office were forced opened,
the locks of the filing cabinet were forced opened,
the documents placed in the filing cabinet were not
in their proper position, it did not occur to you to
check the checks of the company as being placed
in the filing cabinet?
A When we examined the check booklet, we did not

discover anything lost.
Q You did not at all bother Mr. witness or your

treasurer to check something might have lost in the
check [sic], considering that the burglery [sic] and
the filing cabinet were forced opened?

A No, sir.
Q Did you notice anything lost?
A No, Sir. 35
Neither did any of private respondents officers or employees report the incident
to the police authorities, 36 nor did anyone advise the petitioner of such incident
so that the latter could adopt necessary measures to prevent unauthorized
encashments of private respondent's checks. Hence, as correctly held by the trial
court, it is the private respondent, not the petitioner, which must bear the loss.
WHEREFORE, the instant petition is GRANTED the challenged decision of the

Court of Appeals in CA-G.R. CV No. 33513 is hereby REVERSED, and the
decision of the Regional Trial Court of Makati in Civil Case No. 6882 is hereby
REINSTATED.1âwphi1.nêt
SO ORDERED.

FIRST DIVISION
G.R. No. L-53194 March 14, 1988
PHILIPPINE NATIONAL BANK petitioner,

vs.
HON. ROMULO S. QUIMPO, Presiding Judge, Court of First Instance of
Rizal, Branch XIV, and FRANCISCO S. GOZON II, respondents.
GANCAYCO, J.:
On July 3, 1973, Francisco S. Gozon II, who was a depositor of the Caloocan
City Branch of the Philippine National Bank, went to the bank in his car
accompanied by his friend Ernesto Santos whom he left in the car while he
transacted business in the bank. When Santos saw that Gozon left his check
book he took a check therefrom, filled it up for the amount of P5,000.00, forged
the signature of Gozon, and thereafter he encashed the check in the bank on the
same day. The account of Gozon was debited the said amount. Upon receipt of
the statement of account from the bank, Gozon asked that the said amount of
P5,000.00 should be returned to his account as his signature on the check was
forged but the bank refused.
Upon complaint of private respondent on February 1, 1974 Ernesto Santos was

apprehended by the police authorities and upon investigation he admitted that he
stole the check of Gozon, forged his signature and encashed the same with the
Bank.
Hence Gozon filed the complaint for recovery of the amount of P5,000.00, plus
interest, damages, attorney's fees and costs against the bank in the Court of First
Instance of Rizal. After the issues were joined and the trial on the merits ensued,
a decision was rendered on February 4, 1980, the dispositive part of which reads
as follows:
WHEREFORE, judgment is hereby rendered in favor of the

plaintiff. The defendant is hereby condemned to return to plaintiff
the amount of P5,000.00 which it had unlawfully withheld from the
latter, with interest at the legal rate from September 22, 1972 until
the amount is fully delivered. The defendant is further condemned
to pay plaintiff the sum of P2,000.00 as attorney's fees and to pay
the costs of this suit.

Not satisfied therewith, the bank now filed this petition for review on certiorari in
this Court raising the sole legal issue that —
THE ACT OF RESPONDENT FRANCISCO GOZON, II IN

PUTTING HIS CHECK BOOK CONTAINING THE CHECK IN
QUESTION INTO THE HANDS OF ERNESTO SANTOS WAS
INDEED THE PROXIMATE CAUSE OF THE LOSS, THEREBY
PRECLUDING HIM FROM SETTING UP THE DEFENSE OF
FORGERY OR WANT 0F AUTHORITY UNDER SECTION 23 OF
THE NEGOTIABLE INSTRUMENTS LAW, ACT NO. 3201
The petition is devoid of merit.
This Court reproduces with approval the disquisition of the court a quo as follows:
A bank is bound to know the signatures of its customers; and if it

pays a forged check, it must be considered as making the
payment out of its own funds, and cannot ordinarily change the
amount so paid to the account of the depositor whose name was
forged' (San Carlos Milling Co. vs. Bank of the P.I., 59 Phil. 59).
This rule is absolutely necessary to the circulation of drafts and

checks, and is based upon the presumed negligence of the
drawee in failing to meet its obligation to know the signature of its
correspondent. ... There is nothing inequitable in such a rule. If the
paper comes to the drawee in the regular course of business, and
he, having the opportunity ascertaining its character, pronounces
it to be valid and pays it, it is not only a question of payment under
mistake, but payment in neglect of duty which the commercial law
places upon him, and the result of his negligence must rest upon
him (12 ALR 1901, citing many cases found in I Agbayani, supra).
Defendant, however, interposed the defense that it exercised

diligence in accordance with the accepted norms of banking
practice when it accepted and paid Exhibit "A". It presented
evidence that the check had to pass scrutiny by a signature
verifier as well as an officer of the bank.
A comparison of the signature (Exhibit "A-l") on the forged check

(Exhibit "A") with plaintiffs exemplar signatures (Exhibits "5-N" and
"5-B") found in the PNB Form 35-A would immediately show the

negligence of the employees of the defendant bank. Even a not
too careful comparison would immediately arrest one's attention
and direct it to the graceful lines of plaintiffs exemplar signatures
found in Exhibits "5-A" and "5-B". The formation of the first letter
"F" in the exemplars, which could be regarded as artistic, is
completely different from the way the same letter is formed in
Exhibit "A-l". That alone should have alerted a more careful and
prudent signature verifier.
The prime duty of a bank is to ascertain the genuineness of the signature of the
drawer or the depositor on the check being encashed. 1 It is expected to use
reasonable business prudence in accepting and cashing a check presented to it.
In this case the findings of facts of the court a quo are conclusive. The trial court
found that a comparison of the signature on the forged check and the sample
signatures of private respondent show marked differences as the graceful lines in
the sample signature which is completely different from those of the signature on
the forged check. Indeed the NBI handwriting expert Estelita Santiago Agnes
whom the trial court considered to be an "unbiased scientific expert" indicated the
marked differences between the signature of private respondent on the sample
signatures and the questioned signature. Notwithstanding the testimony of Col.
Fernandez, witness for petitioner, advancing the opinion that the questioned
signature appears to be genuine, the trial court by merely examining the pictorial
report presented by said witness, found a marked difference in the second "c" in
Francisco as written on the questioned signature as compared to the sample
signatures, and the separation between the "s" and the "c" in the questioned
signature while they are connected in the sample signatures.2
Obviously, petitioner was negligent in encashing said forged check without

carefully examining the signature which shows marked variation from the
genuine signature of private respondent.
In reference to the allegation of the petitioner that it is the negligence of private

respondent that is the cause of the loss which he suffered, the trial court held:
The act of plaintiff in leaving his checkbook in the car while he

went out for a short while can not be considered negligence
sufficient to excuse the defendant bank from its own negligence. It
should be home in mind that when defendant left his car, Ernesto
Santos, a long time classmate and friend remained in the same.
Defendant could not have been expected to know that the said
Ernesto Santos would remove a check from his

checkbook. Defendant had trust in his classmate and friend. He
had no reason to suspect that the latter would breach that trust .
We agree.
Private respondent trustee Ernesto Santos as a classmate and a friend. He

brought him along in his car to the bank and he left his personal belongings in the
car. Santos however removed and stole a check from his cheek book without the
knowledge and consent of private respondent. No doubt private respondent
cannot be considered negligent under the circumstances of the case.
WHEREFORE, the petition is DISMISSED for lack of merit with costs against
petitioner.
SO ORDERED.

THIRD DIVISION
G.R. No. 138510 October 10, 2002
TRADERS ROYAL BANK, petitioner,

vs.
RADIO PHILIPPINES NETWORK, INC.,
INTERCONTINENTAL BROADCASTING CORPORATION and
BANAHAW BROADCASTING CORPORATION,
through the BOARD OF ADMINISTRATORS,
and SECURITY BANK AND TRUST COMPANY, respondents.
DECISION
CORONA, J.:
Petitioner seeks the review and prays for the reversal of the Decision1 of April 30,
1999 of Court of Appeals in CA-G.R. CV No. 54656, the dispositive portion of
which reads:
WHEREFORE, the appealed decision is AFFIRMED with modification in the

sense that appellant SBTC is hereby absolved from any liability. Appellant TRB is
solely liable to the appellees for the damages and costs of suit specified in the
dispositive portion of the appealed decision. Costs against appellant TRB.
SO ORDERED.2
As found by the Court of Appeals, the antecedent facts of the case are as
follows:
On April 15, 1985, the Bureau of Internal Revenue (BIR) assessed plaintiffs
Radio Philippines Network (RPN), Intercontinental Broadcasting Corporation
(IBC), and Banahaw Broadcasting Corporation (BBC) of their tax obligations for
the taxable years 1978 to 1983.
On March 25, 1987, Mrs. Lourdes C. Vera, plaintiffs’ comptroller, sent a letter to
the BIR requesting settlement of plaintiffs’ tax obligations.
The BIR granted the request and accordingly, on June 26, 1986, plaintiffs
purchased from defendant Traders Royal Bank (TRB) three (3) manager’s
checks to be used as payment for their tax liabilities, to wit:

Check Number Amount
30652 P4,155.835.00
30650 3,949,406.12
30796 1,685,475.75
Defendant TRB, through Aida Nuñez, TRB Branch Manager at Broadcast City
Branch, turned over the checks to Mrs. Vera who was supposed to deliver the
same to the BIR in payment of plaintiffs’ taxes.
Sometime in September, 1988, the BIR again assessed plaintiffs for their tax
liabilities for the years 1979-82. It was then they discovered that the three (3)
managers checks (Nos. 30652, 30650 and 30796) intended as payment for their
taxes were never delivered nor paid to the BIR by Mrs. Vera. Instead, the checks
were presented for payment by unknown persons to defendant Security Bank
and Trust Company (SBTC), Taytay Branch as shown by the bank’s routing
symbol transit number (BRSTN 01140027) or clearing code stamped on the
reverse sides of the checks.
Meanwhile, for failure of the plaintiffs to settle their obligations, the BIR issued
warrants of levy, distraint and garnishment against them. Thus, they were
constrained to enter into a compromise and paid BIR P18,962,225.25 in
settlement of their unpaid deficiency taxes.
Thereafter, plaintiffs sent letters to both defendants, demanding that the amounts
covered by the checks be reimbursed or credited to their account. The
defendants refused, hence, the instant suit.3
On February 17, 1985, the trial court rendered its decision, thus:
WHEREFORE, in view of the foregoing considerations, judgment is hereby

rendered in favor of the plaintiffs and against the defendants by :
a) Condemning the defendant Traders Royal Bank to pay actual damages

in the sum of Nine Million Seven Hundred Ninety Thousand and Seven
Hundred Sixteen Pesos and Eighty-Seven Centavos (P9,790,716.87)
broken down as follows:
1) To plaintiff RPN-9 - P4,155,835.00

2) To Plaintiff IBC-13 - P3,949,406.12
3) To Plaintiff BBC-2 - P1,685,475.72
plus interest at the legal rate from the filing of this case in court.
b) Condemning the defendant Security Bank and Trust Company, being

collecting bank, to reimburse the defendant Traders Royal Bank, all the
amounts which the latter would pay to the aforenamed plaintiffs;
c) Condemning both defendants to pay to each of the plaintiffs the sum of

Three Hundred Thousand (P300,000.00) Pesos as exemplary damages
and attorney’s fees equivalent to twenty-five percent of the total amount
recovered; and
d) Costs of suit.
SO ORDERED.4
Defendants Traders Royal Bank and Security Bank and Trust Company, Inc.
both appealed the trial court’s decision to the Court of Appeals. However, as
quoted in the beginning hereof, the appellate court absolved defendant SBTC
from any liability and held TRB solely liable to respondent networks for damages
and costs of suit.
In the instant petition for review on certiorari of the Court of Appeals’ decision,
petitioner TRB assigns the following errors: (a) the Honorable Court of Appeals
manifestly overlooked facts which would justify the conclusion that negligence on
the part of RPN, IBC and BBC bars them from recovering anything from TRB, (b)
the Honorable Court of Appeals plainly erred and misapprehended the facts in
relieving SBTC of its liability to TRB as collecting bank and indorser by
overturning the trial court’s factual finding that SBTC did endorse the three (3)
managers checks subject of the instant case, and (c) the Honorable Court of
Appeals plainly misapplied the law in affirming the award of exemplary damages
in favor of RPN, IBC and BBC.
In reply, respondents RPN, IBC, and BBC assert that TRB’s petition raises
questions of fact in violation of Rule 45 of the 1997 Revised Rules on Civil
Procedure which restricts petitions for review on certiorari of the decisions of the
Court of Appeals on pure questions of law. RPN, IBC and BBC maintain that the
issue of whether or not respondent networks had been negligent were already

passed upon both by the trial and appellate courts, and that the factual findings
of both courts are binding and conclusive upon this Court.
Likewise, respondent SBTC denies liability on the ground that it had no

participation in the negotiation of the checks, emphasizing that the BRSTN
imprints at the back of the checks cannot be considered as proof that respondent
SBTC accepted the disputed checks and presented them to Philippine Clearing
House Corporation for clearing.
Setting aside the factual ramifications of the instant case, the threshold issue
now is whether or not TRB should be held solely liable when it paid the amount
of the checks in question to a person other than the payee indicated on the face
of the check, the Bureau of Internal Revenue.
"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."5 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.
In the instant case, the 3 checks were payable to the BIR. It was established,
however, that said checks were never delivered or paid to the payee BIR but
were in fact presented for payment by some unknown persons who, in order to
receive payment therefor, forged the name of the payee. Despite this fraud,
petitioner TRB paid the 3 checks in the total amount of P9,790,716.87.
Petitioner ought to have known that, where a check is drawn payable to the order
of one person and is presented for payment by another and purports upon its
face to have been duly indorsed by the payee of the check, it is the primary duty
of petitioner to know that the check was duly indorsed by the original payee and,
where it pays the amount of the check to a third person who has forged the
signature of the payee, the loss falls upon petitioner who cashed the check. Its
only remedy is against the person to whom it paid the money.6
It should be noted further that one of the subject checks was crossed. The
crossing of one of the subject checks should have put petitioner on guard; it was
duty-bound to ascertain the indorser’s title to the check or the nature of his
possession. Petitioner should have known the effects of a crossed check: (a) the
check may not be encashed but only deposited in the bank; (b) the check may be
negotiated only once to one who has an account with a bank and (c) the act of

crossing the check serves as a warning to the holder that the check has been
issued for a definite purpose so that he must inquire if he has received the check
pursuant to that purpose, otherwise, he is not a holder in due course.7
By encashing in favor of unknown persons checks which were on their face

payable to the BIR, a government agency which can only act only through its
agents, petitioner did so at its peril and must suffer the consequences of the
unauthorized or wrongful endorsement.8 In this light, petitioner TRB cannot
exculpate itself from liability by claiming that respondent networks were
themselves negligent.
A bank is engaged in a business impressed with public interest and it is its duty
to protect its many clients and depositors who transact business with it. It is
under the obligation to treat the accounts of the depositors and clients with
meticulous care, whether such accounts consist only of a few hundreds or
millions of pesos.9
Petitioner argues that respondent SBTC, as the collecting bank and indorser,
should be held responsible instead for the amount of the checks.
The Court of Appeals addressed exactly the same issue and made the following
findings and conclusions:
As to the alleged liability of appellant SBTC, a close examination of the records

constrains us to deviate from the lower court’s finding that SBTC, as a collecting
bank, should similarly bear the loss.
"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 bank’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."
To hold appellant SBTC liable, it is necessary to determine whether it is a party

to the disputed transactions.
Section 3 of the Negotiable Instruments Law reads:
"SECTION 63. When person deemed indorser. - A person placing his signature
upon an instrument otherwise than as maker, drawer, or acceptor, is deemed to

be an indorser unless he clearly indicates by appropriate words his intention to
be bound in some other capacity."
Upon the other hand, the Philippine Clearing House Corporation (PCHC) rules
provide:
"Sec. 17.- BANK GUARANTEE. All checks cleared through the PCHC shall bear
the guarantee affixed thereto by the Presenting Bank/Branch which shall read as
follows:
"Cleared thru the Philippine Clearing House Corporation. All prior endorsements
and/or lack of endorsement guaranteed. NAME OF BANK/BRANCH BRSTN
(Date of clearing)."
Here, not one of the disputed checks bears the requisite endorsement of
appellant SBTC. What appears to be a guarantee stamped at the back of the
checks is that of the Philippine National Bank, Buendia Branch, thereby
indicating that it was the latter Bank which received the same.
It was likewise established during the trial that whenever appellant SBTC
receives a check for deposit, its practice is to stamp on its face the words, "non-
negotiable". Lana Echevarria’s testimony is relevant:
"ATTY. ROMANO: Could you tell us briefly the procedure you follow in receiving
checks?
"A: First of all, I verify the check itself, the place, the date, the amount in words
and everything. And then, if all these things are in order and verified in the data
sheet I stamp my non-negotiable stamp at the face of the check."
Unfortunately, the words "non-negotiable" do not appear on the face of either of

the three (3) disputed checks.
Moreover, the aggregate amount of the checks is not reflected in the clearing
documents of appellant SBTC. Section 19 of the Rules of the PCHC states:
"Section 19 – Regular Item Procedure:
Each clearing participant, through its authorized representatives, shall deliver to

the PCHC fully qualified MICR checks grouped in 200 or less items to a batch
and supported by an add-list, a batch control slip, and a delivery statement.

It bears stressing that through the add-list, the PCHC can countercheck and
determine which checks have been presented on a particular day by a particular
bank for processing and clearing. In this case, however, the add-list submitted by
appellant SBTC together with the checks it presented for clearing on August 3,
1987 does not show that Check No. 306502 in the sum of P3,949,406.12 was
among those that passed for clearing with the PCHC on that date. The same is
true with Check No. 30652 with a face amount of P4,155,835.00 presented for
clearing on August 11, 1987 and Check No. 30796 with a face amount of
P1,685,475.75.
The foregoing circumstances taken altogether create a serious doubt on whether

the disputed checks passed through the hands of appellant SBTC."10
We subscribe to the foregoing findings and conclusions of the Court of Appeals.
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 itself, and ultimately should be held liable therefor. However,
it is doubtful if the subject checks were ever presented to and accepted by SBTC
so as to hold it liable as a collecting bank, as held by the Court of Appeals.
Since TRB did not pay the rightful holder or other person or entity entitled to
receive payment, it has no right to reimbursement. Petitioner TRB was remiss in
its duty and obligation, and must therefore suffer the consequences of its own
negligence and disregard of established banking rules and procedures.
We agree with petitioner, however, that it should not be made to pay exemplary
damages to RPN, IBC and BBC because its wrongful act was not done in bad
faith, and it did not act in a wanton, fraudulent, reckless or malevolent manner.11
We find the award of attorney’s fees, 25% of P10 million, to be manifestly

exorbitant.12 Considering the nature and extent of the services rendered by
respondent networks’ counsel, however, the Court deems it appropriate to award
the amount of P100,000 as attorney’s fees.
WHEREFORE, the appealed decision is MODIFIED by deleting the award of

exemplary damages. Further, respondent networks are granted the amount of
P100,000 as attorney’s fees. In all other respects, the Court of Appeals’ decision
is hereby AFFIRMED.
SO ORDERED.

SECOND DIVISION
G.R. No. 129015 August 13, 2004
SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC., petitioner,

vs.
FAR EAST BANK AND TRUST COMPANY AND COURT OF
APPEALS, respondents.
DECISION
TINGA, J.:
Called to fore in the present petition is a classic textbook question – if a bank

pays out on a forged check, is it liable to reimburse the drawer from whose
account the funds were paid out? The Court of Appeals, in reversing a trial court
decision adverse to the bank, invoked tenuous reasoning to acquit the bank of
liability. We reverse, applying time-honored principles of law.
The salient facts follow.
Plaintiff Samsung Construction Company Philippines, Inc. ("Samsung

Construction"), while based in Biñan, Laguna, maintained a current account with
defendant Far East Bank and Trust Company1 ("FEBTC") at the latter’s Bel-Air,
Makati branch.2 The sole signatory to Samsung Construction’s account was Jong
Kyu Lee ("Jong"), its Project Manager,3 while the checks remained in the custody
of the company’s accountant, Kyu Yong Lee ("Kyu").4
On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC

Check No. 432100 to the bank’s branch in Bel-Air, Makati. The check, payable to
cash and drawn against Samsung Construction’s current account, was in the
amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos
(P999,500.00). The bank teller, Cleofe Justiani, first checked the balance of
Samsung Construction’s account. After ascertaining there were enough funds to
cover the check,5 she compared the signature appearing on the check with the

specimen signature of Jong as contained in the specimen signature card with the
bank. After comparing the two signatures, Justiani was satisfied as to the
authenticity of the signature appearing on the check. She then asked Gonzaga to
submit proof of his identity, and the latter presented three (3) identification cards. 6
At the same time, Justiani forwarded the check to the branch Senior Assistant
Cashier Gemma Velez, as it was bank policy that two bank branch officers
approve checks exceeding One Hundred Thousand Pesos, for payment or
encashment. Velez likewise counterchecked the signature on the check as
against that on the signature card. He too concluded that the check was indeed
signed by Jong. Velez then forwarded the check and signature card to Shirley
Syfu, another bank officer, for approval. Syfu then noticed that Jose Sempio III
("Sempio"), the assistant accountant of Samsung Construction, was also in the
bank. Sempio was well-known to Syfu and the other bank officers, he being the
assistant accountant of Samsung Construction. Syfu showed the check to
Sempio, who vouched for the genuineness of Jong’s signature. Confirming the
identity of Gonzaga, Sempio said that the check was for the purchase of
equipment for Samsung Construction. Satisfied with the genuineness of the
signature of Jong, Syfu authorized the bank’s encashment of the check to
Gonzaga.
The following day, the accountant of Samsung Construction, Kyu, examined the
balance of the bank account and discovered that a check in the amount of Nine
Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00) had been
encashed. Aware that he had not prepared such a check for Jong’s signature,
Kyu perused the checkbook and found that the last blank check was missing. 7 He
reported the matter to Jong, who then proceeded to the bank. Jong learned of
the encashment of the check, and realized that his signature had been forged.
The Bank Manager reputedly told Jong that he would be reimbursed for the
amount of the check.8 Jong proceeded to the police station and consulted with his
lawyers.9 Subsequently, a criminal case for qualified theft was filed against
Sempio before the Laguna court.10
In a letter dated 6 May 1992, Samsung Construction, through counsel,

demanded that FEBTC credit to it the amount of Nine Hundred Ninety Nine
Thousand Five Hundred Pesos (P999,500.00), with interest.11 In response,
FEBTC said that it was still conducting an investigation on the matter.
Unsatisfied, Samsung Construction filed a Complaint on 10 June 1992 for
violation of Section 23 of the Negotiable Instruments Law, and prayed for the
payment of the amount debited as a result of the questioned check plus interest,
and attorney’s fees.12 The case was docketed as Civil Case No. 92-61506 before
the Regional Trial Court ("RTC") of Manila, Branch 9.13

During the trial, both sides presented their respective expert witnesses to testify
on the claim that Jong’s signature was forged. Samsung Corporation, which had
referred the check for investigation to the NBI, presented Senior NBI Document
Examiner Roda B. Flores. She testified that based on her examination, she
concluded that Jong’s signature had been forged on the check. On the other
hand, FEBTC, which had sought the assistance of the Philippine National Police
(PNP),14 presented Rosario C. Perez, a document examiner from the PNP Crime
Laboratory. She testified that her findings showed that Jong’s signature on the
check was genuine.15
Confronted with conflicting expert testimony, the RTC chose to believe the
findings of the NBI expert. In a Decisiondated 25 April 1994, the RTC held that
Jong’s signature on the check was forged and accordingly directed the bank to
pay or credit back to Samsung Construction’s account the amount of Nine
Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), together
with interest tolled from the time the complaint was filed, and attorney’s fees in
the amount of Fifteen Thousand Pesos (P15,000.00).
FEBTC timely appealed to the Court of Appeals. On 28 November 1996, the

Special Fourteenth Division of the Court of Appeals rendered
a Decision,16 reversing the RTC Decision and absolving FEBTC from any liability.
The Court of Appeals held that the contradictory findings of the NBI and the PNP
created doubt as to whether there was forgery.17 Moreover, the appellate court
also held that assuming there was forgery, it occurred due to the negligence of
Samsung Construction, imputing blame on the accountant Kyu for lack of care
and prudence in keeping the checks, which if observed would have prevented
Sempio from gaining access thereto.18 The Court of Appeals invoked the ruling
in PNB v. National City Bank of New 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 RTC’s finding of forgery. It also
contends that the appellate court erred in finding that it had been negligent in
safekeeping the check, and in applying the equity principle enunciated in PNB v.
National City Bank of New York.
Since the trial court and the Court of Appeals arrived at contrary findings on
questions of fact, the Court is obliged to examine the record to draw out the
correct conclusions. Upon examination of the record, and based on the
applicable laws and jurisprudence, we reverse the Court of Appeals.

Section 23 of the Negotiable Instruments Law states:
When a signature is forged or made without the authority of the person

whose signature it purports to be, it is wholly inoperative, and no
right to retain the instrument, or to give a discharge therefor, or to
enforce payment thereof against any party thereto, can be acquired
through or under such signature, unless the party against whom it is
sought to enforce such right is precluded from setting up the forgery or
want of authority. (Emphasis supplied)
The general rule is to the effect that a forged signature is "wholly inoperative,"
and payment made "through or under such signature" is ineffectual or does not
discharge the instrument.21 If payment is made, the drawee cannot charge it to
the drawer’s account. The traditional justification for the result is that the drawee
is in a superior position to detect a forgery because he has the maker’s signature
and is expected to know and compare it.22 The rule has a healthy cautionary
effect on banks by encouraging care in the comparison of the signatures against
those on the signature cards they have on file. Moreover, the very opportunity of
the drawee to insure and to distribute the cost among its customers who use
checks makes the drawee an ideal party to spread the risk to insurance. 23
Brady, in his treatise The Law of Forged and Altered Checks, elucidates:
When a person deposits money in a general account in a bank, against

which he has the privilege of drawing checks in the ordinary course of
business, the relationship between the bank and the depositor is that of
debtor and creditor. So far as the legal relationship between the two is
concerned, the situation is the same as though the bank had borrowed
money from the depositor, agreeing to repay it on demand, or had bought
goods from the depositor, agreeing to pay for them on demand. The bank
owes the depositor money in the same sense that any debtor owes
money to his creditor. Added to this, in the case of bank and depositor,
there is, of course, the bank’s obligation to pay checks drawn by the
depositor in proper form and presented in due course. When the bank
receives the deposit, it impliedly agrees to pay only upon the depositor’s
order. When the bank pays a check, on which the depositor’s signature is
a forgery, it has failed to comply with its contract in this respect.
Therefore, the bank is held liable.
The fact that the forgery is a clever one is immaterial. The forged
signature may so closely resemble the genuine as to defy detection by

the depositor himself. And yet, if a bank pays the check, it is paying out its
own money and not the depositor’s.
The forgery may be committed by a trusted employee or confidential

agent. The bank still must bear the loss. Even in a case where the forged
check was drawn by the depositor’s partner, the loss was placed upon the
bank. The case referred to is Robinson v. Security Bank, Ark., 216 S. W.
Rep. 717. In this case, the plaintiff brought suit against the defendant
bank for money which had been deposited to the plaintiff’s credit and
which the bank had paid out on checks bearing forgeries of the plaintiff’s
signature.
xxx
It was held that the bank was liable. It was further held that the fact that
the plaintiff waited eight or nine months after discovering the forgery,
before notifying the bank, did not, as a matter of law, constitute a
ratification of the payment, so as to preclude the plaintiff from holding the
bank liable. xxx
This rule of liability can be stated briefly in these words: "A bank is bound
to know its depositors’ signature." The rule is variously expressed in the
many decisions in which the question has been considered. But they all
sum up to the proposition that a bank must know the signatures of those
whose general deposits it carries.24
By no means is the principle rendered obsolete with the advent of modern

commercial transactions. Contemporary texts still affirm this well-entrenched
standard. Nickles, in his book Negotiable Instruments and Other Related
Commercial Paper wrote, thus:
The deposit contract between a payor bank and its customer determines
who can draw against the customer’s account by specifying whose
signature is necessary on checks that are chargeable against the
customer’s account. Therefore, a check drawn against the account of an
individual customer that is signed by someone other than the customer,
and without authority from her, is not properly payable and is not
chargeable to the customer’s account, inasmuch as any "unauthorized
signature on an instrument is ineffective" as the signature of the person
whose name is signed.25

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

forgery. In the case of Tenio-Obsequio v. Court of Appeals, 230 SCRA
550, the Supreme Court held that forgery cannot be presumed; it must be
proved by clear, positive and convincing evidence.
This reasoning is pure sophistry. Any litigator worth his or her salt would never
allow an opponent’s expert witness to stand uncontradicted, thus the spectacle of
competing expert witnesses is not unusual. The trier of fact will have to decide
which version to believe, and explain why or why not such version is more
credible than the other. Reliance therefore cannot be placed merely on the fact
that there are colliding opinions of two experts, both clothed with the presumption
of official duty, in order to draw a conclusion, especially one which is extremely
crucial. Doing so is tantamount to a jurisprudential cop-out.
Much is expected from the Court of Appeals as it occupies the penultimate tier in
the judicial hierarchy. This Court has long deferred to the appellate court as to its
findings of fact in the understanding that it has the appropriate skill and

competence to plough through the minutiae that scatters the factual field. In
failing to thoroughly evaluate the evidence before it, and relying instead on
presumptions haphazardly drawn, the Court of Appeals was sadly remiss. Of
course, courts, like humans, are fallible, and not every error deserves a stern
rebuke. Yet, the appellate court’s error in this case warrants special attention, as
it is absurd and even dangerous as a precedent. If this rationale were adopted as
a governing standard by every court in the land, barely any actionable claim
would prosper, defeated as it would be by the mere invocation of the existence of
a contrary "expert" opinion.
On the other hand, the RTC did adjudge the testimony of the NBI expert as more
credible than that of the PNP, and explained its reason behind the conclusion:
After subjecting the evidence of both parties to a crucible of analysis, the

court arrived at the conclusion that the testimony of the NBI document
examiner is more credible because the testimony of the PNP Crime
Laboratory Services document examiner reveals that there are a lot of
differences in the questioned signature as compared to the standard
specimen signature. Furthermore, as testified to by Ms. Rhoda Flores,
NBI expert, the manner of execution of the standard signatures used
reveals that it is a free rapid continuous execution or stroke as shown by
the tampering terminal stroke of the signatures whereas the questioned
signature is a hesitating slow drawn execution stroke. Clearly, the person
who executed the questioned signature was hesitant when the signature
was made.30
During the testimony of PNP expert Rosario Perez, the RTC bluntly noted that
"apparently, there [are] differences on that questioned signature and the standard
signatures."31 This Court, in examining the signatures, makes a similar finding.
The PNP expert excused the noted "differences" by asserting that they were
mere "variations," which are normal deviations found in writing.32 Yet the RTC,
which had the opportunity to examine the relevant documents and to personally
observe the expert witness, clearly disbelieved the PNP expert. The Court
similarly finds the testimony of the PNP expert as unconvincing. During the trial,
she was confronted several times with apparent differences between strokes in
the questioned signature and the genuine samples. Each time, she would just
blandly assert that these differences were just "variations,"33 as if the mere
conjuration of the word would sufficiently disquiet whatever doubts about the
deviations. Such conclusion, standing alone, would be of little or no value unless
supported by sufficiently cogent reasons which might amount almost to a
demonstration.34

The most telling difference between the questioned and genuine signatures
examined by the PNP is in the final upward stroke in the signature, or "the point
to the short stroke of the terminal in the capital letter ‘L,’" as referred to by the
PNP examiner who had marked it in her comparison chart as "point no. 6." To
the plain eye, such upward final stroke consists of a vertical line which forms a
ninety degree (90º) angle with the previous stroke. Of the twenty one (21) other
genuine samples examined by the PNP, at least nine (9) ended with an upward
stroke.35 However, unlike the questioned signature, the upward strokes of eight
(8) of these signatures are looped, while the upward stroke of the seventh36 forms
a severe forty-five degree (45º) with the previous stroke. The difference is
glaring, and indeed, the PNP examiner was confronted with the inconsistency in
point no. 6.
Q: Now, in this questioned document point no. 6, the "s" stroke is directly
upwards.
A: Yes, sir.
Q: Now, can you look at all these standard signature (sic) were (sic) point
6 is repeated or the last stroke "s" is pointing directly upwards?
A: There is none in the standard signature, sir.37
Again, the PNP examiner downplayed the uniqueness of the final stroke in the
questioned signature as a mere variation,38 the same excuse she proffered for
the other marked differences noted by the Court and the counsel for petitioner.39
There is no reason to doubt why the RTC gave credence to the testimony of the
NBI examiner, and not the PNP expert’s. The NBI expert, Rhoda Flores, clearly
qualifies as an expert witness. A document examiner for fifteen years, she had
been promoted to the rank of Senior Document Examiner with the NBI, and had
held that rank for twelve years prior to her testimony. She had placed among the
top five examinees in the Competitive Seminar in Question Document
Examination, conducted by the NBI Academy, which qualified her 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 examiner’s testimony, and
explained her reasons in its Decisions. While the Court of Appeals disagreed and
upheld the findings of the PNP, it failed to convincingly demonstrate why such
findings were more credible than those of the NBI expert. As a throwaway, the
assailed Decision noted that the PNP, not the NBI, had the opportunity to
examine the specimen signature card signed by Jong, which was relied upon by
the employees of FEBTC in authenticating Jong’s signature. The distinction is
irrelevant in establishing forgery. Forgery can be established comparing the
contested signatures as against those of any sample signature duly established
as that of the persons whose signature was forged.
FEBTC lays undue emphasis on the fact that the PNP examiner did compare the
questioned signature against the bank signature cards. The crucial fact in
question is whether or not the check was forged, not whether the bank
could have detected the forgery. The latter issue becomes relevant only if
there is need to weigh the comparative negligence between the bank and
the party whose signature was forged.
At the same time, the Court of Appeals failed to assess the effect of Jong’s
testimony that the signature on the check was not his.47 The assertion may seem
self-serving at first blush, yet it cannot be ignored that Jong was in the best
position to know whether or not the signature on the check was his. While his
claim should not be taken at face value, any averments he would have on the
matter, if adjudged as truthful, deserve primacy in consideration. Jong’s
testimony is supported by the findings of the NBI examiner. They are also backed
by factual circumstances that support the conclusion that the assailed check was
indeed forged. Judicial notice can be taken that is highly unusual in practice for a
business establishment to draw a check for close to a million pesos and make it
payable to cash or bearer, and not to order. Jong immediately reported the

forgery upon its discovery. He filed the appropriate criminal charges against
Sempio, the putative forger.48
Now for determination is whether Samsung Construction was precluded from

setting up the defense of forgery under Section 23 of the Negotiable Instruments
Law. The Court of Appeals concluded that Samsung Construction was negligent,
and invoked the doctrines that "where a loss must be borne by one of two
innocent person, can be traced to the neglect or fault of either, it is reasonable
that it would be borne by him, even if innocent of any intentional fraud, through
whose means it has succeeded49 or who put into the power of the third person to
perpetuate the wrong."50 Applying these rules, the Court of Appeals determined
that it was the negligence of Samsung Construction that allowed the encashment
of the forged check.
In the case at bar, the forgery appears to have been made possible
through the acts of one Jose Sempio III, an assistant accountant
employed by the plaintiff Samsung [Construction] Co. Philippines, Inc.
who supposedly stole the blank check and who presumably is responsible
for its encashment through a forged signature of Jong Kyu Lee. Sempio
was assistant to the Korean accountant who was in possession of the
blank checks and who through negligence, enabled Sempio to have
access to the same. Had the Korean accountant been more careful and
prudent in keeping the blank checks Sempio would not have had the
chance to steal a page thereof and to effect the forgery. Besides, Sempio
was an employee who appears to have had dealings with the defendant
Bank in behalf of the plaintiff corporation and on the date the check was
encashed, he was there to certify that it was a genuine check issued to
purchase equipment for the company.51
We recognize that Section 23 of the Negotiable Instruments Law bars a party

from setting up the defense of forgery if it is guilty of negligence. 52 Yet, we are
unable to conclude that Samsung Construction was guilty of negligence in this
case. The appellate court failed to explain precisely how the Korean accountant
was negligent or how more care and prudence on his part would have prevented
the forgery. We cannot sustain this "tar and feathering" resorted to without any
basis.
The bare fact that the forgery was committed by an employee of the party whose
signature was forged cannot necessarily imply that such party’s negligence was
the cause for the forgery. Employers do not possess the preternatural gift of
cognition as to the evil that may lurk within the hearts and minds of their

employees. The Court’s pronouncement in PCI Bank v. Court of
Appeals53 applies in this case, to wit:
[T]he mere fact that the forgery was committed by a drawer-payor’s

confidential employee or agent, who by virtue of his position had unusual
facilities for perpetrating the fraud and imposing the forged paper upon
the bank, does not entitle the bank to shift the loss to the drawer-payor, in
the absence of some circumstance raising estoppel against the drawer.54
Admittedly, the record does not clearly establish what measures Samsung
Construction employed to safeguard its blank checks. Jong did testify that his
accountant, Kyu, kept the checks inside a "safety box,"55 and no contrary version
was presented by FEBTC. However, such testimony cannot prove that the
checks were indeed kept in a safety box, as Jong’s testimony on that point is
hearsay, since Kyu, and not Jong, would have the personal knowledge as to how
the checks were kept.
Still, in the absence of evidence to the contrary, we can conclude that there was
no negligence on Samsung Construction’s part. The presumption remains that
every person takes ordinary care of his concerns,56 and that the ordinary course
of business has been followed.57 Negligence is not presumed, but must be
proven by him who alleges it.58 While the complaint was lodged at the instance of
Samsung Construction, the matter it had to prove was the claim it had alleged -
whether the check was forged. It cannot be required as well to prove that it was
not negligent, because the legal presumption remains that ordinary care was
employed.
Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact that
Samsung Construction was negligent. While the payee, as in this case, may not
have the personal knowledge as to the standard procedures observed by the
drawer, it well has the means of disputing the presumption of regularity. Proving
a negative fact may be "a difficult office,"59 but necessarily so, as it seeks to
overcome a presumption in law. FEBTC was unable to dispute the presumption
of ordinary care exercised by Samsung Construction, hence we cannot agree
with the Court of Appeals’ finding of negligence.
The assailed Decision replicated the extensive efforts which FEBTC devoted to
establish that there was no negligence on the part of the bank in its acceptance
and payment of the forged check. However, the degree of diligence exercised by
the bank would be irrelevant if the drawer is not precluded from setting up the
defense of forgery under Section 23 by his own negligence. The rule of equity

enunciated in PNB v. National City Bank of New York, 60 as relied upon by the
Court of Appeals, deserves careful examination.
The point in issue has sometimes been said to be that of negligence. The
drawee who has paid upon the forged signature is held to bear the
loss, because he has been negligent in failing to recognize that the
handwriting is not that of his customer. But it follows obviously that if
the payee, holder, or presenter of the forged paper has himself been in
default, if he has himself been guilty of a negligence prior to that of the
banker, or if by any act of his own he has at all contributed to induce the
banker's negligence, then he may lose his right to cast the loss upon the
banker.61 (Emphasis supplied)
Quite palpably, the general rule remains that the drawee who has paid upon the
forged signature bears the loss. The exception to this rule arises only when
negligence can be traced on the part of the drawer whose signature was forged,
and the need arises to weigh the comparative negligence between the drawer
and the drawee to determine who should bear the burden of loss. The Court finds
no basis to conclude that Samsung Construction was negligent in the
safekeeping of its checks. For one, the settled rule is that the mere fact that the
depositor leaves his check book lying around does not constitute such
negligence as will free the bank from liability to him, where a clerk of the
depositor or other persons, taking advantage of the opportunity, abstract some of
the check blanks, forges the depositor’s signature and collect on the checks from
the bank.62 And for another, in point of fact Samsung Construction was not
negligent at all since it reported the forgery almost immediately upon discovery. 63
It is also worth noting that the forged signatures in PNB v. National City Bank of
New York were not of the drawer, but of indorsers. The same circumstance
attends PNB v. Court of Appeals,64 which was also cited by the Court of Appeals.
It is accepted that a forged signature of the drawer differs in treatment than a
forged signature of the indorser.
The justification for the distinction between forgery of the signature of the
drawer and forgery of an indorsement is that the drawee is in a position to
verify the drawer’s signature by comparison with one in his hands, but
has ordinarily no opportunity to verify an indorsement.65
Thus, a drawee bank is generally liable to its depositor in paying a check

which bears either a forgery of the drawer’s signature or a forged
indorsement. But the bank may, as a general rule, recover back the
money which it has paid on a check bearing a forged indorsement,

whereas it has not this right to the same extent with reference to a check
bearing a forgery of the drawer’s signature.66
The general rule imputing liability on the drawee who paid out on the forgery
holds in this case.
Since FEBTC puts into issue the degree of care it exercised before paying out on
the forged check, we might as well comment on the bank’s performance of its
duty. It might be so that the bank complied with its own internal rules prior to
paying out on the questionable check. Yet, there are several troubling
circumstances that lead us to believe that the bank itself was remiss in its duty.
The fact that the check was made out in the amount of nearly one million pesos
is unusual enough to require a higher degree of caution on the part of the bank.
Indeed, FEBTC confirms this through its own internal procedures. Checks below
twenty-five thousand pesos require only the approval of the teller; those between
twenty-five thousand to one hundred thousand pesos necessitate the approval of
one bank officer; and should the amount exceed one hundred thousand pesos,
the concurrence of two bank officers is required.67
In this case, not only did the amount in the check nearly total one million pesos, it
was also payable to cash. That latter circumstance should have aroused the
suspicion of the bank, as it is not ordinary business practice for a check for such
large amount to be made payable to cash or to bearer, instead of to the order of
a specified person.68Moreover, the check was presented for payment by one
Roberto Gonzaga, who was not designated as the payee of the check, and who
did not carry with him any written proof that he was authorized by Samsung
Construction to encash the check. Gonzaga, a stranger to FEBTC, was not even
an employee of Samsung Construction.69 These circumstances are already
suspicious if taken independently, much more so if they are evaluated in
concurrence. Given the shadiness attending Gonzaga’s presentment of the
check, it was not sufficient for FEBTC to have merely complied with its internal
procedures, but mandatory that all earnest efforts be undertaken to ensure the
validity of the check, and of the authority of Gonzaga to collect payment therefor.
According to FEBTC Senior Assistant Cashier Gemma Velez, the bank tried, but
failed, to contact Jong over the phone to verify the check.70 She added that
calling the issuer or drawer of the check to verify the same was not part of the
standard procedure of the bank, but an "extra effort."71 Even assuming that such
personal verification is tantamount to extraordinary diligence, it cannot be denied
that FEBTC still paid out the check despite the absence of any proof of
verification from the drawer. Instead, the bank seems to have relied heavily on

the say-so of Sempio, who was present at the bank at the time the check was
presented.
FEBTC alleges that Sempio was well-known to the bank officers, as he had
regularly transacted with the bank in behalf of Samsung Construction. It was
even claimed that everytime FEBTC would contact Jong about problems with his
account, Jong would hand the phone over to Sempio.72 However, the only proof
of such allegations is the testimony of Gemma Velez, who also testified that she
did not know Sempio personally,73 and had met Sempio for the first time only on
the day the check was encashed.74 In fact, Velez had to inquire with the other
officers of the bank as to whether Sempio was actually known to the employees
of the bank.75 Obviously, Velez had no personal knowledge as to the past
relationship between FEBTC and Sempio, and any averments of her to that
effect should be deemed hearsay evidence. Interestingly, FEBTC did not present
as a witness any other employee of their Bel-Air branch, including those who
supposedly had transacted with Sempio before.
Even assuming that FEBTC had a standing habit of dealing with Sempio, acting
in behalf of Samsung Construction, the irregular circumstances attending the
presentment of the forged check should have put the bank on the highest degree
of alert. The Court recently emphasized that the highest degree of care and
diligence is required of banks.
Banks are engaged in a business impressed with public interest, and it is

their duty to protect in return their many clients and depositors who
transact business with them. They have the obligation to treat their
client’s account meticulously and with the highest degree of care,
considering the fiduciary nature of their relationship. The diligence
required of banks, therefore, is more than that of a good father of a
family.76
Given the circumstances, extraordinary diligence dictates that FEBTC should

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

be considered as paying out of its funds and cannot charge the amount so paid
to the account of the depositor.77 A bank is liable, irrespective of its good faith, in
paying a forged check.78
WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals

dated 28 November 1996 is REVERSED, and the Decision of the Regional Trial
Court of Manila, Branch 9, dated 25 April 1994 is REINSTATED. Costs against
respondent.
SO ORDERED.

FIRST DIVISION
G.R. No. 149454 May 28, 2004
BANK OF THE PHILIPPINE ISLANDS, petitioner,

vs.
CASA MONTESSORI INTERNATIONALE LEONARDO T.
YABUT, respondents.
x ----------------------------- x
G.R. No. 149507 May 28, 2004
CASA MONTESSORI INTERNATIONALE, petitioner,

vs.
BANK OF THE PHILIPPINE ISLANDS, respondent.
DECISION
PANGANIBAN, J.:
By the nature of its functions, a bank is required to take meticulous care of the
deposits of its clients, who have the right to expect high standards of integrity and
performance from it.
Among its obligations in furtherance thereof is knowing the signatures of its

clients. Depositors are not estopped from questioning wrongful withdrawals, even
if they have failed to question those errors in the statements sent by the bank to
them for verification.
The Case
Before us are two Petitions for Review1 under Rule 45 of the Rules of Court,
assailing the March 23, 2001 Decision2and the August 17, 2001 Resolution3 of
the Court of Appeals (CA) in CA-GR CV No. 63561. The decretal portion of the
assailed Decision reads as follows:
"WHEREFORE, upon the premises, the decision appealed from

is AFFIRMED with the modification that defendant bank [Bank of the
Philippine Islands (BPI)] is held liable only for one-half of the value of the
forged checks in the amount of ₱547,115.00 after deductions subject to

REIMBURSEMENT from third party defendant Yabut who is
likewise ORDERED to pay the other half to plaintiff corporation [Casa
Montessori Internationale (CASA)]."4
The assailed Resolution denied all the parties’ Motions for Reconsideration.
The Facts
The facts of the case are narrated by the CA as follows:
"On November 8, 1982, plaintiff CASA Montessori International5 opened

Current Account No. 0291-0081-01 with defendant BPI[,] with CASA’s
President Ms. Ma. Carina C. Lebron as one of its authorized signatories.
"In 1991, after conducting an investigation, plaintiff discovered that nine

(9) of its checks had been encashed by a certain Sonny D. Santos since
1990 in the total amount of ₱782,000.00, on the following dates and
amounts:
‘Check No. Date Amount

1. 839700 April 24, 1990 ₱ 43,400.00
2. 839459 Nov. 2, 1990 110,500.00
3. 839609 Oct. 17, 1990 47,723.00
4. 839549 April 7, 1990 90,700.00
5. 839569 Sept. 23, 1990 52,277.00
6. 729149 Mar. 22, 1990 148,000.00
7. 729129 Mar. 16, 1990 51,015.00
8. 839684 Dec. 1, 1990 140,000.00
9. 729034 Mar. 2, 1990 98,985.00
Total -- ₱ 782,600.006
"It turned out that ‘Sonny D. Santos’ with account at BPI’s Greenbelt
Branch [was] a fictitious name used by third party defendant Leonardo T.
Yabut who worked as external auditor of CASA. Third party defendant

voluntarily admitted that he forged the signature of Ms. Lebron and
encashed the checks. "The PNP Crime Laboratory conducted an
examination of the nine (9) checks and concluded that the handwritings
thereon compared to the standard signature of Ms. Lebron were not
written by the latter.
"On March 4, 1991, plaintiff filed the herein Complaint for Collection with
Damages against defendant bank praying that the latter be ordered to
reinstate the amount of ₱782,500.007 in the current and savings accounts
of the plaintiff with interest at 6% per annum.
"On February 16, 1999, the RTC rendered the appealed decision in favor
of the plaintiff."8
Modifying the Decision of the Regional Trial Court (RTC), the CA apportioned the
loss between BPI and CASA. The appellate court took into account CASA’s
contributory negligence that resulted in the undetected forgery. It then ordered
Leonardo T. Yabut to reimburse BPI half the total amount claimed; and CASA,
the other half. It also disallowed attorney’s fees and moral and exemplary
damages.
Hence, these Petitions.9
Issues
In GR No. 149454, Petitioner BPI submits the following issues for our
consideration:
"I. The Honorable Court of Appeals erred in deciding this case NOT in
accord with the applicable decisions of this Honorable Court to the
effect that forgery cannot be presumed; that it must be proved by clear,
positive and convincing evidence; and that the burden of proof lies on the
party alleging the forgery.
"II. The Honorable Court of Appeals erred in deciding this case not in
accord with applicable laws, in particular the Negotiable Instruments
Law (NIL) which precludes CASA, on account of its own negligence, from
asserting its forgery claim against BPI, specially taking into account the
absence of any negligence on the part of BPI."10

In GR No. 149507, Petitioner CASA submits the following issues:
"1. The Honorable Court of Appeals erred when it ruled that ‘there is no
showing that [BPI], although negligent, acted in bad faith x x x’ thus
denying the prayer for the award of attorney’s fees, moral damages and
exemplary damages to [CASA]. The Honorable Court also erred when it
did not order [BPI] to pay interest on the amounts due to [CASA].
"2. The Honorable Court of Appeals erred when it declared that [CASA]
was likewise negligent in the case at bar, thus warranting its conclusion
that the loss in the amount of ₱547,115.00 be ‘apportioned between
[CASA] and [BPI] x x x.’"11
These issues can be narrowed down to three. First, was there forgery under the
Negotiable Instruments Law (NIL)? Second, were any of the parties negligent
and therefore precluded from setting up forgery as a defense? Third,should
moral and exemplary damages, attorney’s fees, and interest be awarded?
The Petition in GR No. 149454 has no merit, while that in GR No. 149507 is
partly meritorious.
First Issue:
Forged Signature Wholly Inoperative
Section 23 of the NIL provides:
"Section 23. Forged signature; effect of. -- When a signature is forged or

made without the authority of the person whose signature it purports to
be, it is wholly inoperative, and no right x x x to enforce payment thereof
against any party thereto, can be acquired through or under such
signature, unless the party against whom it is sought to enforce such right
is precluded from setting up the forgery or want of authority."12
Under this provision, a forged signature is a real13 or absolute defense,14 and a

person whose signature on a negotiable instrument is forged is deemed to have
never become a party thereto and to have never consented to the contract that
allegedly gave rise to it.15

The counterfeiting of any writing, consisting in the signing of another’s name with
intent to defraud, is forgery.16
In the present case, we hold that there was forgery of the drawer’s signature on
the check.
First, both the CA17 and the RTC18 found that Respondent Yabut himself had
voluntarily admitted, through an Affidavit, that he had forged the drawer’s
signature and encashed the checks.19 He never refuted these findings.20That he
had been coerced into admission was not corroborated by any evidence on
record.21
Second, the appellate and the trial courts also ruled that the PNP Crime
Laboratory, after its examination of the said checks,22 had concluded that the
handwritings thereon -- compared to the standard signature of the drawer -- were
not hers.23 This conclusion was the same as that in the Report24 that the PNP
Crime Laboratory had earlier issued to BPI -- the drawee bank -- upon the latter’s
request.
Indeed, we respect and affirm the RTC’s factual findings, especially when
affirmed by the CA, since these are supported by substantial evidence on
record.25
Voluntary Admission Not Violative of Constitutional Rights
The voluntary admission of Yabut did not violate his constitutional rights (1) on
custodial investigation, and (2) against self-incrimination.
In the first place, he was not under custodial investigation.26 His Affidavit was
executed in private and before private individuals.27 The mantle of protection
under Section 12 of Article III of the 1987 Constitution28 covers only the period
"from the time a person is taken into custody for investigation of his possible
participation in the commission of a crime or from the time he is singled out as a
suspect in the commission of a crime although not yet in custody."29
Therefore, to fall within the ambit of Section 12, quoted above, there must be an
arrest or a deprivation of freedom, with "questions propounded on him by the
police authorities for the purpose of eliciting admissions, confessions, or any
information."30 The said constitutional provision does "not apply to spontaneous
statements made in a voluntary manner"31 whereby an individual orally admits to

authorship of a crime.32 "What the Constitution proscribes is the compulsory or
coercive disclosure of incriminating facts."33
Moreover, the right against self-incrimination34 under Section 17 of Article III35 of

the Constitution, which is ordinarily available only in criminal prosecutions,
extends to all other government proceedings -- including civil actions, legislative
investigations,36 and administrative proceedings that possess a criminal or penal
aspect37 -- but not to private investigations done by private individuals. Even in
such government proceedings, this right may be waived,38 provided the waiver is
certain; unequivocal; and intelligently, understandingly and willingly made.39
If in these government proceedings waiver is allowed, all the more is it so in

private investigations. It is of no moment that no criminal case has yet been filed
against Yabut. The filing thereof is entirely up to the appropriate authorities or to
the private individuals upon whom damage has been caused. As we shall also
explain later, it is not mandatory for CASA -- the plaintiff below -- to implead
Yabut in the civil case before the lower court.
Under these two constitutional provisions, "[t]he Bill of Rights40 does not concern
itself with the relation between a private individual and another individual. It
governs the relationship between the individual and the State."41Moreover, the
Bill of Rights "is a charter of liberties for the individual and a limitation upon the
power of the [S]tate."42 These rights43 are guaranteed to preclude the slightest
coercion by the State that may lead the accused "to admit something false, not
prevent him from freely and voluntarily telling the truth."44
Yabut is not an accused here. Besides, his mere invocation of the aforesaid
rights "does not automatically entitle him to the constitutional protection." 45 When
he freely and voluntarily executed46 his Affidavit, the State was not even involved.
Such Affidavit may therefore be admitted without violating his constitutional rights
while under custodial investigation and against self-incrimination.
Clear, Positive and Convincing Examination and Evidence
The examination by the PNP, though inconclusive, was nevertheless clear,

positive and convincing.
Forgery "cannot be presumed."47 It must be established by clear, positive and

convincing evidence.48 Under the best evidence rule as applied to documentary
evidence like the checks in question, no secondary or substitutionary evidence
may inceptively be introduced, as the original writing itself must be produced in

court.49 But when, without bad faith on the part of the offeror, the original checks
have already been destroyed or cannot be produced in court, secondary
evidence may be produced.50 Without bad faith on its part, CASA proved the loss
or destruction of the original checks through the Affidavit of the one person who
knew of that fact51 -- Yabut. He clearly admitted to discarding the paid checks to
cover up his misdeed.52 In such a situation, secondary evidence like microfilm
copies may be introduced in court.
The drawer’s signatures on the microfilm copies were compared with the
standard signature. PNP Document Examiner II Josefina de la Cruz testified on
cross-examination that two different persons had written them.53Although no
conclusive report could be issued in the absence of the original checks,54 she
affirmed that her findings were 90 percent conclusive.55 According to her, even if
the microfilm copies were the only basis of comparison, the differences were
evident.56 Besides, the RTC explained that although the Report was inconclusive,
no conclusive report could have been given by the PNP, anyway, in the absence
of the original checks.57 This explanation is valid; otherwise, no such report can
ever be relied upon in court.
Even with respect to documentary evidence, the best evidence rule applies only
when the contents of a document -- such as the drawer’s signature on a check --
is the subject of inquiry.58 As to whether the document has been actually
executed, this rule does not apply; and testimonial as well as any other
secondary evidence is admissible.59Carina Lebron herself, the drawer’s
authorized signatory, testified many times that she had never signed those
checks. Her testimonial evidence is admissible; the checks have not been
actually executed. The genuineness of her handwriting is proved, not only
through the court’s comparison of the questioned handwritings and admittedly
genuine specimens thereof,60 but above all by her.
The failure of CASA to produce the original checks neither gives rise to the
presumption of suppression of evidence61 nor creates an unfavorable inference
against it.62 Such failure merely authorizes the introduction of secondary
evidence63 in the form of microfilm copies. Of no consequence is the fact that
CASA did not present the signature card containing the signatures with which
those on the checks were compared.64 Specimens of standard signatures are not
limited to such a card. Considering that it was not produced in evidence, other
documents that bear the drawer’s authentic signature may be resorted
to.65 Besides, that card was in the possession of BPI -- the adverse party.
We have held that without the original document containing the allegedly forged
signature, one cannot make a definitive comparison that would establish

forgery;66 and that a comparison based on a mere reproduction of the document
under controversy cannot produce reliable results.67 We have also said, however,
that a judge cannot merely rely on a handwriting expert’s testimony, 68 but should
also exercise independent judgment in evaluating the authenticity of a signature
under scrutiny.69 In the present case, both the RTC and the CA conducted
independent examinations of the evidence presented and arrived at reasonable
and similar conclusions. Not only did they admit secondary evidence; they also
appositely considered testimonial and other documentary evidence in the form of
the Affidavit.
The best evidence rule admits of exceptions and, as we have discussed earlier,
the first of these has been met.70The result of examining a questioned
handwriting, even with the aid of experts and scientific instruments, may be
inconclusive;71 but it is a non sequitur to say that such result is not clear, positive
and convincing. The preponderance of evidence required in this case has been
satisfied.72
Second Issue:
Negligence Attributable to BPI Alone
Having established the forgery of the drawer’s signature, BPI -- the drawee --
erred in making payments by virtue thereof. The forged signatures are wholly
inoperative, and CASA -- the drawer whose authorized signatures do not appear
on the negotiable instruments -- cannot be held liable thereon. Neither is the
latter precluded from setting up forgery as a real defense.
Clear Negligence in Allowing Payment Under a Forged Signature
We have repeatedly emphasized that, since the banking business is impressed

with public interest, of paramount importance thereto is the trust and confidence
of the public in general. Consequently, the highest degree of diligence73 is
expected,74 and high standards of integrity and performance are even required,
of it.75 By the nature of its functions, a bank is "under obligation to treat the
accounts of its depositors with meticulous care,76 always having in mind the
fiduciary nature of their relationship."77
BPI contends that it has a signature verification procedure, in which checks are
honored only when the signatures therein are verified to be the same with or
similar to the specimen signatures on the signature cards. Nonetheless, it still
failed to detect the eight instances of forgery. Its negligence consisted in the

omission of that degree of diligence required78 of a bank. It cannot now feign
ignorance, for very early on we have already ruled that a bank is "bound to know
the signatures of its customers; and if it pays a forged check, it must be
considered as making the payment out of its own funds, and cannot ordinarily
charge the amount so paid to the account of the depositor whose name was
forged."79 In fact, BPI was the same bank involved when we issued this ruling
seventy years ago.
Neither Waiver nor Estoppel Results from Failure to Report Error in Bank
Statement
The monthly statements issued by BPI to its clients contain a notice worded as
follows: "If no error is reported in ten (10) days, account will be correct." 80 Such
notice cannot be considered a waiver, even if CASA failed to report the error.
Neither is it estopped from questioning the mistake after the lapse of the ten-day
period.
This notice is a simple confirmation81 or "circularization" -- in accounting parlance

-- that requests client-depositors to affirm the accuracy of items recorded by the
banks.82 Its purpose is to obtain from the depositors a direct corroboration of the
correctness of their account balances with their respective banks.83 Internal or
external auditors of a bank use it as a basic audit procedure84 -- the results of
which its client-depositors are neither interested in nor privy to -- to test the
details of transactions and balances in the bank’s records. 85 Evidential matter
obtained from independent sources outside a bank only serves to provide greater
assurance of reliability86 than that obtained solely within it for purposes of an
audit of its own financial statements, not those of its client-depositors.
Furthermore, there is always the audit risk that errors would not be detected87 for
various reasons. One, materiality is a consideration in audit
planning;88 and two, the information obtained from such a substantive test is
merely presumptive and cannot be the basis of a valid waiver. 89 BPI has no right
to impose a condition unilaterally and thereafter consider failure to meet such
condition a waiver. Neither may CASA renounce a right90 it has never
possessed.91
Every right has subjects -- active and passive. While the active subject is entitled
to demand its enforcement, the passive one is duty-bound to suffer such
enforcement.92
On the one hand, BPI could not have been an active subject, because it could
not have demanded from CASA a response to its notice. Besides, the notice was

a measly request worded as follows: "Please examine x x x and report x x
x."93 CASA, on the other hand, could not have been a passive subject, either,
because it had no obligation to respond. It could -- as it did -- choose not to
respond.
Estoppel precludes individuals from denying or asserting, by their own deed or

representation, anything contrary to that established as the truth, in legal
contemplation.94 Our rules on evidence even make a juris et de
jurepresumption95 that whenever one has, by one’s own act or omission,
intentionally and deliberately led another to believe a particular thing to be true
and to act upon that belief, one cannot -- in any litigation arising from such act or
omission -- be permitted to falsify that supposed truth.96
In the instant case, CASA never made any deed or representation that misled
BPI. The former’s omission, if any, may only be deemed an innocent mistake
oblivious to the procedures and consequences of periodic audits. Since its
conduct was due to such ignorance founded upon an innocent mistake, estoppel
will not arise.97 A person who has no knowledge of or consent to a transaction
may not be estopped by it.98 "Estoppel cannot be sustained by mere argument or
doubtful inference x x x."99 CASA is not barred from questioning BPI’s error even
after the lapse of the period given in the notice.
Loss Borne by Proximate Source of Negligence
For allowing payment100 on the checks to a wrongful and fictitious payee, BPI --
the drawee bank -- becomes liable to its depositor-drawer. Since the encashing
bank is one of its branches,101 BPI can easily go after it and hold it liable for
reimbursement.102 It "may not debit the drawer’s account103 and is not entitled to
indemnification from the drawer."104 In both law and equity, when one of two
innocent persons "must suffer by the wrongful act of a third person, the loss must
be borne by the one whose negligence was the proximate cause of the loss or
who put it into the power of the third person to perpetrate the wrong."105
Proximate cause is determined by the facts of the case.106 "It is that cause which,
in natural and continuous sequence, unbroken by any efficient intervening cause,
produces the injury, and without which the result would not have occurred."107
Pursuant to its prime duty to ascertain well the genuineness of the signatures of
its client-depositors on checks being encashed, BPI is "expected to use
reasonable business prudence."108 In the performance of that obligation, it is
bound by its internal banking rules and regulations that form part of the contract it
enters into with its depositors.109

Unfortunately, it failed in that regard. First, Yabut was able to open a bank
account in one of its branches without privity;110 that is, without the proper
verification of his corresponding identification papers. Second, BPI was unable to
discover early on not only this irregularity, but also the marked differences in the
signatures on the checks and those on the signature card. Third, despite the
examination procedures it conducted, the Central Verification Unit111of the bank
even passed off these evidently different signatures as genuine. Without
exercising the required prudence on its part, BPI accepted and encashed the
eight checks presented to it. As a result, it proximately contributed to the fraud
and should be held primarily liable112 for the "negligence of its officers or agents
when acting within the course and scope of their employment."113 It must bear the
loss.
CASA Not Negligent in Its Financial Affairs
In this jurisdiction, the negligence of the party invoking forgery is recognized as

an exception114 to the general rule that a forged signature is wholly
inoperative.115 Contrary to BPI’s claim, however, we do not find CASA negligent
in handling its financial affairs. CASA, we stress, is not precluded from setting up
forgery as a real defense.
Role of Independent Auditor
The major purpose of an independent audit is to investigate and determine

objectively if the financial statements submitted for audit by a corporation have
been prepared in accordance with the appropriate financial reporting
practices116 of private entities. The relationship that arises therefrom is both legal
and moral.117 It begins with the execution of the engagement letter 118 that
embodies the terms and conditions of the audit and ends with the fulfilled
expectation of the auditor’s ethical119 and competent performance in all aspects
of the audit.120
The financial statements are representations of the client; but it is the auditor who
has the responsibility for the accuracy in the recording of data that underlies their
preparation, their form of presentation, and the opinion121expressed
therein.122 The auditor does not assume the role of employee or of management
in the client’s conduct of operations123 and is never under the control or
supervision124 of the client.
Yabut was an independent auditor125 hired by CASA. He handled its monthly

bank reconciliations and had access to all relevant documents and
checkbooks.126 In him was reposed the client’s127 trust and confidence128 that he

would perform precisely those functions and apply the appropriate procedures in
accordance with generally accepted auditing standards.129 Yet he did not meet
these expectations. Nothing could be more horrible to a client than to discover
later on that the person tasked to detect fraud was the same one who
perpetrated it.
Cash Balances Open to Manipulation
It is a non sequitur to say that the person who receives the monthly bank
statements, together with the cancelled checks and other debit/credit
memoranda, shall examine the contents and give notice of any discrepancies
within a reasonable time. Awareness is not equipollent with discernment.
Besides, in the internal accounting control system prudently installed by

CASA,130 it was Yabut who should examine those documents in order to prepare
the bank reconciliations.131 He owned his working papers,132 and his output
consisted of his opinion as well as the client’s financial statements and
accompanying notes thereto. CASA had every right to rely solely upon his output
-- based on the terms of the audit engagement -- and could thus be unwittingly
duped into believing that everything was in order. Besides, "[g]ood faith is always
presumed and it is the burden of the party claiming otherwise to adduce clear
and convincing evidence to the contrary."133
Moreover, there was a time gap between the period covered by the bank
statement and the date of its actual receipt. Lebron personally received the
December 1990 bank statement only in January 1991134 -- when she was also
informed of the forgery for the first time, after which she immediately requested a
"stop payment order." She cannot be faulted for the late detection of the forged
December check. After all, the bank account with BPI was not personal but
corporate, and she could not be expected to monitor closely all its finances. A
preschool teacher charged with molding the minds of the youth cannot be
burdened with the intricacies or complexities of corporate existence.
There is also a cutoff period such that checks issued during a given month, but
not presented for payment within that period, will not be reflected therein. 135 An
experienced auditor with intent to defraud can easily conceal any devious
scheme from a client unwary of the accounting processes involved by
manipulating the cash balances on record -- especially when bank transactions
are numerous, large and frequent. CASA could only be blamed, if at all, for its
unintelligent choice in the selection and appointment of an auditor -- a fault that is
not tantamount to negligence.

Negligence is not presumed, but proven by whoever alleges it. 136 Its mere
existence "is not sufficient without proof that it, and no other cause," 137 has given
rise to damages.138 In addition, this fault is common to, if not prevalent among,
small and medium-sized business entities, thus leading the Professional
Regulation Commission (PRC), through the Board of Accountancy (BOA), to
require today not only accreditation for the practice of public accountancy, 139 but
also the registration of firms in the practice thereof. In fact, among the
attachments now required upon registration are the code of good
governance140 and a sworn statement on adequate and effective training.141
The missing checks were certainly reported by the bookkeeper142 to the

accountant143 -- her immediate supervisor -- and by the latter to the auditor.
However, both the accountant and the auditor, for reasons known only to them,
assured the bookkeeper that there were no irregularities.
The bookkeeper144 who had exclusive custody of the checkbooks145 did not have
to go directly to CASA’s president or to BPI. Although she rightfully reported the
matter, neither an investigation was conducted nor a resolution of it was arrived
at, precisely because the person at the top of the helm was the culprit. The
vouchers, invoices and check stubs in support of all check disbursements could
be concealed or fabricated -- even in collusion -- and management would still
have no way to verify its cash accountabilities.
Clearly then, Yabut was able to perpetrate the wrongful act through no fault of
CASA. If auditors may be held liable for breach of contract and
negligence,146 with all the more reason may they be charged with the
perpetration of fraud upon an unsuspecting client. CASA had the discretion to
pursue BPI alone under the NIL, by reason of expediency or munificence or both.
Money paid under a mistake may rightfully be recovered, 147 and under such
terms as the injured party may choose.
Third Issue:
Award of Monetary Claims
Moral Damages Denied
We deny CASA’s claim for moral damages.
In the absence of a wrongful act or omission,148 or of fraud or bad faith,149 moral

damages cannot be awarded.150The adverse result of an action does not per se

make the action wrongful, or the party liable for it. One may err, but error alone is
not a ground for granting such damages.151 While no proof of pecuniary loss is
necessary therefor -- with the amount to be awarded left to the court’s
discretion152 -- the claimant must nonetheless satisfactorily prove the existence of
its factual basis153 and causal relation154 to the claimant’s act or omission.155
Regrettably, in this case CASA was unable to identify the particular instance --
enumerated in the Civil Code -- upon which its claim for moral damages is
predicated.156 Neither bad faith nor negligence so gross that it amounts to
malice157 can be imputed to BPI. Bad faith, under the law, "does not simply
connote bad judgment or negligence;158 it imports a dishonest purpose or some
moral obliquity and conscious doing of a wrong, a breach of a known duty
through some motive or interest or ill will that partakes of the nature of fraud." 159
As a general rule, a corporation -- being an artificial person without feelings,

emotions and senses, and having existence only in legal contemplation -- is not
entitled to moral damages,160 because it cannot experience physical suffering
and mental anguish.161 However, for breach of the fiduciary duty required of a
bank, a corporate client may claim such damages when its good reputation is
besmirched by such breach, and social humiliation results therefrom. 162 CASA
was unable to prove that BPI had debased the good reputation of,163 and
consequently caused incalculable embarrassment to, the former. CASA’s mere
allegation or supposition thereof, without any sufficient evidence on record, 164 is
not enough.
Exemplary Damages Also Denied
We also deny CASA’s claim for exemplary damages.
Imposed by way of correction165 for the public good,166 exemplary damages

cannot be recovered as a matter of right.167 As we have said earlier, there is no
bad faith on the part of BPI for paying the checks of CASA upon forged
signatures. Therefore, the former cannot be said to have acted in a wanton,
fraudulent, reckless, oppressive or malevolent manner.168 The latter, having no
right to moral damages, cannot demand exemplary damages.169
Attorney’s Fees Granted
Although it is a sound policy not to set a premium on the right to litigate, 170 we
find that CASA is entitled to reasonable attorney’s fees based on "factual, legal,
and equitable justification."171

When the act or omission of the defendant has compelled the plaintiff to incur
expenses to protect the latter’s interest,172 or where the court deems it just and
equitable,173 attorney’s fees may be recovered. In the present case, BPI
persistently denied the claim of CASA under the NIL to recredit the latter’s
account for the value of the forged checks. This denial constrained CASA to incur
expenses and exert effort for more than ten years in order to protect its corporate
interest in its bank account. Besides, we have already cautioned BPI on a similar
act of negligence it had committed seventy years ago, but it has remained
unrelenting. Therefore, the Court deems it just and equitable to grant ten percent
(10%)174 of the total value adjudged to CASA as attorney’s fees.
Interest Allowed
For the failure of BPI to pay CASA upon demand and for compelling the latter to
resort to the courts to obtain payment, legal interest may be adjudicated at the
discretion of the Court, the same to run from the filing 175 of the
Complaint.176 Since a court judgment is not a loan or a forbearance of recovery,
the legal interest shall be at six percent (6%) per annum.177 "If the obligation
consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the
payment of x x x legal interest, which is six percent per annum."178 The actual
base for its computation shall be "on the amount finally
adjudged,"179 compounded180 annually to make up for the cost of
money181 already lost to CASA.
Moreover, the failure of the CA to award interest does not prevent us from
granting it upon damages awarded for breach of contract. 182 Because BPI
evidently breached its contract of deposit with CASA, we award interest in
addition to the total amount adjudged. Under Section 196 of the NIL, any case
not provided for shall be "governed by the provisions of existing legislation or, in
default thereof, by the rules of the law merchant."183 Damages are not provided
for in the NIL. Thus, we resort to the Code of Commerce and the Civil Code.
Under Article 2 of the Code of Commerce, acts of commerce shall be governed
by its provisions and, "in their absence, by the usages of commerce generally
observed in each place; and in the absence of both rules, by those of the civil
law."184 This law being silent, we look at Article 18 of the Civil Code, which states:
"In matters which are governed by the Code of Commerce and special laws, their
deficiency shall be supplied" by its provisions. A perusal of these three statutes
unmistakably shows that the award of interest under our civil law is justified.
WHEREFORE, the Petition in GR No. 149454 is hereby DENIED, and that in GR

No. 149507 PARTLY GRANTED. The assailed Decision of the Court of Appeals

is AFFIRMED with modification: BPI is held liable for ₱547,115, the total value of
the forged checks less the amount already recovered by CASA from Leonardo T.
Yabut, plus interest at the legal rate of six percent (6%) per annum --
compounded annually, from the filing of the complaint until paid in full; and
attorney’s fees of ten percent (10%) thereof, subject to reimbursement from
Respondent Yabut for the entire amount, excepting attorney’s fees. Let a copy of
this Decision be furnished the Board of Accountancy of the Professional
Regulation Commission for such action as it may deem appropriate against
Respondent Yabut. No costs.
SO ORDERED.

SECOND DIVISION
G.R. No. 138074 August 15, 2003
CELY YANG, Petitioner,

vs.
HON. COURT OF APPEALS, PHILIPPINE COMMERCIAL INTERNATIONAL
BANK, FAR EAST BANK & TRUST CO., EQUITABLE BANKING
CORPORATION, PREM CHANDIRAMANI and FERNANDO
DAVID, Respondents.
DECISION
QUISUMBING, J.:
For review on certiorari is the decision1 of the Court of Appeals, dated March 25,
1999, in CA-G.R. CV No. 52398, which affirmed with modification the joint
decision of the Regional Trial Court (RTC) of Pasay City, Branch 117, dated July
4, 1995, in Civil Cases Nos. 54792 and 5492.3 The trial court dismissed the
complaint against herein respondents Far East Bank & Trust Company (FEBTC),
Equitable Banking Corporation (Equitable), and Philippine Commercial
International Bank (PCIB) and ruled in favor of respondent Fernando David as to
the proceeds of the two cashier’s checks, including the earnings thereof
pendente lite. Petitioner Cely Yang was ordered to pay David moral damages of
₱100,000.00 and attorney’s fees also in the amount of ₱100,000.00.
The facts of this case are not disputed, to wit:
On or before December 22, 1987, petitioner Cely Yang and private respondent
Prem Chandiramani entered into an agreement whereby the latter was to give
Yang a PCIB manager’s check in the amount of ₱4.2 million in exchange for two
(2) of Yang’s manager’s checks, each in the amount of ₱2.087 million, both
payable to the order of private respondent Fernando David. Yang and
Chandiramani agreed that the difference of ₱26,000.00 in the exchange would
be their profit to be divided equally between them.
Yang and Chandiramani also further agreed that the former would secure from
FEBTC a dollar draft in the amount of US$200,000.00, payable to PCIB FCDU
Account No. 4195-01165-2, which Chandiramani would exchange for another
dollar draft in the same amount to be issued by Hang Seng Bank Ltd. of Hong
Kong.

Accordingly, on December 22, 1987, Yang procured the following:
a) Equitable Cashier’s Check No. CCPS 14-009467 in the sum of

₱2,087,000.00, dated December 22, 1987, payable to the order of
Fernando David;
b) FEBTC Cashier’s Check No. 287078, in the amount of ₱2,087,000.00,

dated December 22, 1987, likewise payable to the order of Fernando
David; and
c) FEBTC Dollar Draft No. 4771, drawn on Chemical Bank, New York, in
the amount of US$200,000.00, dated December 22, 1987, payable to
PCIB FCDU Account No. 4195-01165-2.
At about one o’clock in the afternoon of the same day, Yang gave the
aforementioned cashier’s checks and dollar drafts to her business associate,
Albert Liong, to be delivered to Chandiramani by Liong’s messenger, Danilo
Ranigo. Ranigo was to meet Chandiramani at Philippine Trust Bank, Ayala
Avenue, Makati City, Metro Manila where he would turn over Yang’s cashier’s
checks and dollar draft to Chandiramani who, in turn, would deliver to Ranigo a
PCIB manager’s check in the sum of P4.2 million and a Hang Seng Bank dollar
draft for US$200,000.00 in exchange.
Chandiramani did not appear at the rendezvous and Ranigo allegedly lost the
two cashier’s checks and the dollar draft bought by petitioner. Ranigo reported
the alleged loss of the checks and the dollar draft to Liong at half past four in the
afternoon of December 22, 1987. Liong, in turn, informed Yang, and the loss was
then reported to the police.
It transpired, however, that the checks and the dollar draft were not lost, for
Chandiramani was able to get hold of said instruments, without delivering the
exchange consideration consisting of the PCIB manager’s check and the Hang
Seng Bank dollar draft.
At three o’clock in the afternoon or some two (2) hours after Chandiramani and
Ranigo were to meet in Makati City, Chandiramani delivered to respondent
Fernando David at China Banking Corporation branch in San Fernando City,
Pampanga, the following: (a) FEBTC Cashier’s Check No. 287078, dated
December 22, 1987, in the sum of ₱2.087 million; and (b) Equitable Cashier’s
Check No. CCPS 14-009467, dated December 22, 1987, also in the amount of
₱2.087 million. In exchange, Chandiramani got US$360,000.00 from David,

which Chandiramani deposited in the savings account of his wife, Pushpa
Chandiramani; and his mother, Rani Reynandas, who held FCDU Account No.
124 with the United Coconut Planters Bank branch in Greenhills, San Juan,
Metro Manila. Chandiramani also deposited FEBTC Dollar Draft No. 4771, dated
December 22, 1987, drawn upon the Chemical Bank, New York for
US$200,000.00 in PCIB FCDU Account No. 4195-01165-2 on the same date.
Meanwhile, Yang requested FEBTC and Equitable to stop payment on the

instruments she believed to be lost. Both banks complied with her request, but
upon the representation of PCIB, FEBTC subsequently lifted the stop payment
order on FEBTC Dollar Draft No. 4771, thus enabling the holder of PCIB FCDU
Account No. 4195-01165-2 to receive the amount of US$200,000.00.
On December 28, 1987, herein petitioner Yang lodged a Complaint4 for injunction
and damages against Equitable, Chandiramani, and David, with prayer for a
temporary restraining order, with the Regional Trial Court of Pasay City. The
Complaint was docketed as Civil Case No. 5479. The Complaint was
subsequently amended to include a prayer for Equitable to return to Yang the
amount of P2.087 million, with interest thereon until fully paid.5
On January 12, 1988, Yang filed a separate case for injunction and damages,
with prayer for a writ of preliminary injunction against FEBTC, PCIB,
Chandiramani and David, with the RTC of Pasay City, docketed as Civil Case
No. 5492. This complaint was later amended to include a prayer that defendants
therein return to Yang the amount of P2.087 million, the value of FEBTC Dollar
Draft No. 4771, with interest at 18% annually until fully paid.6
On February 9, 1988, upon the filing of a bond by Yang, the trial court issued a
writ of preliminary injunction in Civil Case No. 5479. A writ of preliminary
injunction was subsequently issued in Civil Case No. 5492 also.
Meanwhile, herein respondent David moved for dismissal of the cases against
him and for reconsideration of the Orders granting the writ of preliminary
injunction, but these motions were denied. David then elevated the matter to the
Court of Appeals in a special civil action for certiorari docketed as CA-G.R. SP
No. 14843, which was dismissed by the appellate court.
As Civil Cases Nos. 5479 and 5492 arose from the same set of facts, the two
cases were consolidated. The trial court then conducted pre-trial and trial of the
two cases, but the proceedings had to be suspended after a fire gutted the Pasay
City Hall and destroyed the records of the courts.

After the records were reconstituted, the proceedings resumed and the parties
agreed that the money in dispute be invested in Treasury Bills to be awarded in
favor of the prevailing side. It was also agreed by the parties to limit the issues at
the trial to the following:
1. Who, between David and Yang, is legally entitled to the proceeds of

Equitable Banking Corporation (EBC) Cashier’s Check No. CCPS 14-
009467 in the sum of ₱2,087,000.00 dated December 22, 1987, and Far
East Bank and Trust Company (FEBTC) Cashier’s Check No. 287078 in
the sum of ₱2,087,000.00 dated December 22, 1987, together with the
earnings derived therefrom pendente lite?
2. Are the defendants FEBTC and PCIB solidarily liable to Yang for
having allowed the encashment of FEBTC Dollar Draft No. 4771, in the
sum of US$200,000.00 plus interest thereon despite the stop payment
order of Cely Yang?7
On July 4, 1995, the trial court handed down its decision in Civil Cases Nos.
5479 and 5492, to wit:
WHEREFORE, the Court renders judgment in favor of defendant Fernando

David against the plaintiff Cely Yang and declaring the former entitled to the
proceeds of the two (2) cashier’s checks, together with the earnings derived
therefrom pendente lite; ordering the plaintiff to pay the defendant Fernando
David moral damages in the amount of ₱100,000.00; attorney’s fees in the
amount of ₱100,000.00 and to pay the costs. The complaint against Far East
Bank and Trust Company (FEBTC), Philippine Commercial International Bank
(PCIB) and Equitable Banking Corporation (EBC) is dismissed. The decision is
without prejudice to whatever action plaintiff Cely Yang will file against defendant
Prem Chandiramani for reimbursement of the amounts received by him from
defendant Fernando David.
SO ORDERED.8
In finding for David, the trial court ratiocinated:
The evidence shows that defendant David was a holder in due course for the
reason that the cashier’s checks were complete on their face when they were
negotiated to him. They were not yet overdue when he became the holder
thereof and he had no notice that said checks were previously dishonored; he
took the cashier’s checks in good faith and for value. He parted some

$200,000.00 for the two (2) cashier’s checks which were given to defendant
Chandiramani; he had also no notice of any infirmity in the cashier’s checks or
defect in the title of the drawer. As a matter of fact, he asked the manager of the
China Banking Corporation to inquire as to the genuineness of the cashier’s
checks (tsn, February 5, 1988, p. 21, September 20, 1991, pp. 13-14). Another
proof that defendant David is a holder in due course is the fact that the stop
payment order on [the] FEBTC cashier’s check was lifted upon his inquiry at the
head office (tsn, September 20, 1991, pp. 24-25). The apparent reason for lifting
the stop payment order was because of the fact that FEBTC realized that the
checks were not actually lost but indeed reached the payee defendant David.9
Yang then moved for reconsideration of the RTC judgment, but the trial court
denied her motion in its Order of September 20, 1995.
In the belief that the trial court misunderstood the concept of a holder in due
course and misapprehended the factual milieu, Yang seasonably filed an appeal
with the Court of Appeals, docketed as CA-G.R. CV No. 52398.
On March 25, 1999, the appellate court decided CA-G.R. CV No. 52398 in this
wise:
WHEREFORE, this court AFFIRMS the judgment of the lower court with
modification and hereby orders the plaintiff-appellant to pay defendant-
appellant PCIB the amount of Twenty-Five Thousand Pesos (₱25,000.00).
SO ORDERED.10
In affirming the trial court’s judgment with respect to herein respondent David, the
appellate court found that:
In this case, defendant-appellee had taken the necessary precautions to verify,

through his bank, China Banking Corporation, the genuineness of whether (sic)
the cashier’s checks he received from Chandiramani. As no stop payment order
was made yet (at) the time of the inquiry, defendant-appellee had no notice of
what had transpired earlier between the plaintiff-appellant and Chandiramani. All
he knew was that the checks were issued to Chandiramani with whom he was he
had (sic) a transaction. Further on, David received the checks in question in due
course because Chandiramani, who at the time the checks were delivered to
David, was acting as Yang’s agent.

David had no notice, real or constructive, cogent for him to make further inquiry
as to any infirmity in the instrument(s) and defect of title of the holder. To
mandate that each holder inquire about every aspect on how the instrument
came about will unduly impede commercial transactions, Although negotiable
instruments do not constitute legal tender, they often take the place of
money as a means of payment.
The mere fact that David and Chandiramani knew one another for a long time is
not sufficient to establish that they connived with each other to defraud Yang.
There was no concrete proof presented by Yang to support her theory.11
The appellate court awarded ₱25,000.00 in attorney’s fees to PCIB as it found

the action filed by Yang against said bank to be "clearly unfounded and
baseless." Since PCIB was compelled to litigate to protect itself, then it was
entitled under Article 220812 of the Civil Code to attorney’s fees and litigation
expenses.
Hence, the instant recourse wherein petitioner submits the following issues for
resolution:
a - WHETHER THE CHECKS WERE ISSUED TO PREM

CHANDIRAMANI BY PETITIONER;
b - WHETHER THE ALLEGED TRANSACTION BETWEEN PREM

CHANDIRAMANI AND FERNANDO DAVID IS LEGITIMATE OR A
SCHEME BY BOTH PRIVATE RESPONDENTS TO SWINDLE
PETITIONER;
c - WHETHER FERNANDO DAVID GAVE PREM CHANDIRAMANI

US$360,000.00 OR JUST A FRACTION OF THE AMOUNT
REPRESENTING HIS SHARE OF THE LOOT;
d - WHETHER PRIVATE RESPONDENTS FERNANDO DAVID AND

PCIB ARE ENTITLED TO DAMAGES AND ATTORNEY’S FEES.13
At the outset, we must stress that this is a petition for review under Rule 45 of the
1997 Rules of Civil Procedure. It is basic that in petitions for review under Rule
45, the jurisdiction of this Court is limited to reviewing questions of law, questions
of fact are not entertained absent a showing that the factual findings complained
of are totally devoid of support in the record or are glaringly erroneous. 14 Given

the facts in the instant case, despite petitioner’s formulation, we find that the
following are the pertinent issues to be resolved:
a) Whether the Court of Appeals erred in holding herein respondent

Fernando David to be a holder in due course; and
b) Whether the appellate court committed a reversible error in awarding

damages and attorney’s fees to David and PCIB.
On the first issue, petitioner Yang contends that private respondent Fernando
David is not a holder in due course of the checks in question. While it is true that
he was named the payee thereof, David failed to inquire from Chandiramani
about how the latter acquired possession of said checks. Given his failure to do
so, it cannot be said that David was unaware of any defect or infirmity in the title
of Chandiramani to the checks at the time of their negotiation. Moreover,
inasmuch as the checks were crossed, then David should have, pursuant to our
ruling in Bataan Cigar & Cigarette Factory, Inc. v. Court of Appeals, G.R. No.
93048, March 3, 1994, 230 SCRA 643, been put on guard that the checks were
issued for a definite purpose and accordingly, made inquiries to determine if he
received the checks pursuant to that purpose. His failure to do so negates the
finding in the proceedings below that he was a holder in due course.
Finally, the petitioner argues that there is no showing whatsoever that David
gave Chandiramani any consideration of value in exchange for the
aforementioned checks.
Private respondent Fernando David counters that the evidence on record shows
that when he received the checks, he verified their genuineness with his bank,
and only after said verification did he deposit them. David stresses that he had
no notice of previous dishonor or any infirmity that would have aroused his
suspicions, the instruments being complete and regular upon their face. David
stresses that the checks in question were cashier’s checks. From the very nature
of cashier’s checks, it is highly unlikely that he would have suspected that
something was amiss. David also stresses negotiable instruments are presumed
to have been issued for valuable consideration, and he who alleges otherwise
must controvert the presumption with sufficient evidence. The petitioner failed to
discharge this burden, according to David. He points out that the checks were
delivered to him as the payee, and he took them as holder and payee thereof.
Clearly, he concludes, he should be deemed to be their holder in due course.
We shall now resolve the first issue.

Every holder of a negotiable instrument is deemed prima facie a holder in due
course. However, this presumption arises only in favor of a person who is a
holder as defined in Section 191 of the Negotiable Instruments Law, 15meaning a
"payee or indorsee of a bill or note, who is in possession of it, or the bearer
thereof."
In the present case, it is not disputed that David was the payee of the checks in
question. The weight of authority sustains the view that a payee may be a holder
in due course.16 Hence, the presumption that he is a prima facieholder in due
course applies in his favor. However, said presumption may be rebutted. Hence,
what is vital to the resolution of this issue is whether David took possession of
the checks under the conditions provided for in Section 5217 of the Negotiable
Instruments Law. All the requisites provided for in Section 52 must concur in
David’s case, otherwise he cannot be deemed a holder in due course.
We find that the petitioner’s challenge to David’s status as a holder in due course
hinges on two arguments: (1) the lack of proof to show that David tendered any
valuable consideration for the disputed checks; and (2) David’s failure to inquire
from Chandiramani as to how the latter acquired possession of the checks, thus
resulting in David’s intentional ignorance tantamount to bad faith. In sum,
petitioner posits that the last two requisites of Section 52 are missing, thereby
preventing David from being considered a holder in due course. Unfortunately for
the petitioner, her arguments on this score are less than meritorious and far from
persuasive.
First, with respect to consideration, Section 2418 of the Negotiable Instruments

Law creates a presumption that every party to an instrument acquired the same
for a consideration19 or for value.20 Thus, the law itself creates a presumption in
David’s favor that he gave valuable consideration for the checks in question. In
alleging otherwise, the petitioner has the onus to prove that David got hold of the
checks absent said consideration. In other words, the petitioner must present
convincing evidence to overthrow the presumption. Our scrutiny of the records,
however, shows that the petitioner failed to discharge her burden of proof. The
petitioner’s averment that David did not give valuable consideration when he took
possession of the checks is unsupported, devoid of any concrete proof to sustain
it. Note that both the trial court and the appellate court found that David did not
receive the checks gratis, but instead gave Chandiramani US$360,000.00 as
consideration for the said instruments. Factual findings of the Court of Appeals
are conclusive on the parties and not reviewable by this Court; they carry great
weight when the factual findings of the trial court are affirmed by the appellate
court.21

Second, petitioner fails to point any circumstance which should have put David
on inquiry as to the why and wherefore of the possession of the checks by
Chandiramani. David was not privy to the transaction between petitioner and
Chandiramani. Instead, Chandiramani and David had a separate dealing in which
it was precisely Chandiramani’s duty to deliver the checks to David as payee.
The evidence shows that Chandiramani performed said task to the letter.
Petitioner admits that David took the step of asking the manager of his bank to
verify from FEBTC and Equitable as to the genuineness of the checks and only
accepted the same after being assured that there was nothing wrong with said
checks. At that time, David was not aware of any "stop payment" order. Under
these circumstances, David thus had no obligation to ascertain from
Chandiramani what the nature of the latter’s title to the checks was, if any, or the
nature of his possession. Thus, we cannot hold him guilty of gross neglect
amounting to legal absence of good faith, absent any showing that there was
something amiss about Chandiramani’s acquisition or possession of the checks.
David did not close his eyes deliberately to the nature or the particulars of a fraud
allegedly committed by Chandiramani upon the petitioner, absent any knowledge
on his part that the action in taking the instruments amounted to bad faith.22
Belatedly, and we say belatedly since petitioner did not raise this matter in the
proceedings below, petitioner now claims that David should have been put on
alert as the instruments in question were crossed checks. Pursuant to Bataan
Cigar & Cigarette Factory, Inc. v. Court of Appeals, David should at least have
inquired as to whether he was acquiring said checks for the purpose for which
they were issued, according to petitioner’s submission.
Petitioner’s reliance on the Bataan Cigar case, however, is misplaced. The facts
in the present case are not on all fours with Bataan Cigar. In the latter case, the
crossed checks were negotiated and sold at a discount by the payee, while in the
instant case, the payee did not negotiate further the checks in question but
promptly deposited them in his bank account.
The Negotiable Instruments Law is silent with respect to crossed checks,

although the Code of Commerce23 makes reference to such instruments.
Nonetheless, this Court has taken judicial cognizance of the practice that a check
with two parallel lines in the upper left hand corner means that it could only be
deposited and not converted into cash.24 The effects of crossing a check, thus,
relates to the mode of payment, meaning that the drawer had intended the check
for deposit only by the rightful person, i.e., the payee named therein. In Bataan
Cigar, the rediscounting of the check by the payee knowingly violated the
avowed intention of crossing the check. Thus, in accepting the cross checks and
paying cash for them, despite the warning of the crossing, the subsequent holder

could not be considered in good faith and thus, not a holder in due course. Our
ruling in Bataan Cigar reiterates that in De Ocampo & Co. v. Gatchalian.25
The factual circumstances in De Ocampo and in Bataan Cigar are not present in
this case. For here, there is no dispute that the crossed checks were delivered
and duly deposited by David, the payee named therein, in his bank account. In
other words, the purpose behind the crossing of the checks was satisfied by the
payee.
Proceeding to the issue of damages, petitioner merely argues that respondents

David and PCIB are not entitled to damages, attorney’s fees, and costs of suit as
both acted in bad faith towards her, as shown by her version of the facts which
gave rise to the instant case.
Respondent David counters that he was maliciously and unceremoniously

dragged into this suit for reasons which have nothing to do with him at all, but
which arose from petitioner’s failure to receive her share of the profit promised
her by Chandiramani.1âwphi1 Moreover, in filing this suit which has lasted for
over a decade now, the petitioner deprived David of the rightful enjoyment of the
two checks, to which he is entitled, under the law, compelled him to hire the
services of counsel to vindicate his rights, and subjected him to social humiliation
and besmirched reputation, thus harming his standing as a person of good
repute in the business community of Pampanga. David thus contends that it is
but proper that moral damages, attorney’s fees, and costs of suit be awarded
him.
For its part, respondent PCIB stresses that it was established by both the trial
court and the appellate court that it was needlessly dragged into this case.
Hence, no error was committed by the appellate court in declaring PCIB entitled
to attorney’s fees as it was compelled to litigate to protect itself.
We have thoroughly perused the records of this case and find no reason to
disagree with the finding of the trial court, as affirmed by the appellate court, that:
[D]efendant David is entitled to [the] award of moral damages as he has been

needlessly and unceremoniously dragged into this case which should have been
brought only between the plaintiff and defendant Chandiramani.26
A careful reading of the findings of facts made by both the trial court and
appellate court clearly shows that the petitioner, in including David as a party in
these proceedings, is barking up the wrong tree. It is apparent from the factual

findings that David had no dealings with the petitioner and was not privy to the
agreement of the latter with Chandiramani. Moreover, any loss which the
petitioner incurred was apparently due to the acts or omissions of Chandiramani,
and hence, her recourse should have been against him and not against David.
By needlessly dragging David into this case all because he and Chandiramani
knew each other, the petitioner not only unduly delayed David from obtaining the
value of the checks, but also caused him anxiety and injured his business
reputation while waiting for its outcome. Recall that under Article 221727 of the
Civil Code, moral damages include mental anguish, serious anxiety, besmirched
reputation, wounded feelings, social humiliation, and similar injury. Hence, we
find the award of moral damages to be in order.
The appellate court likewise found that like David, PCIB was dragged into this
case on unfounded and baseless grounds. Both were thus compelled to litigate
to protect their interests, which makes an award of attorney’s fees justified under
Article 2208 (2)28 of the Civil Code. Hence, we rule that the award of attorney’s
fees to David and PCIB was proper.
WHEREFORE, the instant petition is DENIED. The assailed decision of the Court
of Appeals, dated March 25, 1999, in CA-G.R. CV No. 52398 is AFFIRMED.
Costs against the petitioner.
SO ORDERED.

SECOND DIVISION
G.R. No. 154947 August 11, 2004
LEODEGARIO BAYANI, petitioner,

vs.
PEOPLE OF THE PHILIPPINES, respondent.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision1 of the Court of Appeals
in CA-G.R. CR No. 22861 affirming on appeal the Decision2 of the Regional Trial
Court of Lucena City, Branch 59, in Criminal Case No. 93-135 convicting the
accused therein, now the petitioner, for violation of Batas Pambansa (B.P.) Blg.
22.
On February 9, 1993, Leodegario Bayani was charged with violation of B.P. Blg.
22 in an Information which reads:
That on or about the 20th day of August 1992, in the Municipality of

Candelaria, Province of Quezon, Philippines, and within the jurisdiction of
this Honorable Court, the above-named accused did then and there
willfully, unlawfully and feloniously issue and make out Check No. 054936
dated August 29, 1992, in the amount of FIFTY-FIVE THOUSAND
PESOS (P55,000.00) Philippine Currency, drawn against the PSBank,
Candelaria Branch, Candelaria, Quezon, payable to "Cash" and give the
said check to one Dolores Evangelista in exchange for cash although the
said accused knew fully well at the time of issuance of said check that he
did not have sufficient funds in or credit with the drawee bank for payment
of said check in full upon presentment; that upon presentation of said
check to the bank for payment, the same was dishonored and refused
payment for the reason that the drawer thereof, the herein accused, had
no sufficient fund therein, and that despite due notice, said accused failed
to deposit the necessary amount to cover said check or to pay in full the
amount of said check, to the damage and prejudice of said Dolores
Evangelista in the aforesaid amount.
Contrary to law.3

The Case for the Prosecution
At about noon on August 20, 1992, Alicia Rubia arrived at the grocery store of
Dolores Evangelista in Candelaria, Quezon, and asked the latter to rediscount
Philippine Savings Bank (PSBank) Check No. 054936 in the amount
of P55,000.00. The check was drawn by Leodegario Bayani against his account
with the PSBank and postdated August 29, 1992.4 Rubia told Evangelista that
Bayani asked her to rediscount the check for him because he needed the
money.5 Considering that Rubia and Bayani were long-time customers at the
store and she knew Bayani to be a good man, Evangelista agreed to rediscount
the check.6 After Rubia endorsed the check, Evangelista gave her the amount
of P55,000.00.7 However, when Evangelista deposited the check in her account
with the Far East Bank & Trust Company on September 11, 1992, it was
dishonored by the drawee bank for the reason that on September 1, 1992,
Bayani closed his account with the PSBank.8 The reason for the dishonor of the
check was stamped at its dorsal portion. As of August 27, 1992, the balance of
Bayani’s account with the bank was P2,414.96.9 Evangelista then informed Rubia
of the dishonor of the check and demanded the return of her P55,000.00. Rubia
replied that she was only requested by Bayani to have the check rediscounted
and advised Evangelista to see him. When Evangelista talked to Bayani, she was
told that Rubia borrowed the check from him.10
Thereafter, Evangelista, Rubia, Bayani and his wife, Aniceta, had a conference in
the office of Atty. Emmanuel Velasco, Evangelista’s lawyer. Later, in the Office of
the Barangay Captain Nestor Baera, Evangelista showed Bayani a photocopy of
the dishonored check and demanded payment thereof. Bayani and Aniceta, on
one hand, and Rubia, on the other, pointed to each other and denied liability
thereon. Aniceta told Rubia that she should be the one to pay since
the P55,000.00 was with her, but the latter insisted that the said amount was in
payment of the pieces of jewelry Aniceta purchased from her.11 Upon Atty.
Velasco’s prodding, Evangelista suggested Bayani and Rubio to pay P25,000.00
each. Still, Bayani and Rubio pointed to the other as the one solely liable for the
amount of the check.12 Rubia reminded Aniceta that she was given the check as
payment of the pieces of jewelry Aniceta bought from her.
The Case for the Petitioner
Bayani testified that he was the proprietor of a funeral parlor in Candelaria,

Quezon. He maintained an account with the PSBank in Candelaria, Quezon, and
was issued a checkbook which was kept by his wife, Aniceta Bayani. Sometime
in 1992, he changed his residence. In the process, his wife lost four (4) blank
checks, one of which was Check No. 05493613 which formed part of the checks in

the checkbook issued to him by the PSBank.14 He did not report the loss to the
police authorities. He reported such loss to the bank after Evangelista demanded
the refund of the P55,000.00 from his wife.15 He then closed his account with the
bank on September 11, 1992, but was informed that he had closed his account
much earlier. He denied ever receiving the amount of P55,000.00 from Rubia.16
Bayani further testified that his wife discovered the loss of the checks when he
brought his wife to the office of Atty. Emmanuel Velasco. 17 He did not see
Evangelista in the office of the lawyer, and was only later informed by his wife
that she had a conference with Evangelista. His wife narrated that according to
Evangelista, Rubia had rediscounted a check he issued, which turned out to be
the check she (Aniceta) had lost. He was also told that Evangelista had
demanded the refund of the amount of the check.18 He later tried to contact Rubia
but failed. He finally testified that he could not recall having affixed his signature
on the check.19
Aniceta Bayani corroborated the testimony of her husband. She testified that she
was invited to go to the office of Atty. Velasco where she, Rubia and Evangelista
had a conference. It was only then that she met Evangelista. Rubia admitted that
she rediscounted the complainant’s check with Evangelista. When Evangelista
asked her to pay the amount of the check, she asked that the check be shown to
her, but Evangelista refused to do so. She further testified that her husband was
not with her and was in their office at the time.
At the conclusion of the trial, the court rendered judgment finding Bayani guilty
beyond reasonable doubt of violation of Section 1 of B.P. Blg. 22. The decretal
portion of the decision reads:
WHEREFORE, premises considered, the Court finds the accused

Leodegario Bayani guilty beyond reasonable doubt of violation of Section
1, Batas Pambansa Bilang 22 and hereby sentences him to suffer an
imprisonment of ONE (1) YEAR, or to pay a fine of ONE HUNDRED TEN
THOUSAND PESOS (P110,000.00), to pay to complaining witness
Dolores Evangelista the sum of FIFTY-FIVE THOUSAND PESOS
(P55,000.00), the value of the check and to pay the costs.
SO ORDERED.20
On appeal, the petitioner averred that the prosecution failed to adduce evidence
that he affixed his signature on the check, or received from Rubia the amount
of P55,000.00, thus negating his guilt of the crime charged.

The petitioner asserts that even Teresita Macabulag, the bank manager of PSB
who authenticated his specimen signatures on the signature card he submitted
upon opening his account with the bank, failed to testify that the signature on the
check was his genuine signature.
On January 30, 2002, the Court of Appeals rendered judgment21 affirming the
decision of the RTC with modification as to the penalty imposed on the petitioner.
The petitioner asserts in the petition at bar that –
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN

AFFIRMING WITH MODIFICATION THE CONVICTION OF PETITIONER
BY THE TRIAL COURT FOR ALLEGED VIOLATION OF BATAS
PAMBANSA BLG. 22 NOTWITHSTANDING THAT THE PROSECUTION
MISERABLY FAILED TO PROVE THAT THE CHECK WAS ISSUED
FOR A VALUABLE CONSIDERATION.22
The petitioner contends that the prosecution failed to prove all the essential
elements of the crime of violation of Section 1, B.P. Blg. 22. He asserts that the
prosecution failed to prove that he issued the check. He avers that even
assuming that he issued the check, the prosecution failed to prove that it was
issued for valuable consideration, and that he received the amount of P55,000.00
from Rubia. Hence, in light of the ruling of this Court in Magno vs. Court of
Appeals,23 he is entitled to an acquittal on such grounds.
The petitioner further contends that Evangelista’s testimony, that Rubia told her
that it was the petitioner who asked her to have the check rediscounted, is
hearsay and, as such, even if he did not object thereto is inadmissible in
evidence against him. He avers that the prosecution failed to present Rubia as a
witness, depriving him of his right to cross-examine her. He contends that any
declaration made by Rubia to Evangelista is inadmissible in evidence against
him.
The petition is denied.
We agree with the submission of the petitioner that Evangelista’s testimony, that
Rubia told her that the petitioner requested that the subject check be
rediscounted, is hearsay. Evangelista had no personal knowledge of such
request of the petitioner to Rubia. Neither is the information relayed by Rubia to
Evangelista as to the petitioner’s request admissible in evidence against the

latter, because the prosecution failed to present Rubia as a witness, thus,
depriving the petitioner of his right of cross-examination.
However, the evidence belies the petitioner’s assertion that the prosecution failed
to adduce evidence that he issued the subject check. Evangelista testified that
when she talked to the petitioner upon Rubia’s suggestion, the petitioner
admitted that he gave the check to Rubia, but claimed that the latter "borrowed"
the check from him.
Q When this check in question was returned to you because of the closed
account, what did you do, if you did anything?
A I talked to Alicia Rubia, Sir.
Q And what did Alicia Rubia tell you in connection with the check in
question?
A Alicia Rubia told me that she was just requested by Leodegario Bayani,
Sir.
Q And what else did she tell you?
A She advised me to go to Leodegario Bayani, Sir.
Q Did you go to Leodegario Bayani as per instruction of Alicia Rubia?
A Yes, Sir.
Q And what did Leodegario Bayani tell you in connection with this check?
A He told me that Alicia Rubia borrowed the check from him, Sir.24
Evangelista testified that she showed to the petitioner and his wife, Aniceta, a
photocopy of the subject check in the office of Atty. Velasco, where they admitted
to her that they owned the check:
ATTY. ALZAGA (TO WITNESS)
Q When you shown (sic) the check to Leodegario Bayani and his wife in
the law office of Atty. Velasco, what did they tell you?

ATTY. VELASCO:
Misleading. The question is misleading because according to the

question, Your Honor, he had shown the check but that was not
the testimony. The testimony was the xerox copy of the check was
the one shown.
ATTY. ALZAGA
"The xerox copy of the check."
COURT
As modified, answer the question.
WITNESS
A They told me they owned the check but they were pointing to each
other as to who will pay the amount, Sir.25
The petitioner cannot escape criminal liability by denying that he received the
amount of P55,000.00 from Rubia after he issued the check to her. As we ruled
in Lozano vs. Martinez:26
The gravamen of the offense punished by BP 22 is the act of making and

issuing a worthless check or a check that is dishonored upon its
presentation for payment. It is not the non-payment of an obligation which
the law punishes. The law is not intended or designed to coerce a debtor
to pay his debt. The thrust of the law is to prohibit, under pain of penal
sanctions, the making of worthless checks and putting them in circulation.
Because of its deleterious effects on the public interest, the practice is
proscribed by the law. The law punishes the act not as an offense against
property, but an offense against public order.27
The evidence on record shows that Evangelista rediscounted the check and
gave P55,000.00 to Rubia after the latter endorsed the same. As such,
Evangelista is a holder of the check in due course.28 Under Section 28 of the
Negotiable Instruments Law (NIL), absence or failure of consideration is a matter
of defense only as against any person not a holder in due course, thus:

SECTION 28. Effect of want of consideration.— Absence or failure of
consideration is a matter of defense as against any person not a holder in
due course; and partial failure of consideration is a defense pro tanto,
whether the failure is an ascertained and liquidated amount or otherwise.
Moreover, Section 24 of the NIL provides the presumption of consideration, viz:
SECTION 24. Presumption of consideration.— Every negotiable

instrument is deemed prima facie to have been issued for a valuable
consideration; and every person whose signature appears thereon to
have become a party thereto for value.
Such presumption cannot be overcome by the petitioner’s bare denial of receipt

of the amount of P55,000.00 from Rubia.
The petitioner cannot, likewise, seek refuge in the ruling of this Court in Magno
vs. Court of Appeals29 because the facts and issues raised therein are
substantially different from those extant in this case. Indeed, the Court ruled in
the said case that:
It is intriguing to realize that Mrs. Teng did not want the petitioner to know
that it was she who "accommodated" petitioner’s request for Joey Gomez,
to source out the needed funds for the "warranty deposit." Thus, it unfolds
the kind of transaction that is shrouded with mystery, gimmickry and
doubtful legality. It is in simple language, a scheme whereby Mrs. Teng
as the supplier of the equipment in the name of her corporation, Mancor,
would be able to "sell or lease" its goods as in this case, and at the same
time, privately financing those who desperately need petty
accommodations as this one. This modus operandi has in so many
instances victimized unsuspecting businessmen, who likewise need
protection from the law, by availing of the deceptively called "warranty
deposit" not realizing that they also fall prey to leasing equipment under
the guise of lease-purchase agreement when it is a scheme designed to
skim off business clients.30
Equally futile is the petitioner’s contention that the prosecution failed to prove the
crime charged. For the accused to be guilty of violation of Section 1 of B.P. Blg.
22, the prosecution is mandated to prove the essential elements thereof, to wit:
1. That a person makes or draws and issues any check.

2. That the check is made or drawn and issued to apply on account or for
value.
3. That the person who makes or draws and issues the check knows at
the time of issue that he does not have sufficient funds in or credit with
the drawee bank for the payment of such check in full upon its
presentment.
4. That the check is subsequently dishonored by the drawee bank for

insufficiency of funds or credit, or would have been dishonored for the
same reason had not the drawer, without any valid reason, ordered the
bank to stop payment.31
In this case, the prosecution adduced documentary evidence that when the
petitioner issued the subject check on or about August 20, 1992, the balance of
his account with the drawee bank was only P2,414.96. During the conference in
the office of Atty. Emmanuel Velasco, Evangelista showed to the petitioner and
his wife a photocopy of the subject check, with the notation at its dorsal portion
that it was dishonored for the reason "account closed." Despite Evangelista’s
demands, the petitioner refused to pay the amount of the check and, with his
wife, pointed to Rubia as the one liable for the amount. The collective evidence of
the prosecution points to the fact that at the time the petitioner drew and issued
the check, he knew that the residue of the funds in his account with the drawee
bank was insufficient to pay the amount of the check.
IN LIGHT OF ALL THE FOREOING, the petition is DENIED DUE COURSE. The
decision of the Court of Appeals is AFFIRMED.
No costs.
SO ORDERED.

SECOND DIVISION
G.R. No. 70145 November 13, 1986
MARCELO A. MESINA, petitioner,

vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT, HON. ARSENIO M.
GONONG, in his capacity as Judge of Regional Trial Court — Manila
(Branch VIII), JOSE GO, and ALBERT UY, respondents.
PARAS, J.:
This is an appeal by certiorari from the decision of the then Intermediate

Appellate Court (IAC for short), now the Court of Appeals (CA) in AC-G.R. S.P.
04710, dated Jan. 22, 1985, which dismissed the petition for certiorari and
prohibition filed by Marcelo A. Mesina against the trial court in Civil Case No. 84-
22515. Said case (an Interpleader) was filed by Associated Bank against Jose
Go and Marcelo A. Mesina regarding their conflicting claims over Associated
Bank Cashier's Check No. 011302 for P800,000.00, dated December 29, 1983.
Briefly, the facts and statement of the case are as follows:
Respondent Jose Go, on December 29, 1983, purchased from Associated Bank
Cashier's Check No. 011302 for P800,000.00. Unfortunately, Jose Go left said
check on the top of the desk of the bank manager when he left the bank. The
bank manager entrusted the check for safekeeping to a bank official, a certain
Albert Uy, who had then a visitor in the person of Alexander Lim. Uy had to
answer a phone call on a nearby telephone after which he proceeded to the
men's room. When he returned to his desk, his visitor Lim was already gone.
When Jose Go inquired for his cashier's check from Albert Uy, the check was not
in his folder and nowhere to be found. The latter advised Jose Go to go to the
bank to accomplish a "STOP PAYMENT" order, which suggestion Jose Go
immediately followed. He also executed an affidavit of loss. Albert Uy went to the
police to report the loss of the check, pointing to the person of Alexander Lim as
the one who could shed light on it.
The records of the police show that Associated Bank received the lost check for
clearing on December 31, 1983, coming from Prudential Bank, Escolta Branch.
The check was immediately dishonored by Associated Bank by sending it back to

Prudential Bank, with the words "Payment Stopped" stamped on it. However, the
same was again returned to Associated Bank on January 4, 1984 and for the
second time it was dishonored. Several days later, respondent Associated Bank
received a letter, dated January 9, 1984, from a certain Atty. Lorenzo Navarro
demanding payment on the cashier's check in question, which was being held by
his client. He however refused to reveal the name of his client and threatened to
sue, if payment is not made. Respondent bank, in its letter, dated January 20,
1984, replied saying the check belonged to Jose Go who lost it in the bank and is
laying claim to it.
On February 1, 1984, police sent a letter to the Manager of the Prudential Bank,
Escolta Branch, requesting assistance in Identifying the person who tried to
encash the check but said bank refused saying that it had to protect its client's
interest and the Identity could only be revealed with the client's conformity.
Unsure of what to do on the matter, respondent Associated Bank on February 2,
1984 filed an action for Interpleader naming as respondent, Jose Go and one
John Doe, Atty. Navarro's then unnamed client. On even date, respondent bank
received summons and copy of the complaint for damages of a certain Marcelo
A. Mesina from the Regional Trial Court (RTC) of Caloocan City filed on January
23, 1984 bearing the number C-11139. Respondent bank moved to amend its
complaint, having been notified for the first time of the name of Atty. Navarro's
client and substituted Marcelo A. Mesina for John Doe. Simultaneously,
respondent bank, thru representative Albert Uy, informed Cpl. Gimao of the
Western Police District that the lost check of Jose Go is in the possession of
Marcelo Mesina, herein petitioner. When Cpl. Gimao went to Marcelo Mesina to
ask how he came to possess the check, he said it was paid to him by Alexander
Lim in a "certain transaction" but refused to elucidate further. An information for
theft (Annex J) was instituted against Alexander Lim and the corresponding
warrant for his arrest was issued (Annex 6-A) which up to the date of the filing of
this instant petition remains unserved because of Alexander Lim's successful
evation thereof.
Meanwhile, Jose Go filed his answer on February 24, 1984 in the Interpleader
Case and moved to participate as intervenor in the complain for damages. Albert
Uy filed a motion of intervention and answer in the complaint for Interpleader. On
the Scheduled date of pretrial conference inthe interpleader case, it was
disclosed that the "John Doe" impleaded as one of the defendants is actually
petitioner Marcelo A. Mesina. Petitioner instead of filing his answer to the
complaint in the interpleader filed on May 17, 1984 an Omnibus Motion to
Dismiss Ex Abudante Cautela alleging lack of jurisdiction in view of the absence
of an order to litigate, failure to state a cause of action and lack of personality to

sue. Respondent bank in the other civil case (CC-11139) for damages moved to
dismiss suit in view of the existence already of the Interpleader case.
The trial court in the interpleader case issued an order dated July 13, 1984,
denying the motion to dismiss of petitioner Mesina and ruling that respondent
bank's complaint sufficiently pleaded a cause of action for itnerpleader. Petitioner
filed his motion for reconsideration which was denied by the trial court on
September 26, 1984. Upon motion for respondent Jose Go dated October 31,
1984, respondent judge issued an order on November 6, 1984, declaring
petitioner in default since his period to answer has already expirecd and set
the ex-parte presentation of respondent bank's evidence on November 7, 1984.
Petitioner Mesina filed a petition for certioari with preliminary injunction with IAC
to set aside 1) order of respondent court denying his omnibus Motion to Dismiss
2) order of 3) the order of default against him.
On January 22, 1985, IAC rendered its decision dimissing the petition for
certiorari. Petitioner Mesina filed his Motion for Reconsideration which was also
denied by the same court in its resolution dated February 18, 1985.
Meanwhile, on same date (February 18, 1985), the trial court in Civil Case #84-
22515 (Interpleader) rendered a decisio, the dispositive portion reading as
follows:
WHEREFORE, in view of the foregoing, judgment is hereby

rendered ordering plaintiff Associate Bank to replace Cashier's
Check No. 011302 in favor of Jose Go or its cas equivalent with
legal rate of itnerest from date of complaint, and with costs of suit
against the latter.
SO ORDERED.
On March 29, 1985, the trial court in Civil Case No. C-11139, for
damages, issued an order, the pertinent portion of which states:
The records of this case show that on August 20, 1984

proceedings in this case was (were) ordered suspended because
the main issue in Civil Case No. 84-22515 and in this instant case
are the same which is: who between Marcelo Mesina and Jose Go
is entitled to payment of Associated Bank's Cashier's Check No.
CC-011302? Said issue having been resolved already in Civil

casde No. 84-22515, really this instant case has become moot
and academic.
WHEREFORE, in view of the foregoing, the motion sholud be as it

is hereby granted and this case is ordered dismissed.
In view of the foregoing ruling no more action should be taken on

the "Motion For Reconsideration (of the order admitting the
Intervention)" dated June 21, 1984 as well as the Motion For
Reconsideration dated September 10, 1984.
SO ORDERED.
Petitioner now comes to Us, alleging that:
1. IAC erred in ruling that a cashier's check can be countermanded even in the
hands of a holder in due course.
2. IAC erred in countenancing the filing and maintenance of an interpleader suit

by a party who had earlier been sued on the same claim.
3. IAC erred in upholding the trial court's order declaring petitioner as in default
when there was no proper order for him to plead in the interpleader complaint.
4. IAC went beyond the scope of its certiorari jurisdiction by making findings of
facts in advance of trial.
Petitioner now interposes the following prayer:
1. Reverse the decision of the IAC, dated January 22, 1985 and set aside the
February 18, 1985 resolution denying the Motion for Reconsideration.
2. Annul the orders of respondent Judge of RTC Manila giving due course to the
interpleader suit and declaring petitioner in default.
Petitioner's allegations hold no water. Theories and examples advanced by

petitioner on causes and effects of a cashier's check such as 1) it cannot be
countermanded in the hands of a holder in due course and 2) a cashier's check is
a bill of exchange drawn by the bank against itself-are general principles which
cannot be aptly applied to the case at bar, without considering other things.
Petitioner failed to substantiate his claim that he is a holder in due course and for

consideration or value as shown by the established facts of the case. Admittedly,
petitioner became the holder of the cashier's check as endorsed by Alexander
Lim who stole the check. He refused to say how and why it was passed to him.
He had therefore notice of the defect of his title over the check from the start. The
holder of a cashier's check who is not a holder in due course cannot enforce
such check against the issuing bank which dishonors the same. If a payee of a
cashier's check obtained it from the issuing bank by fraud, or if there is some
other reason why the payee is not entitled to collect the check, the respondent
bank would, of course, have the right to refuse payment of the check when
presented by the payee, since respondent bank was aware of the facts
surrounding the loss of the check in question. Moreover, there is no similarity in
the cases cited by petitioner since respondent bank did not issue the cashier's
check in payment of its obligation. Jose Go bought it from respondent bank for
purposes of transferring his funds from respondent bank to another bank near his
establishment realizing that carrying money in this form is safer than if it were in
cash. The check was Jose Go's property when it was misplaced or stolen, hence
he stopped its payment. At the outset, respondent bank knew it was Jose Go's
check and no one else since Go had not paid or indorsed it to anyone. The bank
was therefore liable to nobody on the check but Jose Go. The bank had no
intention to issue it to petitioner but only to buyer Jose Go. When payment on it
was therefore stopped, respondent bank was not the one who did it but Jose Go,
the owner of the check. Respondent bank could not be drawer and drawee for
clearly, Jose Go owns the money it represents and he is therefore the drawer
and the drawee in the same manner as if he has a current account and he issued
a check against it; and from the moment said cashier's check was lost and/or
stolen no one outside of Jose Go can be termed a holder in due course because
Jose Go had not indorsed it in due course. The check in question suffers from
the infirmity of not having been properly negotiated and for value by respondent
Jose Go who as already been said is the real owner of said instrument.
In his second assignment of error, petitioner stubbornly insists that there is no

showing of conflicting claims and interpleader is out of the question. There is
enough evidence to establish the contrary. Considering the aforementioned facts
and circumstances, respondent bank merely took the necessary precaution not
to make a mistake as to whom to pay and therefore interpleader was its proper
remedy. It has been shown that the interpleader suit was filed by respondent
bank because petitioner and Jose Go were both laying their claims on the check,
petitioner asking payment thereon and Jose Go as the purchaser or owner. The
allegation of petitioner that respondent bank had effectively relieved itself of its
primary liability under the check by simply filing a complaint for interpleader is
belied by the willingness of respondent bank to issue a certificate of time deposit
in the amount of P800,000 representing the cashier's check in question in the

name of the Clerk of Court of Manila to be awarded to whoever wig be found by
the court as validly entitled to it. Said validity will depend on the strength of the
parties' respective rights and titles thereto. Bank filed the interpleader suit not
because petitioner sued it but because petitioner is laying claim to the same
check that Go is claiming. On the very day that the bank instituted the case in
interpleader, it was not aware of any suit for damages filed by petitioner against it
as supported by the fact that the interpleader case was first entitled Associated
Bank vs. Jose Go and John Doe, but later on changed to Marcelo A. Mesina for
John Doe when his name became known to respondent bank.
In his third assignment of error, petitioner assails the then respondent IAC in
upholding the trial court's order declaring petitioner in default when there was no
proper order for him to plead in the interpleader case. Again, such contention is
untenable. The trial court issued an order, compelling petitioner and respondent
Jose Go to file their Answers setting forth their respective claims. Subsequently,
a Pre-Trial Conference was set with notice to parties to submit position papers.
Petitioner argues in his memorandum that this order requiring petitioner to file his
answer was issued without jurisdiction alleging that since he is presumably a
holder in due course and for value, how can he be compelled to litigate against
Jose Go who is not even a party to the check? Such argument is trite and
ridiculous if we have to consider that neither his name or Jose Go's name
appears on the check. Following such line of argument, petitioner is not a party to
the check either and therefore has no valid claim to the Check. Furthermore, the
Order of the trial court requiring the parties to file their answers is to all intents
and purposes an order to interplead, substantially and essentially and therefore
in compliance with the provisions of Rule 63 of the Rules of Court. What else is
the purpose of a law suit but to litigate?
The records of the case show that respondent bank had to resort to details in
support of its action for Interpleader. Before it resorted to Interpleader,
respondent bank took an precautionary and necessary measures to bring out the
truth. On the other hand, petitioner concealed the circumstances known to him
and now that private respondent bank brought these circumstances out in court
(which eventually rendered its decision in the light of these facts), petitioner
charges it with "gratuitous excursions into these non-issues." Respondent IAC
cannot rule on whether respondent RTC committed an abuse of discretion or not,
without being apprised of the facts and reasons why respondent Associated
Bank instituted the Interpleader case. Both parties were given an opportunity to
present their sides. Petitioner chose to withhold substantial facts. Respondents
were not forbidden to present their side-this is the purpose of the Comment of
respondent to the petition. IAC decided the question by considering both the

facts submitted by petitioner and those given by respondents. IAC did not act
therefore beyond the scope of the remedy sought in the petition.
WHEREFORE, finding that the instant petition is merely dilatory, the same is
hereby denied and the assailed orders of the respondent court are hereby
AFFIRMED in toto.
SO ORDERED.

SECOND DIVISION
G.R. No. 96160 June 17, 1992
STELCO MARKETING CORPORATION, petitioner,

vs.
HON. COURT OF APPEALS and STEELWELD CORPORATION OF THE
PHILIPPINES, INC., respondent.
NARVASA, c.J.:
Stelco Marketing Corporation is engaged in the distribution and sale to the public
of structural steel bars. 1 On seven (7) different occasions in September and
October, 1980, it sold to RYL Construction, Inc. quantities of steels bars of
various sizes and rolls of G.I. wire. These bars and wire were delivered at
different places at the indication of RYL Construction, Inc. The aggregate price
for the purchases was P126,859.61.
Although the corresponding invoices issued by STELCO stipulated that RYL pay
"COD" (cash on delivery), the latter made no payments for the construction
materials thus ordered and delivered despite insistent demands for payment by
the former.
On April 4, 1981, RYL gave to Armstrong, Industries — described by STELCO as

its "sister corporation" and "manufacturing arm" 2 — a check drawn against
Metrobank in the amount of P126,129.86, numbered 765380 and dated April 4,
1981. That check was a company check of another corporation, Steelweld
Corporation of the Philippines, signed by its President, Peter Rafael Limson, and
its Vice-President, Artemio Torres.
The check was issued by Limson at the behest of his friend, Romeo Y. Lim,
President of RYL. Romeo Lim had asked Limson, for financial assistance, and
the latter had agreed to give Lim a check only by way of accommodation, "only
as guaranty but not to pay for anything." 3 Why the check was made out in the
amount of P126,129.86 is not explained. Anyway, the check was actually issued
in said amount of P126, 129.86, and as already stated, was given by R.Y. Lim to
Armstrong Industries, 4 in payment of an obligation. When the latter deposited the

check at its bank, it was dishonored because "drawn against insufficient
funds." 5 When so deposited, the check bore two(2) endorsements, that of "RYL
Construction," followed by that of "Armstrong Industries." 6
On account of the dishonor of Metrobank Check No. 765380, and on complaint of

Armstrong Industries (through a Mr. Young), Rafael Limson and Artemio Torres
were charged in the Regional Trial Court of Manila with a violation of Batas
Pambansa Bilang 22. 7 They were acquitted in a decision rendered on June 28,
1984 "on the ground that the check in question was not issued by the drawer "to
apply on account for value," it being merely for accommodation purposes. 8 The
judgment however conditioned the acquittal with the following pronouncement:
This is not however to release Steelweld Corporation from its

liability under Sec. 29 of the Negotiable Instruments Law for
having issued it for the accommodation of Romeo Lim.
Eleven months or so later — and some four (4) years after issuance of the check
in question — in May, 1985, STELCO filed with the Regional Trial Court at
Caloocan City a civil complaint 9 against both RYL and STEELWELD for the
recovery of the valued of the steel bars and wire sold to and delivered to RYL (as
already narrated) in the amount of P126,129.86, "plus 18% interest from August
20, 1980 . . . (and) 25% of the total amount sought to be recovered as and by
way of attorney's fees . . . ." 10 Among the allegations of its complaint was that
Metrobank Check No. 765380 above mentioned had been given to it in payment
of RYL's indebtedness, duly indorsed by R.Y. Lim. 11 A preliminary attachment
was issued by the trial court on the basis of the averments of the complaint but
was shortly dissolved upon the filing of a counter-bond by STEELWELD.
RYL could no longer be located and could not be served with

summons. 12 It never appeared. Only STEELWELD filed an answer, under date
of July 16, 1985. 13 In said pleading, it specifically denied the facts alleged in the
complaint, the truth, according to Steelweld, being basically that —
1) STELCO "is a complete stranger to it;" it had "not entered into any transaction
or business dealing of any kind" with STELCO, the transactions described in the
complaint having been solely and exclusively between the plaintiff and RYL
Construction;
2) the check in question was "only given to a certain R. Lim to be used as

collateral for another obligation . . . (but) in breach of his agreement (Lim) utilized
and negotiated the check for another purpose;

3) nevertheless, the check "is wholly inoperative since . . . Steelweld
. . . did not issue it for any valuable consideration either to R. Lim or to the
plaintiff not to mention also the fact that the said plaintiff failed to comply with the
requirements of the law to hold the said defendant (STEELWELD) liable. . ."
Trial ensued upon these issues, after which judgment was rendered on June 26,
1986. 14 The judgment sentenced "the defendant Steelweld Corporation to pay to
. . . (Stelco Marketing Corporation) the amount of P126,129.86 with legal rate of
interest from May 9, 1985, when this case was instituted until fully paid, plus
another sum equivalent to 25% of the total amount due as and for attorney's fees
. . . 15 That disposition was justified in the judgment as follows:16
There is no question, then, that as far as any commercial

transaction is concerned between plaintiff and defendant
Steelweld no such transaction ever occurred. Ordinarily, under
civil law rules, there having been no transaction between them
involving the purchase of certain merchandise there would be no
privity of contract between them, and plaintiff will have no right to
sue the defendant for payment of said merchandise for the simple
reason that the defendant did not order them, such less receive
them.
But we have here a case where the defendant Steelweld thru its
President Peter Rafael Limson admitted to have issued a check
payable to cash in favor of his friend Romeo Lim who was the
President of RYL Construction by way of accommodation. Under
the Negotiable Instruments Law an accommodation party is liable.
Sec. 29. Liability of an accommodation party. — An

accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the
purpose of lending his name to some other person.
Such a person is liable on the instrument to a
holder for value notwithstanding such holder at the
time of taking the instrument knew him to be only
an accommodation party.
From this adverse judgment STEELWELD appealed to the Court of

Appeals 17 and there succeeded in reversing the judgment. By Decision
promulgated on May 29, 1990, 18 the Court of Appeals 19 ordered "the complaint
against appellant (STEELWELD) DISMISSED; (and the appellee, STELCO) to

pay appellant the sum of P15,000.00 as attorney's fees and cost of litigation, the
suit . . . (being) a baseless one that dragged appellant in court and caused it to
incur attorney's fees and expense of litigation.
STELCO's motion for reconsideration was denied by the Appellate Tribunal's

resolution dated November 13, 1990. 20 The Court stressed that —
. . . as far as Steelweld is concerned, there was no commercial

transaction between said appellant and appellee. Moreover, there
is no evidence that appellee Stelco Marketing became a holder for
value. Nowhere in the check itself does the name of Stelco
Marketing appear as payee, indorsee or depositor thereof. Finally,
appellee's complaint is for the collection of the unpaid accounts for
delivery of steels bars and construction materials. It having been
established that appellee had no commercial transaction with
appellant Stelco, appellee had no cause of action against said
appellant.
STELCO appealed to this Court in accordance with Rule 45 of the Rules of

Court. In this Court it seeks to make the following points in connection with its
plea for the overthrow of the Appellate Tribunal's aforesaid decision, viz.:
1) said decision is "not in accord with law and jurisprudence;"
2) "STELCO is a "holder" within the meaning of the Negotiable Instruments Law;"
3) "STELCO is a holder in due course of Metrobank Check No. 765380 . . . (and

hence) holds the same free from personal or equitable defense;" and
4) "Negotiation in breach of faith is a personal defense . . . (and hence) not

effective as against a holder in due course."
The points are not well taken.
The crucial question is whether or not STELCO ever became a holder in due
course of Check No. 765380, a bearer instrument, within the contemplation of the
Negotiable Instruments Law. It never did.
STELCO evidently places much reliance on the pronouncement of the Regional

Trial Court in Criminal Case No. 66571, 21 that the acquittal of the two (2)
accused (Limson and Torres) did not operate "to release Steelweld Corporation

from its liability under Sec. 29 of the Negotiable Instruments Law for having
issued . . . (the check) for the accommodation of Romeo Lim." The cited
provision reads as follows:
Sec. 29. Liability of accommodation party. — An accommodation

party is one who has singed the instrument as maker, drawer,
acceptor, or indorser, without receiving valued therefor, and for
the purpose of lending his name to some other person. Such a
person is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of taking the instrument,
knew him to be only an accommodation party.
It is noteworthy that the Trial Court's pronouncement containing reference to said

Section 29 did not specify to whom STEELWELD, as accommodation party, is
supposed to be liable; and certain it is that neither said pronouncement nor any
other part of the judgment of acquittal declared it liable to STELCO.
"A holder in due course," says the law, 22 "is a holder who has
taken the instrument under the following conditions:
(a) That is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and

without notice that it had been previously dishonored, if such was
the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of

any infirmity in the instrument or defect in the title of the persons
negotiating it.
To be sure, as regards an accommodation party (such as STEELWELD), the

fourth condition, i.e., lack of notice of any infirmity in the instruments or defect in
title of the persons negotiating it, has no application. This is because Section 29
of the law above quoted preserves the right of recourse of a "holder for value"
against the accommodation party notwithstanding that "such holder, at the time
of taking the instrument, knew him to be only an accommodation
party." 23

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

Check No. 765380 ever dated back to nay time before the instrument's
presentment and dishonor. There is no evidence whatsoever that the check was
ever given to it, or indorsed to it in any manner or form in payment of an
obligation or as security for an obligation, or for any other purpose before it was
presented for payment. On the contrary, the factual finding of the Court of
Appeals, which by traditional precept is normally conclusive on this Court, is that
STELCO never became a holder for value and that "(n)owhere in the check itself
does the name of Stelco Marketing appear as payee, indorsee or depositor
thereof." 25
What the record shows is that: (1) the STEELWELD company check in question
was given by its president to R.Y. Lim; (2) it was given only by way of
accommodation, to be "used as collateral for another obligation;" (3) in breach of
the agreement, however, R.Y. Lim indorsed the check to Armstrong in payment
of obligation; (4) Armstrong deposited the check to its account, after indorsing it;
(5) the check was dishonored. The record does not show any intervention or
participation by STELCO in any manner of form whatsoever in these
transactions, or any communication of any sort between STEELWELD and
STELCO, or between either of them and Armstrong Industries, at any time before
the dishonor of the check.
The record does show that after the check had been deposited and dishonored,
STELCO came into possession of it in some way, and was able, several years
after the dishonor of the check, to give it in evidence at the trial of the civil case it
had instituted against the drawers of the check (Limson and Torres) and RYL.
But, as already pointed out, possession of a negotiable instrument after
presentment and dishonor, or payment, is utterly inconsequential; it does not
make the possessor a holder for value within the meaning of the law; it gives rise
to no liability on the part of the maker or drawer and indorsers.
It is clear from the relevant circumstances that STELCO cannot be deemed a

holder of the check for value. It does not meet two of the essential requisites
prescribed by the statute. It did not become "the holder of it before it was

overdue, and without notice that it had been previously dishonored," and it did
not take the check "in good faith and for value." 26
Neither is there any evidence whatever that Armstrong Industries, to whom R.Y.
Lim negotiated the check accepted the instrument and attempted to encash it in
behalf, and as agent of STELCO. On the contrary, the indications are that
Armstrong was really the intended payee of the check and was the party actually
injured by its dishonor; it was after all its representative (a Mr. Young) who
instituted the criminal prosecution of the drawers, Limson and Torres, albeit
unsuccessfully.
The petitioner has failed to show any sufficient cause for modification or reversal
of the challenged judgment of the Court of Appeals which, on the contrary,
appears to be entirely in accord with the facts and the applicable law.
WHEREFORE, the petition is DENIED and the Decision of the Court of Appeals
in CA-G.R. CV No. 13418 is AFFIRMED in toto. Costs against petitioner.
SO ORDERED

THIRD DIVISION
G.R. No. 72764 July 13, 1989
STATE INVESTMENT HOUSE, petitioner,

vs.
INTERMEDIATE APPELLATE COURT, ANITA PEÑA CHUA and HARRIS
CHUA, respondents.
FERNAN, C.J.:
Petitioner State Investment House seeks a review of the decision of respondent

Intermediate Appellate Court (now Court of Appeals) in AC-G.R. CV No. 04523
reversing the decision of the Regional Trial Court of Manila, Branch XXXVII
dated April 30, 1984 and dismissing the complaint for collection filed by petitioner
against private respondents Spouses Anita Pena Chua and Harris Chua.
It appears that shortly before September 5, 1980, New Sikatuna Wood

Industries, Inc. requested for a loan from private respondent Harris Chua. The
latter agreed to grant the same subject to the condition that the former should
wait until December 1980 when he would have the money. In view of this
agreement, private respondent-wife, Anita Pena Chua issued three (3) crossed
checks payable to New Sikatuna Wood Industries, Inc. all postdated December
22, 1980 as follows:
DRAWEE BANK CHECK NO. DATE AMOUNT
1. China Banking Corporation 589053 Dec. 22, 1980 P98,750.00
2. International Corporate Bank 04045549 Dec. 22, 1980 102,313.00
3. Metropolitan Bank & Trust Co. 036512 Dec. 22, 1980 98,387.00
The total value of the three (3) postdated checks amounted to P 299,450.00.
Subsequently, New Sikatuna Wood Industries, Inc. entered into an agreement

with herein petitioner State Investment House, Inc. whereby for and in
consideration of the sum of Pl,047,402.91 under a deed of sale, the former
assigned and discounted with petitioner eleven (11) postdated checks including

the aforementioned three (3) postdated checks issued by herein private
respondent-wife Anita Peña Chua to New Sikatuna Wood Industries, Inc.
When the three checks issued by private respondent Anita Pena Chua were
allegedly deposited by petitioner, these checks were dishonored by reason of
"insufficient funds", "stop payment" and "account closed", respectively. Petitioner
claims that despite demands on private respondent Anita Peña to make good
said checks, the latter failed to pay the same necessitating the former to file an
action for collection against the latter and her husband Harris Chua before the
Regional Trial Court of Manila, Branch XXXVII docketed as Civil Case No. 82-
10547.
Private respondents-defendants filed a third party complaint against New

Sikatuna Wood Industries, Inc. for reimbursement and indemnification in the
event that they be held liable to petitioner-plaintiff. For failure of third party
defendant to answer the third party complaint despite due service of summons,
the latter was declared in default.
On April 30, 1984, the lower court 1 rendered judgment against herein private
respondents spouses, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the

plaintiff or against the defendants ordering the defendants to pay
jointly and severally to the plaintiff the following amounts:
1. P 229,450.00 with interest at the rate of 12% per

annum from February 24,1981 until fully paid;
2. P 29,945.00 as and for attorney's fees; and
3. the costs of suit.
On the third party complaint, third party defendant New Sikatuna

Wood Industries, Inc. is ordered to pay third party plaintiffs Anita
Pena Chua and Harris Chua all amounts said defendants' third-
party plaintiffs may pay to the plaintiff on account of this case. 2
On appeal filed by private respondents in AC-G.R. CV No. 04523, the

Intermediate Appellate Court 3 (now Court of Appeals) reversed the lower court's
judgment in the now assailed decision, the dispositive portion of which reads:

WHEREFORE, finding this appeal meritorious, We Reverse and
Set Aside the appealed judgment, dated April 30, 1984 and a new
judgment is hereby rendered dismissing the complaint, with costs
against plaintiff-appellee. 4
Hence, this petition.
The pivotal issue in this case is whether or not petitioner is a holder in due
course as to entitle it to proceed against private respondents for the amount
stated in the dishonored checks.
Section 52(c) of the Negotiable Instruments Law defines a holder in due course
as one who takes the instrument "in good faith and for value". On the other hand,
Section 52(d) provides that in order that one may be a holder in due course, it is
necessary that "at the time the instrument was negotiated to him he had no
notice of any x x x defect in the title of the person negotiating it." However, under
Section 59 every holder is deemed prima facie to be a holder in due course.
Admittedly, the Negotiable Instruments Law regulating the issuance of negotiable

checks as well as the lights and liabilities arising therefrom, does not mention
"crossed checks". But this Court has taken cognizance of the practice that a
check with two parallel lines in the upper left hand corner means that it could only
be deposited and may not be converted into cash. Consequently, such
circumstance should put the payee on inquiry and upon him devolves the duty to
ascertain the holder's title to the check or the nature of his possession. Failing in
this respect, the payee is declared guilty of gross negligence amounting to legal
absence of good faith and as such the consensus of authority is to the effect that
the holder of the check is not a holder in good faith. 5
Petitioner submits that at the time of the negotiation and endorsement of the
checks in question by New Sikatuna Wood Industries, it had no knowledge of the
transaction and/or arrangement made between the latter and private
respondents.
We agree with respondent appellate court.
Relying on the ruling in Ocampo v. Gatchalian (supra), the Intermediate

Appellate Court (now Court of Appeals), correctly elucidated that the effects of
crossing a check are: the check may not be encashed but only deposited in the
bank; the check may be negotiated only once to one who has an account with a
bank; and the act of crossing the check serves as a warning to the holder that the

check has been issued for a definite purpose so that he must inquire if he has
received the check pursuant to that purpose, otherwise he is not a holder in due
course. Further, the appellate court said:
It results therefore that when appellee rediscounted the check

knowing that it was a crossed check he was knowingly violating
the avowed intention of crossing the check. Furthermore, his
failure to inquire from the holder, party defendant New Sikatuna
Wood Industries, Inc., the purpose for which the three checks
were cross despite the warning of the crossing, prevents him from
being considered in good faith and thus he is not a holder in due
course. Being not a holder in due course, plaintiff is subject to
personal defenses, such as lack of consideration between
appellants and New Sikatuna Wood Industries. Note that under
the facts the checks were postdated and issued only as a loan to
New Sikatuna Wood Industries, Inc. if and when deposits were
made to back up the checks. Such deposits were not made,
hence no loan was made, hence the three checks are without
consideration (Sec. 28, Negotiable Instruments Law).
Likewise New Sikatuna Wood Industries negotiated the three

checks in breach of faith in violation of Article (sic) 55, Negotiable
Instruments Law, which is a personal defense available to the
drawer of the check.6
In addition, such instruments are mentioned in Section 541 of the Negotiable

Instruments Law as follows:
Sec. 541. The maker or any legal holder of a check shall be

entitled to indicate therein that it be paid to a certain banker or
institution, which he shall do by writing across the face the name
of said banker or institution, or only the words "and company."
The payment made to a person other than the banker or institution

shall not exempt the person on whom it is drawn, if the payment
was not correctly made.
Under usual practice, crossing a check is done by placing two parallel lines
diagonally on the left top portion of the check. The crossing may be special
wherein between the two parallel lines is written the name of a bank or a
business institution, in which case the drawee should pay only with the
intervention of that bank or company, or crossing may be general wherein

between two parallel diagonal lines are written the words "and Co." or none at all
as in the case at bar, in which case the drawee should not encash the same but
merely accept the same for deposit.
The effect therefore of crossing a check relates to the mode of its presentment
for payment. Under Section 72 of the Negotiable Instruments Law, presentment
for payment to be sufficient must be made (a) by the holder, or by some person
authorized to receive payment on his behalf ... As to who the holder or authorized
person will be depends on the instructions stated on the face of the check.
The three subject checks in the case at bar had been crossed generally and
issued payable to New Sikatuna Wood Industries, Inc. which could only mean
that the drawer had intended the same for deposit only by the rightful person, i.e.,
the payee named therein. Apparently, it was not the payee who presented the
same for payment and therefore, there was no proper presentment, and the
liability did not attach to the drawer.
Thus, in the absence of due presentment, the drawer did not become
liable. 7 Consequently, no right of recourse is available to petitioner against the
drawer of the subject checks, private respondent wife, considering that petitioner
is not the proper party authorized to make presentment of the checks in question.
Yet it does not follow as a legal proposition that simply because petitioner was
not a holder in due course as found by the appellate court for having taken the
instruments in question with notice that the same is for deposit only to the
account of payee named in the subject checks, petitioner could not recover on
the checks. The Negotiable Instruments Law does not provide that a holder who
is not a holder in due course may not in any case recover on the instrument for in
the case at bar, petitioner may recover from the New Sikatuna Wood Industries,
Inc. if the latter has no valid excuse for refusing payment. The only disadvantage
of a holder who is not in due course is that the negotiable instrument is subject to
defenses as if it were non-negotiable. 8
That the subject checks had been issued subject to the condition that private
respondents on due date would make the back up deposit for said checks but
which condition apparently was not made, thus resulting in the non-
consummation of the loan intended to be granted by private respondents to New
Sikatuna Wood Industries, Inc., constitutes a good defense against petitioner
who is not a holder in due course.
WHEREFORE, the decision appealed from is hereby AFFIRMED with costs

against petitioner.

SO ORDERED.

FIRST DIVISION
G.R. No. 74917 January 20, 1988
BANCO DE ORO SAVINGS AND MORTGAGE BANK, petitioner,

vs.
EQUITABLE BANKING CORPORATION, PHILIPPINE CLEARING HOUSE
CORPORATION, AND REGIONAL TRIAL COURT OF QUEZON CITY,
BRANCH XCII (92), respondents.
GANCAYCO, J.:
This is a petition for review on certiorari of a decision of the Regional Trial Court
of Quezon City promulgated on March 24, 1986 in Civil Case No. Q-46517
entitled Banco de Oro Savings and Mortgage Bank versus Equitable Banking
Corporation and the Philippine Clearing House Corporation after a review of the
Decision of the Board of Directors of the Philippine Clearing House Corporation
(PCHC) in the case of Equitable Banking Corporation (EBC) vs. Banco de Oro
Savings and Mortgage (BCO), ARBICOM Case No. 84033.
The undisputed facts are as follows:
It appears that some time in March, April, May and August 1983,
plaintiff through its Visa Card Department, drew six crossed
Manager's check (Exhibits "A" to "F", and herein referred to as
Checks) having an aggregate amount of Forty Five Thousand
Nine Hundred and Eighty Two & 23/100 (P45,982.23) Pesos and
payable to certain member establishments of Visa Card.
Subsequently, the Checks were deposited with the defendant to
the credit of its depositor, a certain Aida Trencio.
Following normal procedures, and after stamping at the back of

the Checks the usual endorsements. All prior and/or lack of
endorsement guaranteed the defendant sent the checks for
clearing through the Philippine Clearing House Corporation
(PCHC). Accordingly, plaintiff paid the Checks; its clearing
account was debited for the value of the Checks and defendant's
clearing account was credited for the same amount,

Thereafter, plaintiff discovered that the endorsements appearing
at the back of the Checks and purporting to be that of the payees
were forged and/or unauthorized or otherwise belong to persons
other than the payees.
Pursuant to the PCHC Clearing Rules and Regulations, plaintiff

presented the Checks directly to the defendant for the purpose of
claiming reimbursement from the latter. However, defendant
refused to accept such direct presentation and to reimburse the
plaintiff for the value of the Checks; hence, this case.
In its Complaint, plaintiff prays for judgment to require the

defendant to pay the plaintiff the sum of P45,982.23 with interest
at the rate of 12% per annum from the date of the complaint plus
attorney's fees in the amount of P10,000.00 as well as the cost of
the suit.
In accordance with Section 38 of the Clearing House Rules and

Regulations, the dispute was presented for Arbitration; and Atty.
Ceasar Querubin was designated as the Arbitrator.
After an exhaustive investigation and hearing the Arbiter rendered

a decision in favor of the plaintiff and against the defendant
ordering the PCHC to debit the clearing account of the defendant,
and to credit the clearing account of the plaintiff of the amount of
P45,982.23 with interest at the rate of 12% per annum from date
of the complaint and Attorney's fee in the amount of P5,000.00.
No pronouncement as to cost was made. 1
In a motion for reconsideration filed by the petitioner, the Board of Directors of

the PCHC affirmed the decision of the said Arbiter in this wise:
In view of all the foregoing, the decision of the Arbiter is

confirmed; and the Philippine Clearing House Corporation is
hereby ordered to debit the clearing account of the defendant and
credit the clearing account of plaintiff the amount of Forty Five
Thousand Nine Hundred Eighty Two & 23/100 (P45,982.23)
Pesos with interest at the rate of 12% per annum from date of the
complaint, and the Attorney's fee in the amount of Five Thousand
(P5,000.00) Pesos.

Thus, a petition for review was filed with the Regional Trial Court of Quezon City,
Branch XCII, wherein in due course a decision was rendered affirming in toto the
decision of the PCHC.
Hence this petition.
The petition is focused on the following issues:
1. Did the PCHC have any jurisdiction to give due course to and adjudicate
Arbicom Case No. 84033?
2. Were the subject checks non-negotiable and if not, does it fall under the ambit
of the power of the PCHC?
3. Is the Negotiable Instrument Law, Act No. 2031 applicable in deciding

controversies of this nature by the PCHC?
4. What law should govern in resolving controversies of this nature?
5. Was the petitioner bank negligent and thus responsible for any undue
payment?
Petitioner maintains that the PCHC is not clothed with jurisdiction because the
Clearing House Rules and Regulations of PCHC cover and apply only to checks
that are genuinely negotiable. Emphasis is laid on the primary purpose of the
PCHC in the Articles of Incorporation, which states:
To provide, maintain and render an effective, convenient, efficient,

economical and relevant exchange and facilitate service limited to
check processing and sorting by way of assisting member banks,
entities in clearing checks and other clearing items as defined in
existing and in future Central Bank of the Philippines circulars,
memoranda, circular letters, rules and regulations and policies in
pursuance to the provisions of Section 107 of R.A. 265. ...
and Section 107 of R.A. 265 which provides:
xxx xxx xxx
The deposit reserves maintained by the banks in the Central

Bank, in accordance with the provisions of Section 1000 shall

serve as a basis for the clearing of checks, and the settlement of
interbank balances ...
Petitioner argues that by law and common sense, the term check should be
interpreted as one that fits the articles of incorporation of the PCHC, the Central
Bank and the Clearing House Rules stating that it is a negotiable instrument
citing the definition of a "check" as basically a "bill of exchange" under Section
185 of the NIL and that it should be payable to "order" or to "bearer" under
Section 126 of game law. Petitioner alleges that with the cancellation of the
printed words "or bearer from the face of the check, it becomes non-negotiable
so the PCHC has no jurisdiction over the case.
The Regional Trial Court took exception to this stand and conclusion put forth by
the herein petitioner as it held:
Petitioner's theory cannot be maintained. As will be noted, the

PCHC makes no distinction as to the character or nature of the
checks subject of its jurisdiction. The pertinent provisions quoted
in petitioners memorandum simply refer to check(s). Where the
law does not distinguish, we shall not distinguish.
In the case of Reyes vs. Chuanico (CA-G.R. No. 20813 R, Feb. 5,

1962) the Appellate Court categorically stated that there are four
kinds of checks in this jurisdiction; the regular check; the cashier's
check; the traveller's check; and the crossed check. The Court,
further elucidated, that while the Negotiable Instruments Law does
not contain any provision on crossed checks, it is coon practice in
commercial and banking operations to issue checks of this
character, obviously in accordance with Article 541 of the Code of
Commerce. Attention is likewise called to Section 185 of the
Negotiable Instruments Law:
Sec. 185. Check defined. — A check is a bill of

exchange drawn on a bank payable on demand.
Except as herein otherwise provided, the provisions
of this act applicable to a bill of exchange payable
on demand apply to a check
and the provisions of Section 61 (supra) that the drawer may

insert in the instrument an express stipulation negating or limiting
his own liability to the holder. Consequently, it appears that the
use of the term "check" in the Articles of Incorporation of PCHC is

to be perceived as not limited to negotiable checks only, but to
checks as is generally known in use in commercial or business
transactions.
Anent Petitioner's liability on said instruments, this court is in full

accord with the ruling of the PCHC Board of Directors that:
In presenting the Checks for clearing and for

payment, the defendant made an express
guarantee on the validity of "all prior
endorsements." Thus, stamped at the back of the
checks are the defendant's clear warranty; ALL
PRIOR ENDORSEMENTS AND/OR LACK OF
ENDORSEMENTS GUARANTEED. With. out such
warranty, plaintiff would not have paid on the
checks.
No amount of legal jargon can reverse the clear

meaning of defendant's warranty. As the warranty
has proven to be false and inaccurate, the
defendant is liable for any damage arising out of
the falsity of its representation.
The principle of estoppel, effectively prevents the

defendant from denying liability for any damage
sustained by the plaintiff which, relying upon an
action or declaration of the defendant, paid on the
Checks. The same principle of estoppel effectively
prevents the defendant from denying the existence
of the Checks. (Pp. 1011 Decision; pp. 4344, Rollo)
We agree.
As provided in the aforecited articles of incorporation of PCHC its operation

extend to "clearing checks and other clearing items." No doubt transactions on
non-negotiable checks are within the ambit of its jurisdiction.
In a previous case, this Court had occasion to rule: "Ubi lex non distinguish nec
nos distinguere debemos." 2 It was enunciated in Loc Cham v. Ocampo, 77 Phil.
636 (1946):

The rule, founded on logic is a corollary of the principle that
general words and phrases in a statute should ordinarily be
accorded their natural and general significance. In other words,
there should be no distinction in the application of a statute where
none is indicated.
There should be no distinction in the application of a statute where none is

indicated for courts are not authorized to distinguish where the law makes no
distinction. They should instead administer the law not as they think it ought to be
but as they find it and without regard to consequences. 3
The term check as used in the said Articles of Incorporation of PCHC can only
connote checks in general use in commercial and business activities. It cannot
be conceived to be limited to negotiable checks only.
Checks are used between banks and bankers and their customers, and are
designed to facilitate banking operations. It is of the essence to be payable on
demand, because the contract between the banker and the customer is that the
money is needed on demand. 4
The participation of the two banks, petitioner and private respondent, in the
clearing operations of PCHC is a manifestation of their submission to its
jurisdiction. Sec. 3 and 36.6 of the PCHC-CHRR clearing rules and regulations
provide:
SEC. 3. AGREEMENT TO THESE RULES. — It is the general

agreement and understanding that any participant in the Philippine
Clearing House Corporation, MICR clearing operations by the
mere fact of their participation, thereby manifests its agreement to
these Rules and Regulations and its subsequent amendments."
Sec 36.6. (ARBITRATION) — The fact that a bank participates in

the clearing operations of the PCHC shall be deemed its written
and subscribed consent to the binding effect of this arbitration
agreement as if it had done so in accordance with section 4 of the
Republic Act No. 876, otherwise known as the Arbitration Law.
Further Section 2 of the Arbitration Law mandates:
Two or more persons or parties may submit to the arbitration of

one or more arbitrators any controversy existing between them at

the time of the submission and which may be the subject of an
action, or the parties of any contract may in such contract agree to
settle by arbitration a controversy thereafter arising between them.
Such submission or contract shall be valid and irrevocable, save
upon grounds as exist at law for the revocation of any contract.
Such submission or contract may include question arising out of

valuations, appraisals or other controversies which may be
collateral, incidental, precedent or subsequent to any issue
between the parties. ...
Sec. 21 of the same rules, says:
Items which have been the subject of material alteration or items

bearing forged endorsement when such endorsement is
necessary for negotiation shall be returned by direct presentation
or demand to the Presenting Bank and not through the regular
clearing house facilities within the period prescribed by law for the
filing of a legal action by the returning bank/branch, institution or
entity sending the same. (Emphasis supplied)
Viewing these provisions the conclusion is clear that the PCHC Rules and
Regulations should not be interpreted to be applicable only to checks which are
negotiable instruments but also to non-negotiable instruments and that the PCHC
has jurisdiction over this case even as the checks subject of this litigation are
admittedly non-negotiable.
Moreover, petitioner is estopped from raising the defense of non-negotiability of

the checks in question. It stamped its guarantee on the back of the checks and
subsequently presented these checks for clearing and it was on the basis of
these endorsements by the petitioner that the proceeds were credited in its
clearing account.
The petitioner by its own acts and representation can not now deny liability
because it assumed the liabilities of an endorser by stamping its guarantee at the
back of the checks.
The petitioner having stamped its guarantee of "all prior endorsements and/or
lack of endorsements" (Exh. A-2 to F-2) is now estopped from claiming that the
checks under consideration are not negotiable instruments. The checks were
accepted for deposit by the petitioner stamping thereon its guarantee, in order

that it can clear the said checks with the respondent bank. By such deliberate
and positive attitude of the petitioner it has for all legal intents and purposes
treated the said cheeks as negotiable instruments and accordingly assumed the
warranty of the endorser when it stamped its guarantee of prior endorsements at
the back of the checks. It led the said respondent to believe that it was acting as
endorser of the checks and on the strength of this guarantee said respondent
cleared the checks in question and credited the account of the petitioner.
Petitioner is now barred from taking an opposite posture by claiming that the
disputed checks are not negotiable instrument.
This Court enunciated in Philippine National Bank vs. Court of Appeals 5 a point
relevant to the issue when it stated the doctrine of estoppel is based upon the
grounds of public policy, fair dealing, good faith and justice and its purpose is to
forbid one to speak against his own act, representations or commitments to the
injury of one to whom they were directed and who reasonably relied thereon.
A commercial bank cannot escape the liability of an endorser of a check and

which may turn out to be a forged endorsement. Whenever any bank treats the
signature at the back of the checks as endorsements and thus logically
guarantees the same as such there can be no doubt said bank has considered
the checks as negotiable.
Apropos the matter of forgery in endorsements, this Court has succinctly

emphasized that the collecting bank or last endorser generally suffers the loss
because it has the duty to ascertain the genuineness of all prior endorsements
considering that the act of presenting the check for payment to the drawee is an
assertion that the party making the presentment has done its duty to ascertain
the genuineness of the endorsements. This is laid down in the case of PNB vs.
National City Bank. 6 In another case, this court held that if the drawee-bank
discovers that the signature of the payee was forged after it has paid the amount
of the check to the holder thereof, it can recover the amount paid from the
collecting bank. 7
A truism stated by this Court is that — "The doctrine of estoppel precludes a

party from repudiating an obligation voluntarily assumed after having accepted
benefits therefrom. To countenance such repudiation would be contrary to equity
and put premium on fraud or misrepresentation". 8
We made clear in Our decision in Philippine National Bank vs. The National City
Bank of NY & Motor Service Co. that:

Where a check is accepted or certified by the bank on which it is
drawn, the bank is estopped to deny the genuineness of the
drawers signature and his capacity to issue the instrument.
If a drawee bank pays a forged check which was previously

accepted or certified by the said bank, it can not recover from a
holder who did not participate in the forgery and did not have
actual notice thereof.
The payment of a check does not include or imply its acceptance

in the sense that this word is used in Section 62 of the Negotiable
Instruments Act. 9
The point that comes uppermost is whether the drawee bank was negligent in
failing to discover the alteration or the forgery. Very akin to the case at bar is one
which involves a suit filed by the drawer of checks against the collecting bank
and this came about in Farmers State Bank 10 where it was held:
A cause of action against the (collecting bank) in favor of the

appellee (the drawer) accrued as a result of the bank breaching its
implied warranty of the genuineness of the indorsements of the
name of the payee by bringing about the presentation of the
checks (to the drawee bank) and collecting the amounts thereof,
the right to enforce that cause of action was not destroyed by the
circumstance that another cause of action for the recovery of the
amounts paid on the checks would have accrued in favor of the
appellee against another or to others than the bank if when the
checks were paid they have been indorsed by the payee. (United
States vs. National Exchange Bank, 214 US, 302, 29 S CT665, 53
L. Ed 1006, 16 Am. Cas. 11 84; Onondaga County Savings Bank
vs. United States (E.C.A.) 64 F 703)
Section 66 of the Negotiable Instruments ordains that:
Every indorser who indorsee without qualification, warrants to all

subsequent holders in due course' (a) that the instrument is
genuine and in all respects what it purports to be; (b) that he has
good title to it; (c) that all prior parties have capacity to contract;
and (d) that the instrument is at the time of his indorsement valid
and subsisting. 11

It has been enunciated in an American case particularly in American Exchange
National Bank vs. Yorkville Bank 12that: "the drawer owes no duty of diligence to
the collecting bank (one who had accepted an altered check and had paid over
the proceeds to the depositor) except of seasonably discovering the alteration by
a comparison of its returned checks and check stubs or other equivalent record,
and to inform the drawee thereof." In this case it was further held that:
The real and underlying reasons why negligence of the drawer

constitutes no defense to the collecting bank are that there is no
privity between the drawer and the collecting bank (Corn
Exchange Bank vs. Nassau Bank, 204 N.Y.S. 80) and the drawer
owe to that bank no duty of vigilance (New York Produce
Exchange Bank vs. Twelfth Ward Bank, 204 N.Y.S. 54) and no act
of the collecting bank is induced by any act or representation or
admission of the drawer (Seaboard National Bank vs. Bank of
America (supra) and it follows that negligence on the part of the
drawer cannot create any liability from it to the collecting bank,
and the drawer thus is neither a necessary nor a proper party to
an action by the drawee bank against such bank. It is quite true
that depositors in banks are under the obligation of examining
their passbooks and returned vouchers as a protection against the
payment by the depository bank against forged checks, and
negligence in the performance of that obligation may relieve that
bank of liability for the repayment of amounts paid out on forged
checks, which but for such negligence it would be bound to repay.
A leading case on that subject is Morgan vs. United States
Mortgage and Trust Col. 208 N.Y. 218, 101 N.E. 871 Amn. Cas.
1914D, 462, L.R.A. 1915D, 74.
Thus We hold that while the drawer generally owes no duty of diligence to the
collecting bank, the law imposes a duty of diligence on the collecting bank to
scrutinize checks deposited with it for the purpose of determining their
genuineness and regularity. The collecting bank being primarily engaged in
banking holds itself out to the public as the expert and the law holds it to a high
standard of conduct.
And although the subject checks are non-negotiable the responsibility of

petitioner as indorser thereof remains.
To countenance a repudiation by the petitioner of its obligation would be contrary

to equity and would deal a negative blow to the whole banking system of this
country.

The court reproduces with approval the following disquisition of the PCHC in its
decision —
II. Payments To Persons Other
Than The Payees Are Not Valid
And Give Rise To An Obligation
To Return Amounts Received
Nothing is more clear than that neither the defendant's depositor

nor the defendant is entitled to receive payment payable for the
Checks. As the checks are not payable to defendant's depositor,
payments to persons other than payees named therein, their
successor-in-interest or any person authorized to receive payment
are not valid. Article 1240, New Civil Code of the Philippines
unequivocably provides that:
"Art. 1240. Payment shall be made to the person in

whose favor the obligation has been constituted, or
his successo-in-interest, or any person authorized
to receive it. "
Considering that neither the defendant's depositor nor the

defendant is entitled to receive payments for the Checks,
payments to any of them give rise to an obligation to return the
amounts received. Section 2154 of the New Civil Code mandates
that:
Article 2154. If something is received when there is

no right to demand it, and it was unduly delivered
through mistake, the obligation to return it arises.
It is contended that plaintiff should be held responsible for issuing

the Checks notwithstanding that the underlying transactions were
fictitious This contention has no basis in our jurisprudence.
The nullity of the underlying transactions does not diminish, but in

fact strengthens, plaintiffs right to recover from the defendant.
Such nullity clearly emphasizes the obligation of the payees to

return the proceeds of the Checks. If a failure of consideration is
sufficient to warrant a finding that a payee is not entitled to
payment or must return payment already made, with more reason
the defendant, who is neither the payee nor the person authorized
by the payee, should be compelled to surrender the proceeds of
the Checks received by it. Defendant does not have any title to the
Checks; neither can it claim any derivative title to them.
III. Having Violated Its Warranty
On Validity Of All Endorsements,
Collecting Bank Cannot Deny
liability To Those Who Relied
On Its Warranty
In presenting the Checks for clearing and for payment, the

defendant made an express guarantee on the validity of "all prior
endorsements." Thus, stamped at the bank of the checks are the
defendant's clear warranty: ALL PRIOR ENDORSEMENTS
AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without
such warranty, plaintiff would not have paid on the checks.
No amount of legal jargon can reverse the clear meaning of

defendant's warranty. As the warranty has proven to be false and
inaccurate, the defendant is liable for any damage arising out of
the falsity of its representation.
The principle of estoppel effectively prevents the defendant from

denying liability for any damages sustained by the plaintiff which,
relying upon an action or declaration of the defendant, paid on the
Checks. The same principle of estoppel effectively prevents the
defendant from denying the existence of the Checks.
Whether the Checks have been issued for valuable considerations

or not is of no serious moment to this case. These Checks have
been made the subject of contracts of endorsement wherein the
defendant made expressed warranties to induce payment by the
drawer of the Checks; and the defendant cannot now refuse

liability for breach of warranty as a consequence of such forged
endorsements. The defendant has falsely warranted in favor of
plaintiff the validity of all endorsements and the genuineness of
the cheeks in all respects what they purport to be.
The damage that will result if judgment is not rendered for the
plaintiff is irreparable. The collecting bank has privity with the
depositor who is the principal culprit in this case. The defendant
knows the depositor; her address and her history, Depositor is
defendant's client. It has taken a risk on its depositor when it
allowed her to collect on the crossed-checks.
Having accepted the crossed checks from persons other than the
payees, the defendant is guilty of negligence; the risk of wrongful
payment has to be assumed by the defendant.
On the matter of the award of the interest and attorney's fees, the
Board of Directors finds no reason to reverse the decision of the
Arbiter. The defendant's failure to reimburse the plaintiff has
constrained the plaintiff to regular the services of counsel in order
to protect its interest notwithstanding that plaintiffs claim is plainly
valid just and demandable. In addition, defendant's clear
obligation is to reimburse plaintiff upon direct presentation of the
checks; and it is undenied that up to this time the defendant has
failed to make such reimbursement.
WHEREFORE, the petition is DISMISSED for lack of merit without

pronouncement as to costs. The decision of the respondent court of 24 March
1986 and its order of 3 June 1986 are hereby declared to be immediately
executory.
SO ORDERED.

FIRST DIVISION
G.R. No. L-30910 February 27, 1987
PEOPLE OF THE PHILIPPINES, plaintiff-appellee,

vs.
JULIA MANIEGO, accused-appellant.
NARVASA, J.:
Application of the established rule in this jurisdiction, that the acquittal of an

accused on reasonable doubt is not generally an impediment to the imposition, in
the same criminal action, of civil liability for damages on said accused, is what is
essentially called into question by the appellant in this case.
The information which initiated the instant criminal proceedings in the Court of
First Instance of Rizal indicted three (3) persons — Lt. Rizalino M. Ubay, Mrs.
Milagros Pamintuan, and Mrs. Julia T. Maniego — for the crime of
MALVERSATION committed as follows:
That on or about the period covering the month of May, 1957 up to

and including the month of August, 1957, in Quezon City,
Philippines, the above-named accused, conspiring together,
confederating with and helping one another, with intent of gain
and without authority of law, did, then and there, willfully,
unlawfully and feloniously malverse, misappropriate and misapply
public funds in the amount of P 66,434.50 belonging to the
Republic of the Philippines, in the following manner, to wit: the
accused, Lt. RIZALINO M. Ubay, a duly appointed officer in the
Armed Forces of the Philippines in active duty, who, during the
period specified above, was designated as Disbursing Officer in
the Office of the Chief of Finance, GHQ, Camp Murphy, Quezon
City, and as such was entrusted with and had under his custody
and control public funds, conspiring and confederating with co-
accused, MILAGROS T. PAMINTUAN and JULIA T. MANIEGO,
did then and there, unlawfully, willfully and feloniously, with intent
of gain and without authority of law, and in pursuance of their
conspiracy, take, receive, and accept from his said co-accused
several personal checks drawn against the Philippine National

Bank and the Bank of the Philippine Islands, of which the
accused, MILAGROS T. PAMINTUAN is the drawer and the
accused, JULIA T. MANIEGO, is the indorser, in the total amount
of P66,434.50, cashing said checks and using for this purpose the
public funds entrusted to and placed under the custody and
control of the said Lt. Rizalino M. Ubay, all the said accused
knowing fully well that the said checks are worthless and are not
covered by funds in the aforementioned banks, for which reason
the same were dishonored and rejected by the said banks when
presented for encashment, to the damage and prejudice of the
Republic of the Philippines, in the amount of P66,434.50,
Philippine currency. 1
Only Lt. Ubay and Mrs. Maniego were arraigned, Mrs. Pamintuan having
apparently fled to the United States in August, 1962. 2 Both Ubay and Maniego
entered a plea of not guilty. 3
After trial judgment was rendered by the Court of First Instance, 4 the dispositive
part whereof reads:
There being sufficient evidence beyond reasonable doubt against

the accused, Rizalino M. Ubay, the Court hereby convicts him of
the crime of malversation and sentences him to suffer the penalty
of reclusion temporal of TWELVE (12) YEARS, ONE (1) DAY to
FOURTEEN (14) YEARS, EIGHT (8) MONTHS, and a fine of
P57,434.50 which is the amount malversed, and to suffer
perpetual special disqualification.
In the absence of evidence against accused Julia T. Maniego, the

Court hereby acquits her, but both she and Rizal T. Ubay are
hereby ordered to pay jointly and severally the amount of
P57,434.50 to the government. 5
Maniego sought reconsideration of the judgment, praying that she be absolved

from civil liability or, at the very least, that her liability be reduced to
P46,934.50. 6 The Court declined to negate her civil liability, but did reduce the
amount thereof to P 46,934.50. 7 She appealed to the Court of Appeals 8 as Ubay
had earlier done. 9
Ubay's appeal was subsequently dismissed by the Appellate Court because of

his failure to file brief. 10 On the other hand, Maniego submitted her brief in due
course, and ascribed three (3) errors to the Court a quo, to wit:

1) The Lower Court erred in holding her civilly liable to indemnify
the Government for the value of the cheeks after she had been
found not guilty of the crime out of which the civil liability arises.
2) Even assuming arguendo that she could properly be held civilly

liable after her acquittal, it was error for the lower Court to adjudge
her liable as an indorser to indemnify the government for the
amount of the cheeks.
3) The Lower Court erred in declaring her civilly liable jointly and
severally with her co-defendant Ubay, instead of absolving her
altogether. 11
Because, in the Appellate Court's view, Maniego's brief raised only questions of
law, her appeal was later certified to this Court pursuant to Section 17, in relation
to Section 31, of the Judiciary Act, as amended, and Section 3, Rule 50 of the
Rules of Court. 12
The verdict must go against the appellant.
Well known is the principle that "any person criminally hable for felony is also
civilly liable." 13 But a person adjudged not criminally responsible may still be held
to be civilly liable. A person's acquittal of a crime on the ground that his guilt has
not been proven beyond reasonable doubt 14 does not bar a civil action for
damages founded on the same acts involved in the offense. 15 Extinction of the
penal action does not carry with it extinction of the civil unless the extinction
proceeds from a declaration in a final judgment that the fact from which the civil
might arise did not exist. 16
Rule III SEC. 3(b) — Extinction of the penal action does not carry
with it extinction of the civil, unless the extinction proceeds from a
declaration in a final judgment that the fact from which the civil
might arise did not exist. In other cases, the person entitled to the
civil action may institute it in the jurisdiction and in the manner
provided by law against the person who may be liable for
restitution of the thing and reparation of indemnity for the damage
suffered. (1985 Rules on Criminal Procedure).
Hence, contrary to her submission, 17 Maniego's acquittal on reasonable doubt of

the crime of Malversation imputed to her and her two (2) co-accused did not
operate to absolve her from civil liability for reimbursement of the amount

rightfully due to the Government as owner thereof. Her liability therefor could
properly be adjudged, as it was so adjudged, by the Trial Court on the basis of
the evidence before it, which adequately establishes that she was an indorser of
several checks drawn by her sister, which were dishonored after they had been
exchanged with cash belonging to the Government, then in the official custody of
Lt. Ubay.
Appellant's contention that as mere indorser, she may not be made liable on
account of the dishonor of the checks indorsed by her, is likewise untenable.
Under the law, the holder or last indorsee of a negotiable instrument has the right
to "enforce payment of the instrument for the full amount thereof against all
parties liable thereon." 18 Among the "parties liable thereon" is an indorser of the
instrument i.e., "a person placing his signature upon an instrument otherwise
than as maker, drawer, or acceptor ** unless he clearly indicates by appropriate
words his intention to be bound in some other capacity. " 19 Such an indorser
"who indorses without qualification," inter alia "engages that on due presentment,
** (the instrument) shall be accepted or paid, or both, as the case may be,
according to its tenor, and that if it be dishonored, and the necessary
proceedings on dishonor be duly taken, he will pay the amount thereof to the
holder, or to any subsequent indorser who may be compelled to pay
it." 20 Maniego may also be deemed an "accommodation party" in the light of the
facts, i.e., a person "who has signed the instrument as maker, drawer, acceptor,
or indorser, without receiving value therefor, and for the purpose of lending his
name to some other person." 21 As such, she is under the law "liable on the
instrument to a holder for value, notwithstanding such holder at the time of taking
the instrument knew ** (her) to be only an accommodation party," 22 although she
has the right, after paying the holder, to obtain reimbursement from the party
accommodated, "since the relation between them is in effect that of principal and
surety, the accommodation party being the surety." 23
One last word. The Trial Court acted correctly in adjudging Maniego to be civilly
liable in the same criminal action in which she had been acquitted of the felony of
Malversation ascribed to her, dispensing with the necessity of having a separate
civil action subsequently instituted against her for the purpose. 24
WHEREFORE, the judgment of the Trial Court, being entirely in accord with the
facts and the law, is hereby affirmed in toto, with costs against the appellant.
SO ORDERED.

THIRD DIVISION
G.R. No. 156262 July 14, 2005
MARIA TUAZON, ALEJANDRO P. TUAZON, MELECIO P. TUAZON, Spouses

ANASTACIO and MARY T. BUENAVENTURA, Petitioners,
vs.
HEIRS OF BARTOLOME RAMOS, Respondents.
DECISION
PANGANIBAN, J.:
Stripped of nonessentials, the present case involves the collection of a sum of

money. Specifically, this case arose from the failure of petitioners to pay
respondents’ predecessor-in-interest. This fact was shown by the non-
encashment of checks issued by a third person, but indorsed by herein Petitioner
Maria Tuazon in favor of the said predecessor. Under these circumstances, to
enable respondents to collect on the indebtedness, the check drawer need not
be impleaded in the Complaint. Thus, the suit is directed, not against the drawer,
but against the debtor who indorsed the checks in payment of the obligation.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court,

challenging the July 31, 2002 Decision2 of the Court of Appeals (CA) in CA-GR
CV No. 46535. The decretal portion of the assailed Decision reads:
"WHEREFORE, the appeal is DISMISSED and the appealed decision is

AFFIRMED."
On the other hand, the affirmed Decision3 of Branch 34 of the Regional Trial
Court (RTC) of Gapan, Nueva Ecija, disposed as follows:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against

the defendants, ordering the defendants spouses Leonilo Tuazon and Maria
Tuazon to pay the plaintiffs, as follows:
"1. The sum of ₱1,750,050.00, with interests from the filing of the second
amended complaint;

"2. The sum of ₱50,000.00, as attorney’s fees;
"3. The sum of ₱20,000.00, as moral damages
"4. And to pay the costs of suit.
x x x x x x x x x"4
The Facts
The facts are narrated by the CA as follows:
"[Respondents] alleged that between the period of May 2, 1988 and June 5,
1988, spouses Leonilo and Maria Tuazon purchased a total of 8,326 cavans of
rice from [the deceased Bartolome] Ramos [predecessor-in-interest of
respondents]. That of this [quantity,] x x x only 4,437 cavans [have been paid for
so far], leaving unpaid 3,889 cavans valued at ₱1,211,919.00. In payment
therefor, the spouses Tuazon issued x x x [several] Traders Royal Bank checks.
xxxxxxxxx
[B]ut when these [checks] were encashed, all of the checks bounced due to
insufficiency of funds. [Respondents] advanced that before issuing said checks[,]
spouses Tuazon already knew that they had no available fund to support the
checks, and they failed to provide for the payment of these despite repeated
demands made on them.
"[Respondents] averred that because spouses Tuazon anticipated that they

would be sued, they conspired with the other [defendants] to defraud them as
creditors by executing x x x fictitious sales of their properties. They executed x x
x simulated sale[s] [of three lots] in favor of the x x x spouses Buenaventura x x
x[,] as well as their residential lot and the house thereon[,] all located at Nueva
Ecija, and another simulated deed of sale dated July 12, 1988 of a Stake Toyota
registered with the Land Transportation Office of Cabanatuan City on September
7, 1988. [Co-petitioner] Melecio Tuazon, a son of spouses Tuazon, registered a
fictitious Deed of Sale on July 19, 1988 x x x over a residential lot located at
Nueva Ecija. Another simulated sale of a Toyota Willys was executed on January
25, 1988 in favor of their other son, [co-petitioner] Alejandro Tuazon x x x. As a
result of the said sales, the titles of these properties issued in the names of
spouses Tuazon were cancelled and new ones were issued in favor of the [co-
]defendants spouses Buenaventura, Alejandro Tuazon and Melecio Tuazon.

Resultantly, by the said ante-dated and simulated sales and the corresponding
transfers there was no more property left registered in the names of spouses
Tuazon answerable to creditors, to the damage and prejudice of [respondents].
"For their part, defendants denied having purchased x x x rice from [Bartolome]
Ramos. They alleged that it was Magdalena Ramos, wife of said deceased, who
owned and traded the merchandise and Maria Tuazon was merely her agent.
They argued that it was Evangeline Santos who was the buyer of the rice and
issued the checks to Maria Tuazon as payments therefor. In good faith[,] the
checks were received [by petitioner] from Evangeline Santos and turned over to
Ramos without knowing that these were not funded. And it is for this reason that
[petitioners] have been insisting on the inclusion of Evangeline Santos as an
indispensable party, and her non-inclusion was a fatal error. Refuting that the
sale of several properties were fictitious or simulated, spouses Tuazon
contended that these were sold because they were then meeting financial
difficulties but the disposals were made for value and in good faith and done
before the filing of the instant suit. To dispute the contention of plaintiffs that they
were the buyers of the rice, they argued that there was no sales invoice, official
receipts or like evidence to prove this. They assert that they were merely agents
and should not be held answerable."5
The corresponding civil and criminal cases were filed by respondents against
Spouses Tuazon. Those cases were later consolidated and amended to include
Spouses Anastacio and Mary Buenaventura, with Alejandro Tuazon and Melecio
Tuazon as additional defendants. Having passed away before the pretrial,
Bartolome Ramos was substituted by his heirs, herein respondents.
Contending that Evangeline Santos was an indispensable party in the case,

petitioners moved to file a third-party complaint against her. Allegedly, she was
primarily liable to respondents, because she was the one who had purchased the
merchandise from their predecessor, as evidenced by the fact that the checks
had been drawn in her name. The RTC, however, denied petitioners’ Motion.
Since the trial court acquitted petitioners in all three of the consolidated criminal
cases, they appealed only its decision finding them civilly liable to respondents.
Sustaining the RTC, the CA held that petitioners had failed to prove the existence
of an agency between respondents and Spouses Tuazon. The appellate court
disbelieved petitioners’ contention that Evangeline Santos should have been
impleaded as an indispensable party. Inasmuch as all the checks had been

indorsed by Maria Tuazon, who thereby became liable to subsequent holders for
the amounts stated in those checks, there was no need to implead Santos.
Hence, this Petition.6
Issues
Petitioners raise the following issues for our consideration:
"1. Whether or not the Honorable Court of Appeals erred in ruling that petitioners
are not agents of the respondents.
"2. Whether or not the Honorable Court of Appeals erred in rendering judgment
against the petitioners despite x x x the failure of the respondents to include in
their action Evangeline Santos, an indispensable party to the suit."7
The Petition is unmeritorious.
First Issue:
Agency
Well-entrenched is the rule that the Supreme Court’s role in a petition under Rule
45 is limited to reviewing errors of law allegedly committed by the Court of
Appeals. Factual findings of the trial court, especially when affirmed by the CA,
are conclusive on the parties and this Court.8 Petitioners have not given us
sufficient reasons to deviate from this rule.
In a contract of agency, one binds oneself to render some service or to do

something in representation or on behalf of another, with the latter’s consent or
authority.9 The following are the elements of agency: (1) the parties’ consent,
express or implied, to establish the relationship; (2) the object, which is the
execution of a juridical act in relation to a third person; (3) the representation, by
which the one who acts as an agent does so, not for oneself, but as a
representative; (4) the limitation that the agent acts within the scope of his or her
authority.10 As the basis of agency is representation, there must be, on the part of
the principal, an actual intention to appoint, an intention naturally inferable from
the principal’s words or actions. In the same manner, there must be an intention

on the part of the agent to accept the appointment and act upon it. Absent such
mutual intent, there is generally no agency.11
This Court finds no reversible error in the findings of the courts a quo that
petitioners were the rice buyers themselves; they were not mere agents of
respondents in their rice dealership. The question of whether a contract is one of
sale or of agency depends on the intention of the parties.12
The declarations of agents alone are generally insufficient to establish the fact or
extent of their authority.13 The law makes no presumption of agency; proving its
existence, nature and extent is incumbent upon the person alleging it. 14 In the
present case, petitioners raise the fact of agency as an affirmative defense, yet
fail to prove its existence.
The Court notes that petitioners, on their own behalf, sued Evangeline Santos for
collection of the amounts represented by the bounced checks, in a separate civil
case that they sought to be consolidated with the current one. If, as they claim,
they were mere agents of respondents, petitioners should have brought the suit
against Santos for and on behalf of their alleged principal, in accordance with
Section 2 of Rule 3 of the Rules on Civil Procedure.15 Their filing a suit against
her in their own names negates their claim that they acted as mere agents in
selling the rice obtained from Bartolome Ramos.
Second Issue:
Indispensable Party
Petitioners argue that the lower courts erred in not allowing Evangeline Santos to
be impleaded as an indispensable party. They insist that respondents’ Complaint
against them is based on the bouncing checks she issued; hence, they point to
her as the person primarily liable for the obligation.
We hold that respondents’ cause of action is clearly founded on petitioners’

failure to pay the purchase price of the rice. The trial court held that Petitioner
Maria Tuazon had indorsed the questioned checks in favor of respondents, in
accordance with Sections 31 and 63 of the Negotiable Instruments Law.16 That
Santos was the drawer of the checks is thus immaterial to the respondents’
cause of action.
As indorser, Petitioner Maria Tuazon warranted that upon due presentment, the
checks were to be accepted or paid, or both, according to their tenor; and that in

case they were dishonored, she would pay the corresponding amount.17After an
instrument is dishonored by nonpayment, indorsers cease to be merely
secondarily liable; they become principal debtors whose liability becomes
identical to that of the original obligor. The holder of a negotiable instrument need
not even proceed against the maker before suing the indorser. 18 Clearly,
Evangeline Santos -- as the drawer of the checks -- is not an indispensable party
in an action against Maria Tuazon, the indorser of the checks.
Indispensable parties are defined as "parties in interest without whom no final

determination can be had."19 The instant case was originally one for the
collection of the purchase price of the rice bought by Maria Tuazon from
respondents’ predecessor. In this case, it is clear that there is no privity of
contract between respondents and Santos. Hence, a final determination of the
rights and interest of the parties may be made without any need to implead her.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED.

Costs against petitioners.
SO ORDERED.

SECOND DIVISION
G.R. No. 148211 July 25, 2006
SINCERE Z. VILLANUEVA, petitioner,

vs.
MARLYN P. NITE,* respondent.
DECISION
CORONA, J.:
In this petition for review on certiorari under Rule 45, petitioner submits that the
Court of Appeals (CA) erred in annulling and setting aside the Regional Trial
Court (RTC) decision on the ground of extrinsic fraud.
The facts follow.1
Respondent allegedly took out a loan of P409,000 from petitioner. To secure the
loan, respondent issued petitioner an Asian Bank Corporation (ABC) check
(Check No. AYA 020195) in the amount of P325,500 dated February 8, 1994.
The date was later changed to June 8, 1994 with the consent and concurrence of
petitioner.
The check was, however, dishonored due to a material alteration when petitioner
deposited the check on due date. On August 24, 1994, respondent, through her
representative Emily P. Abojada, remitted P235,000 to petitioner as partial
payment of the loan. The balance of P174, 000 was due on or before December
8, 1994.
On August 24, 1994, however, petitioner filed an action for a sum of money and
damages (Civil Case No. Q-94-21495) against ABC for the full amount of the
dishonored check. And in a decision dated May 23, 1997, the RTC of Quezon
City, Branch 101 ruled in his favor.2 When respondent went to ABC Salcedo
Village Branch on June 30, 1997 to withdraw money from her account, she was
unable to do so because the trial court had ordered ABC to pay petitioner the
value of respondent’s ABC check.
On August 25, 1997, ABC remitted to the sheriff a manager’s check amounting
to P325,500 drawn on respondent’s account. The check was duly received by
petitioner on the same date.

Respondent then filed a petition in the CA seeking to annul and set aside the trial
court’s decision ordering ABC to pay petitioner the value of the ABC check. 3 The
CA ruled:
WHEREFORE, premises considered, the petition is GRANTED and the

Decision dated May 23, 1997 of the public respondent is
hereby ANNULLED and SET ASIDE for extrinsic fraud.
[Petitioner] Villanueva is hereby ordered to pay [Nite] —
1) the sum of [P146,500] as actual damages plus interest at 12% per

annum from August 25, 1997 until full payment;
2) the sum of [P75,000] as moral damages;
3) the sum of [P50,000] as exemplary damages; and
4) the sum of [P50,000] as attorney’s fees and cost of suit.
SO ORDERED.4
Thus, this petition. We find for respondent.
Annulment of judgment is a remedy in law independent of the case where the

judgment sought to be annulled is promulgated. It can be filed by one who was
not a party to the case in which the assailed judgment was rendered.Section 1 of
Rule 47 provides:
Section 1. Coverage. – This Rule shall govern the annulment by the Court
of Appeals of judgments or final orders and resolutions in civil actions of
Regional Trial Courts for which the ordinary remedies of new trial, appeal,
petition for relief or other appropriate remedies are no longer available
through no fault of the petitioner.
Respondent may avail of the remedy of annulment of judgment under Rule

47. The ordinary remedies of new trial, appeal and petition for relief were not
available to her for the simple reason that she was not made a party to the suit
against ABC. Thus, she was neither able to participate in the original
proceedings nor resort to the other remedies because the case was filed when
she was abroad.

Annulment of judgment may be based only on extrinsic fraud and lack of
jurisdiction.5 Extrinsic or collateral fraud pertains to such fraud which prevents the
aggrieved party from having a trial or presenting his case to the court, or is used
to procure the judgment without fair submission of the controversy.6 This refers to
acts intended to keep the unsuccessful party away from the courts as when there
is a false promise of compromise or when one is kept in ignorance of the suit.7
We uphold the appellate court’s finding of extrinsic fraud:
Barely 6 days after receipt of the partial payment of P235,000.00 and

agreeing that the balance of P174,000.00 shall be paid on or before
December 8, 1994, [Sincere] filed his complaint against [ABC] for the full
amount of the dishonored check in the sum of P320,500.00 without
impleading petitioner. The apparent haste by which [Sincere] filed his
complaint and his failure to implead [Marlyn] clearly shows his intent to
prevent [Marlyn] from opposing his action.
[A]t the time news about [Marlyn] having left the country was widespread,
appearing even in print media as early as May 1994, [Marlyn] paid
[Sincere] the amount of P235,000.00 as partial payment on [August 18,
1994], through a representative.
Notwithstanding the foregoing, SIX (6) days later or on [August 24, 1994,
Sincere] instituted an action for collection with damages for the whole
amount of the issued check.
[Sincere] does not deny knowledge of such payment neither of the fact
that he concurred in settling the balance of P174,000.00 on December 8,
1994.
[His] actuation and pronouncement shows not only bad faith on his part
but also of his fraudulent intention to completely exclude [Marlyn] from the
proceedings in the court a quo. By doing what he did he prevented the
[trial court] from fully appreciating the particulars of the case.8
In any event, the RTC decision may be annulled for lack of jurisdiction over the
person of respondent. The pertinent provisions of the Negotiable Instruments
Law are enlightening:
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.9 (emphasis ours)
SEC. 189. When check operates as an assignment. – A check of itself

does not operate as an assignment of any part of the funds to the credit
of the drawer with the bank, and the bank is not liable to the holder,
unless and until it accepts or certifies the check. (emphasis ours)
If a bank refuses to pay a check (notwithstanding the sufficiency of funds), the

payee-holder cannot, in view of the cited sections, sue the bank. The payee
should instead sue the drawer who might in turn sue the bank. Section 189 is
sound law based on logic and established legal principles: no privity of contract
exists between the drawee-bank and the payee. Indeed, in this case, there was
no such privity of contract between ABC and petitioner.
Petitioner should not have sued ABC. Contracts take effect only between the
parties, their assigns and heirs, except in cases where the rights and obligations
arising from the contract are not transmissible by their nature, or by stipulation or
by provision of law.10 None of the foregoing exceptions to the relativity of
contracts applies in this case.
The contract of loan was between petitioner and respondent. No collection suit
could prosper without respondent who was an indispensable party. Rule 3, Sec.
7 of the Rules of Court states:
Sec. 7. Compulsory joinder of indispensable parties. – Parties in

interest without whom no final determination can be had of an
action shall be joined either as plaintiffs or defendants. (emphasis ours)
An indispensable party is one whose interest in the controversy is such that a

final decree will necessarily affect his rights. The court cannot proceed without
his presence.11 If an indispensable party is not impleaded, any judgment is
ineffective.12 On this, Aracelona v. Court of Appeals13 declared:
Rule 3, Section 7 of the Rules of Court defines indispensable parties as

parties-in-interest without whom there can be no final determination of an
action. As such, they must be joined either as plaintiffs or as defendants.
The general rule with reference to the making of parties in a civil action
requires, of course, the joinder of all necessary parties where possible,
and the joinder of all indispensable parties under any and all conditions,
their presence being sine qua non for the exercise of judicial power. It is

precisely "when an indispensable party is not before the court (that) the
action should be dismissed." The absence of an indispensable party
renders all subsequent actions of the court null and void for want of
authority to act, not only as to the absent parties but even as to those
present.
WHEREFORE, the petition is hereby DENIED. The decision of the Court of

Appeals in CA-G.R. SP No. 44971 is AFFIRMED in toto.
Costs against petitioner.
SO ORDERED.

FIRST DIVISION
G.R. No. 144887 November 17, 2004
ALFREDO RIGOR, petitioner,

vs.
PEOPLE OF THE PHILIPPINES, respondent.
DECISION
AZCUNA, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals, in
CA-G.R. CR No. 18855, which affirmed the decision of the Regional Trial Court
of Pasig, Branch 163, in Criminal Case No. 86025, convicting petitioner Alfredo
Rigor of violation of Batas Pambansa Blg. 22 (the Bouncing Checks Law), and
imposing upon him the penalty of imprisonment for six (6) months and ordering
him to restitute to the Rural Bank of San Juan the sum of P500,000 and to pay
the costs.
The Information1 against petitioner reads:
That on or about the 16th day of November 1989 in the Municipality of

San Juan, Metro Manila, Philippines and within the jurisdiction of this
Honorable Court, the above-named accused, did then and there willfully,
unlawfully and feloniously make or draw and issue to Rural Bank of San
Juan, Inc. thru its loan officer Carlos N. Garcia, a postdated check to
apply on account or for value the check described below:
Check No. : 165476
Drawn against : Associated Bank, Tarlac Branch
In the Amount of : P500,000.00
Dated : February 16, 1990
Payable to : Rural Bank of San Juan

said accused well knowing that at the time of issue on 16 November
1989, he has already insufficient funds or credit with the drawee bank for
the payment in full of the face amount of such check and that as of 2
February 1990 his bank accounts were already closed and that check
when presented for payment from and after the date thereof, was
subsequently dishonored for the reason "Account Closed" and despite
receipt of notice of such dishonor, the accused failed to pay said payee
the face amount of said check or to make arrangement for full payment
thereof during the period of not less than five (5) banking days after
receiving notice.
When arraigned, petitioner pleaded not guilty. Thereafter, trial on the merits
ensued.
The facts, as narrated by the Court of Appeals, are as follows:
The prosecution evidence was furnished by witnesses Edmarcos

Basangan of Rural Bank of San Juan (RBSJ) and Esteban Pasion,
employee of the Associated Bank. It was shown that on November 16,
1989, appellant (petitioner herein) applied for a commercial loan from the
Rural Bank of San Juan, Inc., at N. Domingo St., San Juan, Metro Manila
in the sum of P500,000.00 (Exh. "A"). He signed a promissory note
stating that an interest of 24% per annum from its date will be charged on
the loan (Exh. "B"). The loan was approved by RBSJ’s Bank Manager
Melquecedes de Guzman and Controller Agustin Uy. A cashier’s check
with RBSJ No. 2023424 in the amount of P487,000.00, net proceeds of
the loan, was issued to appellant (Exh. "C"). Appellant endorsed, then
encashed the check with RBSJ Teller Eleneth Cruz, who stamped
thereon the word "paid" (Exh. "C-4"). After appellant received the
proceeds, he issued an undated check, Associated Bank Check No.
165476, Tarlac Branch, in the amount of P500,000, payable to RBSJ
(Exh. "D").
It was not the bank policy for a borrower to apply for a loan, obtain its
approval and its proceeds on the same day. Appellant’s case was a
special one considering that he is the "kumpare" of the President of RBSJ
and he is well-known to all the bank’s directors since he, like them, comes
from Tarlac.
Appellant failed to pay his loan upon its maturity on December 16, 1989.
He personally asked de Guzman for a two-month extension and advised
RBSJ to date to February 16, 1990 his Associated Bank check no.

165476. Failing anew to pay, he asked for another two-month extension
or up to April 16, 1990. Both requests de Guzman granted. On April 16,
1990, appellant still failed to pay his loan. Basangan and his co-
employee, Carlos Garcia, went to Tarlac to collect from appellant the
amount of the loan. Appellant’s written request for another 30-day
extension was denied by de Guzman who instead, sent him a formal
demand letter dated April 25, 1990.
On May 25, 1990, Associated Bank check no. 165476 was deposited with
PS Bank, San Juan Branch. The check was later returned with the words
"closed account" stamped on its face. Associated Bank employee
PASION declared that appellant’s Current Account No. 1022-001197-9
with Associated Bank had been closed since February 2, 1990.
Appellant’s balance under the bank’s statement of account as of
November 16, 1989 was only P859. The most appellant had on his
account was P40,000 recorded on November 19, 1989 (Exh. "K").
Basangan and Garcia, in Tarlac, advised appellant of the dishonor of his

check. Appellant wrote Atty. Joselito Lim, RBSJ Chairman of the Board,
about the loan and arrangements as to the schedule of his payment. His
letter was referred to de Guzman, who, in turn, sent to him another
demand letter dated September 17, 1990. The letter informed him of the
dishonor of his check. De Guzman required him to take the necessary
step for the early settlement of his obligation. He still refused to pay.
Appellant denied the charge. He claimed that on November 16, 1989,

Agapito Uy and his sister Agnes Angeles proposed to him that he secure
a loan from the RBSJ for P500,000. P200,000 of it will be for him and the
P300,000 will go to Uy and to his sister to pay unpaid loans of borrowers
in their "side banking" activities. For the approval of his loan, Uy told him
that appellant can put up his four-door Mercedes Benz as collateral for
the P200,000 loan. The P300,000 will have no collateral. Uy also told him
the he (Uy) has complete control of the bank and his Mercedes Benz will
be enough collateral for the P500,000.
Appellant agreed to the proposal. He signed a blank loan application form

and a promissory note plus a chattel mortgage for his Mercedes Benz.
Thereafter, he was told to come back in two days. Uy gave him two
Premiere Bank checks worth P100,000 each. He gave one check to his
brother Efren Rigor and the other to his sister-in-law for encashment in
Tarlac. He issued to Uy a personal check for P500,000 undated. This
check was deposited in the bank for encashment in the later part of May,

1990 but it bounced. When demand was made for him to pay his loan, he
told Uy to get his Mercedes Benz as payment for P200,000 but Uy
refused. Uy wanted him to pay the whole amount of P500,000.2
On July 8, 1994, the trial court rendered judgment against petitioner, the
dispositive portion of which reads:
WHEREFORE, foregoing premises considered, this Court finds accused

Alfredo Rigor guilty beyond reasonable doubt of the crime of Violation of
Section 1 of Batas Pambansa Blg. 22 and there being no mitigating or
aggravating circumstance on record, imposes upon him the penalty of
imprisonment for six (6) months and to restitute to the Rural Bank of San
Juan the sum of P500,000.00 and to pay the costs. 3
The trial court stated the reasons for petitioner’s conviction, thus:
In the case at bar, accused admitted having issued Associated Bank

Check No. 165476 in the amount of P500,000.00. the check was undated
when issued. Records, however, show that it was issued on 16 November
1989 but as it appear[s] now it is dated 16 February 1990. The probable
reason must be because upon the maturity of his loan on 16 December
1989, accused asked for extension of two (2) months to pay the same.
And the expiration of that two (2) months period is 16 February 1990.
Nevertheless, Exhibit "K" for the prosecution including its submarkings
show that the highest outstanding amount in the current account of
accused with the Associated Bank, Tarlac Branch for the month of
November 1989, the month Rigor issued aforesaid check, is only about
P40,000.00. Hence, Rigor has no sufficient deposit in the bank to cover
the amount of P500,000.00 when he issued Check No. 165476.
Therefore, Rigor knowingly issued the same he having no sufficient funds
in or credit with the drawee bank in violation of section 1 of [B.P.] Blg. 22.
The defense of the accused that the amount of loan he secured from the
Rural Bank of San Juan is only P200,000.00 is of no moment. The fact is
he admitted having issued Associated Bank Check No. 165476 in the
amount of P500,000.00 and upon its deposit for encashment, the same
was dishonored for reason account closed.4
Petitioner appealed his conviction to the Court of Appeals, which affirmed the trial
court’s decision. The dispositive portion of the appellate court’s decision reads:

WHEREFORE, the appealed decision is AFFIRMED with the modification
that the reference to lack of mitigating or aggravating circumstances
should be deleted and disregarded.5
Hence, this petition for review on certiorari.
Petitioner raises the following:
1) Absent the element of knowingly issuing a worthless check entitles the

petitioner to acquittal;
2) Without proof that accused actually received a notice of dishonor, a

prosecution for violation of the Bouncing Checks Law cannot prosper;
3) The Pasig Court below had no jurisdiction to try and decide the case
for violation of Batas Pambansa Bilang 22.6
Petitioner contends that he did not violate Batas Pambansa Bilang 22 because
he told the officers of the complainant bank from the very beginning that he did
not have sufficient funds in the bank; he was merely enticed by Agustin Uy, the
bank’s managing director and comptroller, to obtain the instant loan where he
received only P200,000, while Uy took P300,000; and his check was partly used
to collateralize an accommodation in favor of Uy in the amount of P300,000.
The contention is without merit.
Petitioner is charged with violation of Section 1 of Batas Pambansa Bilang 22,

thus:
SECTION 1.Checks without sufficient funds.-- Any person who makes or

draws and issues any check to apply on account or for value, knowing at
the time of issue that he does not have sufficient funds in or credit with
the drawee bank for the payment of such check in full upon its
presentment, which check is subsequently dishonored by the drawee
bank for insufficiency of funds or credit or would have been dishonored
for the same reason had not the drawer, without any valid reason,
ordered the bank to stop payment, shall be punished by imprisonment of
not less than thirty days but not more than one (1) year or by a fine of not
less than but not more than double the amount of the check which fine
shall in no case exceed Two hundred thousand pesos, or both such fine
and imprisonment at the discretion of the court.

The elements of the offense are: (1) Making, drawing, and issuance of any check
to apply on account or for value; (2) knowledge of the maker, drawer, or issuer
that at the time of issue he does not have sufficient funds in or credit with the
drawee bank for the payment of the check in full upon its presentment; and (3)
subsequent dishonor of the check by the drawee bank for insufficiency of funds
or credit, or dishonor of the check for the same reason had not the drawer,
without any valid cause, ordered the bank to stop payment.7
As found by the Regional Trial Court and the Court of Appeals, all the
aforementioned elements are present in this case.
The evidence shows that on November 16, 1989, petitioner applied8 for a loan in
the amount of P500,000 with the Rural Bank of San Juan and on the same day,
he issued an undated Associated Bank Check No. 1654769 worth P500,000
payable to Rural Bank of San Juan in connection with the loan, which check was
later dated February 16, 1990.10 The check was thus issued to apply for
value.11 This shows the presence of the first element of the offense.
The presence of the second element of the offense is shown by petitioner’s

admission12 that he knew of the insufficiency of his funds in the drawee bank
when he issued the check and he allegedly did not hide the fact from the officials
of the Rural Bank of San Juan.
The Court of Appeals correctly ruled, thus:
xxx
Knowledge involves a state of mind difficult to establish. We hold that

appellant’s admission of the insufficiency of his fund at the time he issued
the check constitutes the very element of "knowledge" contemplated in
Sec. 1 of BP 22. The prima facie presumption of knowledge required in
Sec. 2, Ibid., does not apply because (a) the check was presented for
payment only on May 25, 1990 or beyond the 90-day period, which
expired on May 16, 1990, counted from the maturity date of the check on
February 16, 1990 and (b) an actually admitted knowledge of a fact needs
no presumption.
While it is true that if a check is presented beyond ninety (90) days from
its due date, there is no more presumption of knowledge by the drawer
that at the time of issue his check has no sufficient funds, the
presumption in this case is supplanted by appellant’s own admission that

he did not hide the fact that he had no sufficient funds for the check. In
fact, it appears that when he authorized RBSJ to date his check on
February 16, 1990, his current account was already closed two weeks
earlier, on February 2, 1990.13
Petitioner, however, argues that since the officers of the bank knew that he did
not have sufficient funds, he has not violated Batas Pambansa Bilang 22.
Assuming arguendo that the payee had knowledge that he had insufficient funds
at the time he issued the check, such knowledge by the payee is immaterial as
deceit is not an essential element of the offense under Batas Pambansa Bilang
22.14 The gravamen of the offense is the issuance of a bad check; hence, malice
and intent in the issuance thereof are inconsequential.15
Moreover, the cited case of Magno v. Court of Appeals, 16 which resulted in the
acquittal of the accused therein, is inapplicable to petitioner as the facts of said
case are different. In Magno, the bounced checks were issued to cover a
warranty deposit in a lease contract, where the lessor-supplier was also the
financier of the deposit.17 It was a modus operandi whereby the supplier of the
goods is also able to sell or lease the same goods at the same time privately
financing those in desperate need so they may be accommodated.18 The Court
therein held:
To charge the petitioner for the refund of a "warranty deposit" which he

did not withdraw as it was not his own account, it having remained with
LS Finance, is to even make him pay an unjust "debt," to say the least,
since petitioner did not receive the amount in question. All the while, said
amount was in the safekeeping of the financing company, which is
managed, supervised and operated by the corporation officials and
employees of LS Finance. Petitioner did not even know that the checks
he issued were turned over by Joey Gomez to Mrs. Teng, whose
operation was kept from his knowledge on her instruction. This fact alone
evoke suspicion that the transaction is irregular and immoral per se,
hence, she specifically requested Gomez not to divulge the source of the
"warrant deposit."
It is intriguing to realize that Mrs. Teng did not want the petitioner to know
that it was she who "accommodated" petitioner’s request for Joey Gomez,
to source out the needed funds for the "warranty deposit." Thus it unfolds
the kind of transaction that is shrouded with mystery, gimmickry and
doubtful legality. It is in simple language, a scheme whereby Mrs. Teng
as the supplier of the equipment in the name of her corporation, Mancor,

would be able to "sell or lease" its goods as in this case, and at the same
time, privately financing those who desperately need petty
accommodations as this one. This modus operandi has in so many
instances victimized unsuspecting businessmen, who likewise need
protection from the law, by availing of the deceptively called "warranty
deposit" not realizing that they also fall prey to leasing equipment under
the guise of a lease purchase agreement when it is a scheme designed to
skim off business clients.19
This case, however, involves an ordinary loan transaction between petitioner and
the Rural Bank of San Juan wherein petitioner issued the check certainly to be
applied to the payment of his loan since the check and the loan have the same
value of P500,000. Whether petitioner agreed to give a portion of the proceeds of
his loan to Agustin Uy, an officer of complainant bank, to finance Uy’s and his
(petitioner) sister’s alleged "side-banking" activity, such agreement is immaterial
to petitioner’s liability for issuing the dishonored check under Batas Pambansa
Bilang 22.
Lozano v. Martinez20 states:
The gravamen of the offense punished by BP 22 is the act of making and

issuing a worthless check or a check that is dishonored upon its
presentation for payment. It is not the non-payment of an obligation which
the law punishes. The law is not intended or designed to coerce a debtor
to pay his debt. The thrust of the law is to prohibit, under pain of penal
sanctions, the making of worthless checks and putting them in circulation.
Because of its deleterious effects on the public interest, the practice is
proscribed by the law. The law punishes the act not as an offense against
property, but an offense against public order.
People v. Nitafan21 held that to require that the agreement surrounding the
issuance of checks be first looked into and thereafter exempt such issuance from
the provisions of Batas Pambansa Bilang 22 on the basis of such agreement or
understanding would frustrate the very purpose for which the law was enacted.
Further, the presence of the third element of the offense is shown by the fact that
after the check was deposited for encashment, it was dishonored by Associated
Bank for reason of "closed account" as evidenced by its Check Return
Slip.22 Despite receipt of a notice of dishonor from complainant bank, petitioner
failed to pay his obligation.

Petitioner next contends that he did not receive a notice of dishonor, the absence
of which precludes criminal prosecution.
The contention is likewise of no merit.
The notice of dishonor of a check may be sent to the drawer or maker by the
drawee bank, the holder of the check, or the offended party either by personal
delivery or by registered mail.23 The notice of dishonor to the maker of a check
must be in writing.24
In this case, prosecution witness Edmarcos Basangan testified that after

petitioner’s check was dishonored, he and co-employee Carlos Garcia went to
petitioner’s residence in Tarlac to inform him about it. Thereafter, petitioner wrote
a letter dated June 28, 1990 to Atty. Joselito Lim, RBSJ chairman of the Board of
Directors, proposing a manner of paying the loan. The letter was referred to the
bank manager who sent petitioner another demand letter25dated September 17,
1990 through registered mail.26 Said letter informed petitioner of the dishonor of
his check for the reason of account closed, and required him to settle his
obligation, thus:
xxx
September 17, 1990
Mr. Alfredo Rigor

Victoria, Tarlac
Dear Mr. Rigor,
Please be informed that the check dated February 16, 1990, that you
issued purportedly for the payment of your loan, which has already
become due and demandable in the sum of PESOS: Five Hundred
Thousand Pesos Only (P500,000.00) was dishonored on February 16,
1990 (should be May 25, 1990) for the reason Account Closed (AC).
We trust that you will take the necessary step for the early settlement of
your obligation to us.

Very truly yours,
MELQUECEDES DE GUZMAN
The transcript of records27 shows that petitioner admitted knowledge of the

dishonor of his check through a demand letter sent to him. Hence, petitioner
cannot pretend that he did not receive a notice of dishonor of his check.
Lastly, petitioner contends that the Regional Trial Court of Pasig had no
jurisdiction over this case since no proof has been offered that his check was
issued, delivered, dishonored or that knowledge of insufficiency of funds
occurred in the Municipality of San Juan, Metro Manila.
The contention is untenable.
As regards venue of a criminal action, Section 15, paragraph (a), of Rule 110 of
the 2000 Revised Rules of Criminal Procedure, which reflects the old
rule,28 provides:
Sec. 15. Place where action is to be instituted. –
(a) Subject to existing laws, the criminal action shall be instituted and tried
in the court of the municipality or territory where the offense was
committed or where any of its essential ingredients occurred. (Emphasis
supplied.)
Violations of Batas Pambansa Bilang 22 are categorized as transitory or

continuing crimes.29 In such crimes, some acts material and essential to the
crimes and requisite to their consummation occur in one municipality or territory
and some in another, in which event, the court of either has jurisdiction to try the
cases, it being understood that the first court taking cognizance of the case
excludes the other.30 Hence, a person charged with a transitory crime may be
validly tried in any municipality or territory where the offense was in part
committed.31
The evidence clearly shows that the undated check was issued and delivered at
the Rural Bank of San Juan, Metro Manila32 on November 16, 1989, and
subsequently the check was dated February 16, 1990 thereat. On May 25, 1990,

the check was deposited with PS Bank, San Juan Branch, Metro Manila.33 Thus,
the Court of Appeals correctly ruled:
Violations of B.P. 22 are categorized as transitory or continuing crimes. A

suit on the check can be filed in any of the places where any of the
elements of the offense occurred, that is, where the check is drawn,
issued, delivered or dishonored. x x x
The information at bar effectively charges San Juan as the place of

drawing and issuing. The jurisdiction of courts in criminal cases is
determined by the allegations of the complaint or information. Although,
the check was dishonored by the drawee, Associated Bank, in its Tarlac
Branch, appellant has drawn, issued and delivered it at RBSJ, San Juan.
The place of issue and delivery was San Juan and knowledge, as an
essential part of the offense, was also overtly manifested in San Juan.
There is no question that crimes committed in November, 1989 in San
Juan are triable by the RTC stationed in Pasig. In short both allegation
and proof in this case sufficiently vest jurisdiction upon the RTC in Pasig
City. 34
WHEREFORE, the petition is DENIED and the assailed Decision of the Court of
Appeals, in CA-G.R. CR No. 18855, is hereby AFFIRMED. Costs against
petitioner.
SO ORDERED.

THIRD DIVISION
G.R. No. 156940 December 14, 2004
ASSOCIATED BANK (Now WESTMONT BANK), petitioner,

vs.
VICENTE HENRY TAN, respondent.
DECISION
PANGANIBAN, J.:
While banks are granted by law the right to debit the value of a dishonored check
from a depositor’s account, they must do so with the highest degree of care, so
as not to prejudice the depositor unduly.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing
the January 27, 2003 Decision2 of the Court of Appeals (CA) in CA-GR CV No.
56292. The CA disposed as follows:
"WHEREFORE, premises considered, the Decision dated December 3,

1996, of the Regional Trial Court of Cabanatuan City, Third Judicial
Region, Branch 26, in Civil Case No. 892-AF is hereby AFFIRMED. Costs
against the [petitioner]."3
The Facts
The CA narrated the antecedents as follows:
"Vicente Henry Tan (hereafter TAN) is a businessman and a regular

depositor-creditor of the Associated Bank (hereinafter referred to as the
BANK). Sometime in September 1990, he deposited a postdated UCPB
check with the said BANK in the amount of P101,000.00 issued to him by

a certain Willy Cheng from Tarlac. The check was duly entered in his
bank record thereby making his balance in the amount of P297,000.00,
as of October 1, 1990, from his original deposit of P196,000.00. Allegedly,
upon advice and instruction of the BANK that the P101,000.00 check was
already cleared and backed up by sufficient funds, TAN, on the same
date, withdrew the sum of P240,000.00, leaving a balance of P57,793.45.
A day after, TAN deposited the amount of P50,000.00 making his existing
balance in the amount of P107,793.45, because he has issued several
checks to his business partners, to wit:
CHECK NUMBERS DATE AMOUNT

a. 138814 Sept. 29, 1990 P9,000.00
b. 138804 Oct. 8, 1990 9,350.00
c. 138787 Sept. 30, 1990 6,360.00
d. 138847 Sept. 29, 1990 21,850.00
e. 167054 Sept. 29, 1990 4,093.40
f. 138792 ` Sept. 29, 1990 3,546.00
g. 138774 Oct. 2, 1990 6,600.00
h. 167072 Oct. 10, 1990 9,908.00
i. 168802 Oct. 10, 1990 3,650.00
"However, his suppliers and business partners went back to him alleging
that the checks he issued bounced for insufficiency of funds. Thereafter,
TAN, thru his lawyer, informed the BANK to take positive steps regarding
the matter for he has adequate and sufficient funds to pay the amount of
the subject checks. Nonetheless, the BANK did not bother nor offer any
apology regarding the incident. Consequently, TAN, as plaintiff, filed a
Complaint for Damages on December 19, 1990, with the Regional Trial
Court of Cabanatuan City, Third Judicial Region, docketed as Civil Case
No. 892-AF, against the BANK, as defendant.
"In his [C]omplaint, [respondent] maintained that he ha[d] sufficient funds

to pay the subject checks and alleged that his suppliers decreased in
number for lack of trust. As he has been in the business community for
quite a time and has established a good record of reputation and probity,
plaintiff claimed that he suffered embarrassment, humiliation, besmirched
reputation, mental anxieties and sleepless nights because of the said
unfortunate incident. [Respondent] further averred that he continuously
lost profits in the amount of P250,000.00. [Respondent] therefore prayed

for exemplary damages and that [petitioner] be ordered to pay him the
sum of P1,000,000.00 by way of moral damages, P250,000.00 as lost
profits, P50,000.00 as attorney’s fees plus 25% of the amount claimed
including P1,000.00 per court appearance.
"Meanwhile, [petitioner] filed a Motion to Dismiss on February 7, 1991, but

the same was denied for lack of merit in an Order dated March 7, 1991.
Thereafter, [petitioner] BANK on March 20, 1991 filed its Answer denying,
among others, the allegations of [respondent] and alleged that no banking
institution would give an assurance to any of its client/depositor that the
check deposited by him had already been cleared and backed up by
sufficient funds but it could only presume that the same has been
honored by the drawee bank in view of the lapse of time that ordinarily
takes for a check to be cleared. For its part, [petitioner] alleged that on
October 2, 1990, it gave notice to the [respondent] as to the return of his
UCPB check deposit in the amount of P101,000.00, hence, on even date,
[respondent] deposited the amount of P50,000.00 to cover the returned
check.
"By way of affirmative defense, [petitioner] averred that [respondent] had

no cause of action against it and argued that it has all the right to debit
the account of the [respondent] by reason of the dishonor of the check
deposited by the [respondent] which was withdrawn by him prior to its
clearing. [Petitioner] further averred that it has no liability with respect to
the clearing of deposited checks as the clearing is being undertaken by
the Central Bank and in accepting [the] check deposit, it merely obligates
itself as depositor’s collecting agent subject to actual payment by the
drawee bank. [Petitioner] therefore prayed that [respondent] be ordered to
pay it the amount of P1,000,000.00 by way of loss of goodwill, P7,000.00
as acceptance fee plus P500.00 per appearance and by way of attorney’s
fees.
"Considering that Westmont Bank has taken over the management of the
affairs/properties of the BANK, [respondent] on October 10, 1996, filed an
Amended Complaint reiterating substantially his allegations in the original
complaint, except that the name of the previous defendant ASSOCIATED
BANK is now WESTMONT BANK.
"Trial ensured and thereafter, the court rendered its Decision dated December 3,
1996 in favor of the [respondent] and against the [petitioner], ordering the latter to
pay the [respondent] the sum of P100,000.00 by way of moral
damages, P75,000.00 as exemplary damages, P25,000.00 as attorney’s fees,

plus the costs of this suit. In making said ruling, it was shown that [respondent]
was not officially informed about the debiting of the P101,000.00 [from] his
existing balance and that the BANK merely allowed the [respondent] to use the
fund prior to clearing merely for accommodation because the BANK considered
him as one of its valued clients. The trial court ruled that the bank manager was
negligent in handling the particular checking account of the [respondent] stating
that such lapses caused all the inconveniences to the [respondent]. The trial
court also took into consideration that [respondent’s] mother was originally
maintaining with the x x x BANK [a] current account as well as [a] time deposit,
but [o]n one occasion, although his mother made a deposit, the same was not
credited in her favor but in the name of another."4
Petitioner appealed to the CA on the issues of whether it was within its rights, as
collecting bank, to debit the account of its client for a dishonored check; and
whether it had informed respondent about the dishonor prior to debiting his
account.
Affirming the trial court, the CA ruled that the bank should not have authorized
the withdrawal of the value of the deposited check prior to its clearing. Having
done so, contrary to its obligation to treat respondent’s account with meticulous
care, the bank violated its own policy. It thereby took upon itself the obligation to
officially inform respondent of the status of his account before unilaterally
debiting the amount of P101,000. Without such notice, it is estopped from
blaming him for failing to fund his account.
The CA opined that, had the P101,000 not been debited, respondent would have
had sufficient funds for the postdated checks he had issued. Thus, the supposed
accommodation accorded by petitioner to him is the proximate cause of his
business woes and shame, for which it is liable for damages.
Because of the bank’s negligence, the CA awarded respondent moral damages

of P100,000. It also granted him exemplary damages of P75,000 and attorney’s
fees of P25,000.
Hence this Petition.5
Issue

In its Memorandum, petitioner raises the sole issue of "whether or not the
petitioner, which is acting as a collecting bank, has the right to debit the account
of its client for a check deposit which was dishonored by the drawee bank."6
The Petition has no merit.
Sole Issue:
Debit of Depositor’s Account
Petitioner-bank contends that its rights and obligations under the present set of
facts were misappreciated by the CA. It insists that its right to debit the amount of
the dishonored check from the account of respondent is clear and unmistakable.
Even assuming that it did not give him notice that the check had been
dishonored, such right remains immediately enforceable.
In particular, petitioner argues that the check deposit slip accomplished by

respondent on September 17, 1990, expressly stipulated that the bank was
obligating itself merely as the depositor’s collecting agent and -- until such time
as actual payment would be made to it -- it was reserving the right to charge
against the depositor’s account any amount previously credited. Respondent was
allowed to withdraw the amount of the check prior to clearing, merely as an act of
accommodation, it added.
At the outset, we stress that the trial court’s factual findings that were affirmed by
the CA are not subject to review by this Court.7 As petitioner itself takes no issue
with those findings, we need only to determine the legal consequence, based on
the established facts.
Right of Setoff
A bank generally has a right of setoff over the deposits therein for the payment of
any withdrawals on the part of a depositor.8 The right of a collecting bank to debit
a client’s account for the value of a dishonored check that has previously been
credited has fairly been established by jurisprudence. To begin with, Article 1980
of the Civil Code provides that "[f]ixed, savings, and current deposits of money in
banks and similar institutions shall be governed by the provisions concerning
simple loan."

Hence, the relationship between banks and depositors has been held to be that
of creditor and debtor.9 Thus, legal compensation under Article 127810 of the Civil
Code may take place "when all the requisites mentioned in Article 1279 are
present,"11 as follows:
"(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 consist 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 be 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."12
Nonetheless, the real issue here is not so much the right of petitioner to debit
respondent’s account but, rather, the manner in which it exercised such right.
The Court has held that even while the right of setoff is conceded, separate is the
question of whether that remedy has properly been exercised.13
The liability of petitioner in this case ultimately revolves around the issue of
whether it properly exercised its right of setoff. The determination thereof hinges,
in turn, on the bank’s role and obligations, first, as respondent’s depositary bank;
and second, as collecting agent for the check in question.
Obligation as
Depositary Bank
In BPI v. Casa Montessori,14 the Court has emphasized that the banking
business is impressed with public interest. "Consequently, the highest degree of
diligence is expected, and high standards of integrity and performance are even
required of it. By the nature of its functions, a bank is under obligation to treat the
accounts of its depositors with meticulous care."15
Also affirming this long standing doctrine, Philippine Bank of Commerce v. Court
of Appeals16 has held that "the degree of diligence required of banks is more than

that of a good father of a family where the fiduciary nature of their relationship
with their depositors is concerned."17 Indeed, the banking business is vested with
the trust and confidence of the public; hence the "appropriate standard of
diligence must be very high, if not the highest, degree of diligence."18 The
standard applies, regardless of whether the account consists of only a few
hundred pesos or of millions.19
The fiduciary nature of banking, previously imposed by case law, 20 is now

enshrined in Republic Act No. 8791 or the General Banking Law of 2000. Section
2 of the law specifically says that the State recognizes the "fiduciary nature of
banking that requires high standards of integrity and performance."
Did petitioner treat respondent’s account with the highest degree of care? From
all indications, it did not.
It is undisputed -- nay, even admitted -- that purportedly as an act of

accommodation to a valued client, petitioner allowed the withdrawal of the face
value of the deposited check prior to its clearing. That act certainly disregarded
the clearance requirement of the banking system. Such a practice is unusual,
because a check is not legal tender or money;21 and its value can properly be
transferred to a depositor’s account only after the check has been cleared by the
drawee bank.22
Under ordinary banking practice, after receiving a check deposit, a

bank either immediately credit the amount to a depositor’s account; or infuse
value to that account only after the drawee bank shall have paid such
amount.23Before the check shall have been cleared for deposit, the collecting
bank can only "assume" at its own risk -- as herein petitioner did -- that the check
would be cleared and paid out.
Reasonable business practice and prudence, moreover, dictated that petitioner

should not have authorized the withdrawal by respondent of P240,000 on
October 1, 1990, as this amount was over and above his outstanding cleared
balance of P196,793.45.24 Hence, the lower courts correctly appreciated the
evidence in his favor.
Obligation as
Collecting Agent
Indeed, the bank deposit slip expressed this reservation:

"In receiving items on deposit, this Bank obligates itself only as the
Depositor’s Collecting agent, assuming no responsibility beyond
carefulness in selecting correspondents, and until such time as actual
payments shall have come to its possession, this Bank reserves the right
to charge back to the Depositor’s account any amounts previously
credited whether or not the deposited item is returned. x x x."25
However, this reservation is not enough to insulate the bank from any liability. In
the past, we have expressed doubt about the binding force of such conditions
unilaterally imposed by a bank without the consent of the depositor. 26 It is indeed
arguable that "in signing the deposit slip, the depositor does so only to identify
himself and not to agree to the conditions set forth at the back of the deposit
slip."27
Further, by the express terms of the stipulation, petitioner took upon itself certain
obligations as respondent’s agent, consonant with the well-settled rule that the
relationship between the payee or holder of a commercial paper and the
collecting bank is that of principal and agent.28 Under Article 190929 of the Civil
Code, such bank could be held liable not only for fraud, but also for negligence.
As a general rule, a bank is liable for the wrongful or tortuous acts and
declarations of its officers or agents within the course and scope of their
employment.30 Due to the very nature of their business, banks are expected to
exercise the highest degree of diligence in the selection and supervision of their
employees.31 Jurisprudence has established that the lack of diligence of a
servant is imputed to the negligence of the employer, when the negligent or
wrongful act of the former proximately results in an injury to a third person; 32 in
this case, the depositor.
The manager of the bank’s Cabanatuan branch, Consorcia Santiago,

categorically admitted that she and the employees under her control had
breached bank policies. They admittedly breached those policies when, without
clearance from the drawee bank in Baguio, they allowed respondent to withdraw
on October 1, 1990, the amount of the check deposited. Santiago testified that
respondent "was not officially informed about the debiting of the P101,000 from
his existing balance of P170,000 on October 2, 1990 x x x."33
Being the branch manager, Santiago clearly acted within the scope of her
authority in authorizing the withdrawal and the subsequent debiting without
notice. Accordingly, what remains to be determined is whether her actions
proximately caused respondent’s injury. Proximate cause is that which -- in a

natural and continuous sequence, unbroken by any efficient intervening cause --
produces the injury, and without which the result would not have occurred.34
Let us go back to the facts as they unfolded. It is undeniable that the bank’s
premature authorization of the withdrawal by respondent on October 1, 1990,
triggered -- in rapid succession and in a natural sequence -- the debiting of his
account, the fall of his account balance to insufficient levels, and the subsequent
dishonor of his own checks for lack of funds. The CA correctly noted thus:
"x x x [T]he depositor x x x withdrew his money upon the advice by

[petitioner] that his money was already cleared. Without such advice,
[respondent] would not have withdrawn the sum of P240,000.00.
Therefore, it cannot be denied that it was [petitioner’s] fault which allowed
[respondent] to withdraw a huge sum which he believed was already his.
"To emphasize, it is beyond cavil that [respondent] had sufficient funds for
the check. Had the P101,000.00 not [been] debited, the subject checks
would not have been dishonored. Hence, we can say that [respondent’s]
injury arose from the dishonor of his well-funded checks. x x x."35
Aggravating matters, petitioner failed to show that it had immediately and duly
informed respondent of the debiting of his account. Nonetheless, it argues that
the giving of notice was discernible from his act of depositing P50,000 on
October 2, 1990, to augment his account and allow the debiting. This argument
deserves short shrift.
First, notice was proper and ought to be expected. By the bank manager’s
account, respondent was considered a "valued client" whose checks had always
been sufficiently funded from 1987 to 1990,36 until the October imbroglio. Thus,
he deserved nothing less than an official notice of the precarious condition of his
account.
Second, under the provisions of the Negotiable Instruments Law regarding the
liability of a general indorser37 and the procedure for a notice of dishonor,38 it was
incumbent on the bank to give proper notice to respondent. In Gullas v. National
Bank,39 the Court emphasized:
"x x x [A] general indorser of a negotiable instrument engages that if the

instrument – the check in this case – is dishonored and the necessary
proceedings for its dishonor are duly taken, he will pay the amount
thereof to the holder (Sec. 66) It has been held by a long line of

authorities that notice of dishonor is necessary to charge an indorser and
that the right of action against him does not accrue until the notice is
given.
"x x x. The fact we believe is undeniable that prior to the mailing of notice
of dishonor, and without waiting for any action by Gullas, the bank made
use of the money standing in his account to make good for the treasury
warrant. At this point recall that Gullas was merely an indorser and had
issued checks in good faith. As to a depositor who has funds sufficient to
meet payment of a check drawn by him in favor of a third party, it has
been held that he has a right of action against the bank for its refusal to
pay such a check in the absence of notice to him that the bank has
applied the funds so deposited in extinguishment of past due claims held
against him. (Callahan vs. Bank of Anderson [1904], 2 Ann. Cas., 203.)
However this may be, as to an indorser the situation is different, and
notice should actually have been given him in order that he might protect
his interests."40
Third, regarding the deposit of P50,000 made by respondent on October 2, 1990,

we fully subscribe to the CA’s observations that it was not unusual for a well-
reputed businessman like him, who "ordinarily takes note of the amount of money
he takes and releases," to immediately deposit money in his current account to
answer for the postdated checks he had issued.41
Damages
Inasmuch as petitioner does not contest the basis for the award of damages and
attorney’s fees, we will no longer address these matters.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED.

Costs against petitioner.
SO ORDERED.

THIRD DIVISION
G.R. No. 105774 April 25, 2002
GREAT ASIAN SALES CENTER CORPORATION and TAN CHONG

LIN, petitioners,
vs.
THE COURT OF APPEALS and BANCASIA FINANCE AND INVESTMENT
CARPIO, J.:
The Case
Before us is a Petition for Review on Certiorari under Rule 45 of the Revised

Rules on Civil Procedure assailing the June 9, 1992 Decision1 of the Court of
Appeals2 in CA-G.R. CV No. 20167. The Court of Appeals affirmed the January
26, 1988 Decision3 of the Regional Trial Court of Manila, Branch 52,4 ordering
petitioners Great Asian Sales Center Corporation ("Great Asian" for brevity) and
Tan Chong Lin to pay, solidarily, respondent Bancasia Finance and Investment
Corporation ("Bancasia" for brevity) the amount of P1,042,005.00. The Court of
Appeals affirmed the trial court’s award of interest and costs of suit but deleted
the award of attorney’s fees.
The Facts
Great Asian is engaged in the business of buying and selling general

merchandise, in particular household appliances. On March 17, 1981, the board
of directors of Great Asian approved a resolution authorizing its Treasurer and
General Manager, Arsenio Lim Piat, Jr. ("Arsenio" for brevity) to secure a loan
from Bancasia in an amount not to exceed P1.0 million. The board resolution
also authorized Arsenio to sign all papers, documents or promissory notes
necessary to secure the loan. On February 10, 1982, the board of directors of
Great Asian approved a second resolution authorizing Great Asian to secure a
discounting line with Bancasia in an amount not exceeding P2.0 million. The
second board resolution also designated Arsenio as the authorized signatory to
sign all instruments, documents and checks necessary to secure the discounting
line.
On March 4, 1981, Tan Chong Lin signed a Surety Agreement in favor of

Bancasia to guarantee, solidarily, the debts of Great Asian to Bancasia. On

January 29, 1982, Tan Chong Lin signed a Comprehensive and Continuing
Surety Agreement in favor of Bancasia to guarantee, solidarily, the debts of
Great Asian to Bancasia. Thus, Tan Chong Lin signed two surety agreements
("Surety Agreements" for brevity) in favor of Bancasia.
Great Asian, through its Treasurer and General Manager Arsenio, signed four (4)
Deeds of Assignment of Receivables ("Deeds of Assignment" for brevity),
assigning to Bancasia fifteen (15) postdated checks. Nine of the checks were
payable to Great Asian, three were payable to "New Asian Emp.", and the last
three were payable to cash. Various customers of Great Asian issued these
postdated checks in payment for appliances and other merchandise.
Great Asian and Bancasia signed the first Deed of Assignment on January 12,
1982 covering four postdated checks with a total face value of P244,225.82, with
maturity dates not later than March 17, 1982. Of these four postdated checks,
two were dishonored. Great Asian and Bancasia signed the second Deed of
Assignment also on January 12, 1982 covering four postdated checks with a total
face value of P312,819.00, with maturity dates not later than April 1, 1982. All
these four checks were dishonored. Great Asian and Bancasia signed the third
Deed of Assignment on February 11, 1982 covering eight postdated checks with
a total face value of P344,475.00, with maturity dates not later than April 30,
1982. All these eight checks were dishonored. Great Asian and Bancasia signed
the fourth Deed of Assignment on March 5, 1982 covering one postdated check
with a face value of P200,000.00, with maturity date on March 18, 1982. This last
check was also dishonored. Great Asian assigned the postdated checks to
Bancasia at a discount rate of less than 24% of the face value of the checks.
Arsenio endorsed all the fifteen dishonored checks by signing his name at the
back of the checks. Eight of the dishonored checks bore the endorsement of
Arsenio below the stamped name of "Great Asian Sales Center", while the rest of
the dishonored checks just bore the signature of Arsenio. The drawee banks
dishonored the fifteen checks on maturity when deposited for collection by
Bancasia, with any of the following as reason for the dishonor: "account closed",
"payment stopped", "account under garnishment", and "insufficiency of funds".
The total amount of the fifteen dishonored checks is P1,042,005.00. Below is a
table of the fifteen dishonored checks:
Drawee Bank Check No. Amount Maturity Date

1st Deed
Solid Bank C-A097480 P137,500.00 March 16, 1982

Pacific Banking Corp. 23950 P47,211.00 March 17, 1982
2nd Deed
Metrobank 030925 P68,722.00 March 19, 1982
030926 P45,230.00 March 19, 1982
Solidbank C-A097478 P140,000.00 March 23, 1982
Pacific Banking Corp. CC 769910 P58,867.00 April 1, 1982
3rd Deed
Phil. Trust Company 060835 P21,228.00 April 21, 1982
060836 P22,187.00 April 28, 1982
Allied Banking Corp. 11251624 P41,773.00 April 22, 1982
11251625 P38,592.00 April 29, 1982
Pacific Banking Corp. 237984 P37,886.00 April 23, 1982
237988 P47,385.00 April 28, 1982
237985 P46,748.00 April 30, 1982
Security Bank & Trust 22061 P88,676.00 April 30, 1982
Co.
4th Deed
Pacific Banking Corp. 860178 P200,000.00 March 18, 1982
After the drawee bank dishonored Check No. 097480 dated March 16, 1982,
Bancasia referred the matter to its lawyer, Atty. Eladia Reyes, who sent by
registered mail to Tan Chong Lin a letter dated March 18, 1982, notifying him of
the dishonor and demanding payment from him. Subsequently, Bancasia sent by
personal delivery a letter dated June 16, 1982 to Tan Chong Lin, notifying him of
the dishonor of the fifteen checks and demanding payment from him. Neither
Great Asian nor Tan Chong Lin paid Bancasia the dishonored checks.
On May 21, 1982, Great Asian filed with the then Court of First Instance of
Manila a petition for insolvency, verified under oath by its Corporate Secretary,
Mario Tan. Attached to the verified petition was a "Schedule and Inventory of
Liabilities and Creditors of Great Asian Sales Center Corporation," listing
Bancasia as one of the creditors of Great Asian in the amount of P1,243,632.00.

On June 23, 1982, Bancasia filed a complaint for collection of a sum of money
against Great Asian and Tan Chong Lin. Bancasia impleaded Tan Chong Lin
because of the Surety Agreements he signed in favor of Bancasia. In its answer,
Great Asian denied the material allegations of the complaint claiming it was
unfounded, malicious, baseless, and unlawfully instituted since there was already
a pending insolvency proceedings, although Great Asian subsequently withdrew
its petition for voluntary insolvency. Great Asian further raised the alleged lack of
authority of Arsenio to sign the Deeds of Assignment as well as the absence of
consideration and consent of all the parties to the Surety Agreements signed by
Tan Chong Lin.
Ruling of the Trial Court
The trial court rendered its decision on January 26, 1988 with the following
findings and conclusions:
"From the foregoing facts and circumstances, the Court finds that the
plaintiff has established its causes of action against the defendants. The
Board Resolution (Exh. "T"), dated March 17, 1981, authorizing Arsenio
Lim Piat, Jr., general manager and treasurer of the defendant Great Asian
to apply and negotiate for a loan accommodation or credit line with the
plaintiff Bancasia in an amount not exceeding One Million Pesos
(P1,000,000.00), and the other Board Resolution approved on February
10, 1982, authorizing Arsenio Lim Piat, Jr., to obtain for defendant Asian
Center a discounting line with Bancasia at prevailing discounting rates in
an amount not to exceed Two Million Pesos (P2,000,000.00), both of
which were intended to secure money from the plaintiff financing firm to
finance the business operations of defendant Great Asian, and pursuant
to which Arsenio Lim Piat, Jr. was able to have the aforementioned fifteen
(15) checks totaling P1,042,005.00 discounted with the plaintiff, which
transactions were obviously known by the beneficiary thereof, defendant
Great Asian, as in fact, in its aforementioned Schedule and Inventory of
Liabilities and Creditors (Exh. DD, DD-1) attached to its Verified Petition
for Insolvency, dated May 12, 1982 (pp. 50-56), the defendant Great
Asian admitted an existing liability to the plaintiff, in the amount of
P1,243,632.00, secured by it, by way of ‘financing accommodation,’ from
the said financing institution Bancasia Finance and Investment
Corporation, plaintiff herein, sufficiently establish the liability of the
defendant Great Asian to the plaintiff for the amount of P1,042,005.00
sought to be recovered by the latter in this case.5
xxx

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the two (2) defendants ordering the latter, jointly and severally, to
pay the former:
(a) The amount of P1,042,005.00, plus interest thereon at the legal rate
from the filing of the complaint until the same is fully paid;
(b) Attorney’s fees equivalent to twenty per cent (20%) of the total amount
due; and
(c) The costs of suit.
SO ORDERED."6
On appeal, the Court of Appeals sustained the decision of the lower court,
deleting only the award of attorney’s fees, as follows:
"As against appellants’ bare denial of it, the Court is more inclined to
accept the appellee’s version, to the effect that the subject deeds of
assignment are but individual transactions which -- being collectively
evidentiary of the loan accommodation and/or credit line it granted the
appellant corporation -- should not be taken singly and distinct therefrom.
In addition to its plausibility, the proposition is, more importantly,
adequately backed by the documentary evidence on record. Aside from
the aforesaid Deeds of Assignment (Exhs. "A", "D", "I", and "R") and the
Board Resolutions of the appellant corporation’s Board of Directors
(Exhs. "T", "U" and "V"), the appellee -- consistent with its theory --
interposed the Surety Agreements the appellant Tan Chong Lin executed
(Exhs. "W" and "X"), as well as the demand letters it served upon the
latter as surety (Exhs. "Y" and "Z"). It bears emphasis that the second
Resolution of the appellant corporation’s Board of Directors (Exh. "V")
even closely coincides with the execution of the February 11, 1982 and
March 5, 1982 Deeds of Assignment (Exhs. "I" and "R"). Were the
appellants’ posturings true, it seems rather strange that the appellant Tan
Chong Lin did not even protest or, at least, make known to the appellee
what he -- together with the appellant corporation -- represented to be a
corporate larceny to which all of them supposedly fell prey. In the petition
for voluntary insolvency it filed, the appellant corporation, instead,
indirectly acknowledged its indebtedness in terms of financing

accommodations to the appellee, in an amount which, while not exactly
matching the sum herein sought to be collected, approximates the same
(Exhs. "CC", "DD" and "DD-1").7
xxx
The appellants contend that the foregoing warranties enlarged or

increased the surety’s risk, such that appellant Tan Chong Lin should be
released from his liabilities (pp. 37-44, Appellant’s Brief). Without saying
more, the appellants’ position is, however, soundly debunked by the
undertaking expressed in the Comprehensive and Continuing Surety
Agreements (Exhs. "W" and "X"), to the effect that the "xxx surety/ies,
jointly and severally among themselves and likewise with the principal,
hereby agree/s and bind/s himself to pay at maturity all the notes, drafts,
bills of exchange, overdrafts and other obligations which the principal may
now or may hereafter owe the creditor xxx." With the possible exception
of the fixed ceiling for the amount of loan obtainable, the surety
undertaking in the case at bar is so comprehensive as to contemplate
each and every condition, term or warranty which the principal parties
may have or may be minded to agree on. Having affixed his signature
thereto, the appellant Tan Chong Lin is expected to have, at least, read
and understood the same.
xxx
With the foregoing disquisition, the Court sees little or no reason to go

into the appellants’ remaining assignments of error, save the matter of
attorney’s fees. For want of a statement of the rationale therefore in the
body of the challenged decision, the trial court’s award of attorney’s fees
should be deleted and disallowed (Abrogar vs. Intermediate Appellate
Court, 157 SCRA 57).
WHEREFORE, the decision appealed from is MODIFIED, to delete the

trial court’s award of attorney’s fees. The rest is AFFIRMED in toto.
SO ORDERED."8
The Issues
The petition is anchored on the following assigned errors:

"1. The respondent Court erred in not holding that the proper parties
against whom this action for collection should be brought are the drawers
and indorser of the checks in question, being the real parties in interest,
and not the herein petitioners.
2. The respondent Court erred in not holding that the petitioner-

corporation is discharged from liability for failure of the private respondent
to comply with the provisions of the Negotiable Instruments Law on the
dishonor of the checks.
3. The respondent Court erred in its appreciation and interpretation of the

effect and legal consequences of the signing of the deeds of assignment
and the subsequent indorsement of the checks by Arsenio Lim Piat, Jr. in
his individual and personal capacity and without stating or indicating the
name of his supposed principal.
4. The respondent Court erred in holding that the assignment of the

checks is a loan accommodation or credit line accorded by the private
respondent to petitioner-corporation, and not a purchase and sale thereof.
5. The respondent Court erred in not holding that there was a material
alteration of the risk assumed by the petitioner-surety under his surety
agreement by the terms, conditions, warranties and obligations assumed
by the assignor Arsenio Lim Piat, Jr. under the deeds of assignment or
receivables.
6. The respondent Court erred in holding that the petitioner-corporation

impliedly admitted its liability to private respondent when the former
included the latter as one of its creditors in its petition for voluntary
insolvency, although no claim was filed and proved by the private
respondent in the insolvency court.
7. The respondent Court erred in holding the petitioners liable to private

respondent on the transactions in question."9
The issues to be resolved in this petition can be summarized into three:
1. WHETHER ARSENIO HAD AUTHORITY TO EXECUTE THE DEEDS

OF ASSIGNMENT AND THUS BIND GREAT ASIAN;

2. WHETHER GREAT ASIAN IS LIABLE TO BANCASIA UNDER THE
DEEDS OF ASSIGNMENT FOR BREACH OF CONTRACT PURSUANT
TO THE CIVIL CODE, INDEPENDENT OF THE NEGOTIABLE
INSTRUMENTS LAW;
3. WHETHER TAN CHONG LIN IS LIABLE TO GREAT ASIAN UNDER

THE SURETY AGREEMENTS.
The petition is bereft of merit.
First Issue: Authority of Arsenio to Sign the Deeds of Assignment
Great Asian asserts that Arsenio signed the Deeds of Assignment and indorsed
the checks in his personal capacity. The primordial question that must be
resolved is whether Great Asian authorized Arsenio to sign the Deeds of
Assignment. If Great Asian so authorized Arsenio, then Great Asian is bound by
the Deeds of Assignment and must honor its terms.
The Corporation Code of the Philippines vests in the board of directors the
exercise of the corporate powers of the corporation, save in those instances
where the Code requires stockholders’ approval for certain specific acts. Section
23 of the Code provides:
"SEC. 23. The Board of Directors or Trustees. Unless otherwise provided

in this Code, the corporate powers of all corporations formed under this
Code shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees x x
x."
In the ordinary course of business, a corporation can borrow funds or dispose of

assets of the corporation only on authority of the board of directors. The board of
directors normally designates one or more corporate officers to sign loan
documents or deeds of assignment for the corporation.
To secure a credit accommodation from Bancasia, the board of directors of Great

Asian adopted two board resolutions on different dates, the first on March 17,
1981, and the second on February 10, 1982. These two board resolutions, as
certified under oath by Great Asian’s Corporate Secretary Mario K. Tan, state:

First Board Resolution
"RESOLVED, that the Treasurer of the corporation, Mr. Arsenio Lim Piat,
Jr., be authorized as he is authorized to apply for and negotiate for a loan
accommodation or credit line in the amount not to exceed ONE MILLION
PESOS (P1,000,000.00), with Bancasia Finance and Investment
Corporation, and likewise to sign any and all papers, documents, and/or
promissory notes in connection with said loan accommodation or credit
line, including the power to mortgage such properties of the corporation
as may be needed to effectuate the same."10 (Emphasis supplied)
Second Board Resolution
"RESOLVED that Great Asian Sales Center Corp. obtain a discounting

line with BANCASIA FINANCE & INVESTMENT CORPORATION, at
prevailing discounting rates, in an amount not to exceed** TWO MILLION
PESOS ONLY (P2,000,000),** Philippine Currency.
RESOLVED FURTHER, that the corporation secure such other forms of

credit lines with BANCASIA FINANCE & INVESTMENT CORPORATION
in an amount not to exceed** TWO MILLION PESOS ONLY
(P2,000,000.00),** PESOS, under such terms and conditions as the
signatories may deem fit and proper.
RESOLVED FURTHER, that the following persons be authorized

individually, jointly or collectively to sign, execute and deliver any and all
instruments, documents, checks, sureties, etc. necessary or incidental to
secure any of the foregoing obligation:
(signed)
Specimen Signature
1. ARSENIO LIM PIAT, JR.
2. _______________________
3. _______________________
4. _______________________

PROVIDED FINALLY that this authority shall be valid, binding and
effective until revoked by the Board of Directors in the manner prescribed
by law, and that BANCASIA FINANCE & INVESTMENT CORPORATION
shall not be bound by any such revocation until such time as it is noticed
in writing of such revocation."11(Emphasis supplied)
The first board resolution expressly authorizes Arsenio, as Treasurer of Great

Asian, to apply for a "loan accommodation or credit line" with Bancasia for not
more than P1.0 million. Also, the first resolution explicitly authorizes Arsenio to
sign any document, paper or promissory note, including mortgage deeds over
properties of Great Asian, to secure the loan or credit line from Bancasia.
The second board resolution expressly authorizes Great Asian to secure a

"discounting line" from Bancasia for not more than P2.0 million. The second
board resolution also expressly empowers Arsenio, as the authorized signatory
of Great Asian, "to sign, execute and deliver any and all documents, checks x x x
necessary or incidental to secure" the discounting line. The second board
resolution specifically authorizes Arsenio to secure the discounting line "under
such terms and conditions as (he) x x x may deem fit and proper."
As plain as daylight, the two board resolutions clearly authorize Great Asian to
secure a loan or discounting linefrom Bancasia. The two board resolutions also
categorically designate Arsenio as the authorized signatory to sign and deliver all
the implementing documents, including checks, for Great Asian. There is no iota
of doubt whatsoever about the purpose of the two board resolutions, and about
the authority of Arsenio to act and sign for Great Asian. The second board
resolution even gave Arsenio full authority to agree with Bancasia on the terms
and conditions of the discounting line. Great Asian adopted the correct and
proper board resolutions to secure a loan or discounting line from Bancasia, and
Bancasia had a right to rely on the two board resolutions of Great Asian.
Significantly, the two board resolutions specifically refer to Bancasia as the
financing institution from whom Great Asian will secure the loan accommodation
or discounting line.
Armed with the two board resolutions, Arsenio signed the Deeds of Assignment
selling, and endorsing, the fifteen checks of Great Asian to Bancasia. On the face
of the Deeds of Assignment, the contracting parties are indisputably Great Asian
and Bancasia as the names of these entities are expressly mentioned therein as
the assignor and assignee, respectively. Great Asian claims that Arsenio signed
the Deeds of Assignment in his personal capacity because Arsenio signed above
his printed name, below which was the word "Assignor", thereby making Arsenio
the assignor. Great Asian conveniently omits to state that the first paragraph of

the Deeds expressly contains the following words: "the ASSIGNOR, Great Asian
Sales Center, a domestic corporation x x x herein represented by its Treasurer
Arsenio Lim Piat, Jr." The assignor is undoubtedly Great Asian, represented by
its Treasurer, Arsenio. The only issue to determine is whether the Deeds of
Assignment are indeed the transactions the board of directors of Great Asian
authorized Arsenio to sign under the two board resolutions.
Under the Deeds of Assignment, Great Asian sold fifteen postdated checks at a
discount, over three months, to Bancasia. The Deeds of Assignment uniformly
state that Great Asian, –
"x x x for valuable consideration received, does hereby SELL,

TRANSFER, CONVEY, and ASSIGN, unto the ASSIGNEE, BANCASIA
FINANCE & INVESTMENT CORP., a domestic corporation x x x, the
following ACCOUNTS RECEIVABLES due and payable to it, having an
aggregate face value of x x x."
The Deeds of Assignment enabled Great Asian to generate instant cash from its
fifteen checks, which were still not due and demandable then. In short, instead of
waiting for the maturity dates of the fifteen postdated checks, Great Asian sold
the checks to Bancasia at less than the total face value of the checks. In
exchange for receiving an amount less than the face value of the checks, Great
Asian obtained immediately much needed cash. Over three months, Great Asian
entered into four transactions of this nature with Bancasia, showing that Great
Asian availed of a discounting line with Bancasia.
In the financing industry, the term "discounting line" means a credit facility with a
financing company or bank, which allows a business entity to sell, on a
continuing basis, its accounts receivable at a discount.12 The term "discount"
means the sale of a receivable at less than its face value. The purpose of a
discounting line is to enable a business entity to generate instant cash out of its
receivables which are still to mature at future dates. The financing company or
bank which buys the receivables makes its profit out of the difference between
the face value of the receivable and the discounted price. Thus, Section 3 (a) of
the Financing Company Act of 1998 provides:
"Financing companies" are corporations x x x primarily organized for the

purpose of extending credit facilities to consumers and to industrial,
commercial or agricultural enterprises by discounting or factoring
commercial papers or accounts receivable, or by buying and
selling contracts, leases, chattel mortgages, or other evidences of

indebtedness, or by financial leasing of movable as well as immovable
property." (Emphasis supplied)
This definition of "financing companies" is substantially the same definition as in

the old Financing Company Act (R.A. No. 5980).13
Moreover, Section 1 (h) of the New Rules and Regulations adopted by the
Securities and Exchange Commission to implement the Financing Company Act
of 1998 states:
"Discounting" is a type of receivables financing whereby evidences of

indebtedness of a third party, such as installment contracts, promissory notes
and similar instruments, are purchased by, or assigned to, a financing company
in an amount or for a consideration less than their face value." (Emphasis
supplied)
Likewise, this definition of "discounting" is an exact reproduction of the definition

of "discounting" in the implementing rules of the old Finance Company Act.
Clearly, the discounting arrangements entered into by Arsenio under the Deeds
of Assignment were the very transactions envisioned in the two board resolutions
of Great Asian to raise funds for its business. Arsenio acted completely within the
limits of his authority under the two board resolutions. Arsenio did exactly what
the board of directors of Great Asian directed and authorized him to do.
Arsenio had all the proper and necessary authority from the board of directors of
Great Asian to sign the Deeds of Assignment and to endorse the fifteen
postdated checks. Arsenio signed the Deeds of Assignment as agent and
authorized signatory of Great Asian under an authority expressly granted by its
board of directors. The signature of Arsenio on the Deeds of Assignment is
effectively also the signature of the board of directors of Great Asian, binding on
the board of directors and on Great Asian itself. Evidently, Great Asian shows its
bad faith in disowning the Deeds of Assignment signed by its own Treasurer,
after receiving valuable consideration for the checks assigned under the Deeds.
Second Issue: Breach of Contract by Great Asian
Bancasia’s complaint against Great Asian is founded on the latter’s breach of

contract under the Deeds of Assignment. The Deeds of Assignment uniformly
stipulate14 as follows:

"If for any reason the receivables or any part thereof cannot be paid by
the obligor/s, the ASSIGNOR unconditionally and irrevocably agrees to
pay the same, assuming the liability to pay, by way of penalty three per
cent (3%) of the total amount unpaid, for the period of delay until the
same is fully paid.
In case of any litigation which the ASSIGNEE may institute to enforce the
terms of this agreement, the ASSIGNOR shall be liable for all the costs,
plus attorney’s fees equivalent to twenty-five (25%) per cent of the total
amount due. Further thereto, the ASSIGNOR agrees that any and all
actions which may be instituted relative hereto shall be filed before the
proper courts of the City of Manila, all other appropriate venues being
hereby waived.
The last Deed of Assignment15 contains the following added stipulation:
"xxx Likewise, it is hereby understood that the warranties which the

ASSIGNOR hereby made are deemed part of the consideration for this
transaction, such that any violation of any one, some, or all of said
warranties shall be deemed as deliberate misrepresentation on the part of
the ASSIGNOR. In such event, the monetary obligation herein conveyed
unto the ASSIGNEE shall be conclusively deemed defaulted, giving rise
to the immediate responsibility on the part of the ASSIGNOR to make
good said obligation, and making the ASSIGNOR liable to pay the penalty
stipulated hereinabove as if the original obligor/s of the receivables
actually defaulted. xxx"
Obviously, there is one vital suspensive condition in the Deeds of Assignment.

That is, in case the drawers fail to pay the checks on maturity, Great Asian
obligated itself to pay Bancasia the full face value of the dishonored checks,
including penalty and attorney’s fees. The failure of the drawers to pay the
checks is a suspensive condition,16 the happening of which gives rise to
Bancasia’s right to demand payment from Great Asian. This conditional
obligation of Great Asian arises from its written contracts with Bancasia as
embodied in the Deeds of Assignment. Article 1157 of the Civil Code provides
that -
"Obligations arise from:
(1) Law;

(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts."
By express provision in the Deeds of Assignment, Great Asian unconditionally

obligated itself to pay Bancasia the full value of the dishonored checks. In short,
Great Asian sold the postdated checks on with recourse basis against itself. This
is an obligation that Great Asian is bound to faithfully comply because it has the
force of law as between Great Asian and Bancasia. Article 1159 of the Civil Code
further provides that -
"Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith."
Great Asian and Bancasia agreed on this specific with recourse stipulation,
despite the fact that the receivables were negotiable instruments with the
endorsement of Arsenio. The contracting parties had the right to adopt the with
recourse stipulation which is separate and distinct from the warranties of an
endorser under the Negotiable Instruments Law. Article 1306 of the Civil Code
provides that –
"The contracting parties may establish such stipulations, clauses, terms

and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public policy."
The explicit with recourse stipulation against Great Asian effectively enlarges, by
agreement of the parties, the liability of Great Asian beyond that of a mere
endorser of a negotiable instrument. Thus, whether or not Bancasia gives notice
of dishonor to Great Asian, the latter remains liable to Bancasia because of
the with recourse stipulation which is independent of the warranties of an
endorser under the Negotiable Instruments Law.
There is nothing in the Negotiable Instruments Law or in the Financing Company

Act (old or new), that prohibits Great Asian and Bancasia parties from adopting
the with recourse stipulation uniformly found in the Deeds of Assignment. Instead
of being negotiated, a negotiable instrument may be assigned. 17 Assignment of a
negotiable instrument is actually the principal mode of conveying accounts

receivable under the Financing Company Act. Since in discounting of receivables
the assignee is subrogated as creditor of the receivable, the endorsement of the
negotiable instrument becomes necessary to enable the assignee to collect from
the drawer. This is particularly true with checks because collecting banks will not
accept checks unless endorsed by the payee. The purpose of the endorsement
is merely to facilitate collection of the proceeds of the checks.
The purpose of the endorsement is not to make the assignee finance company a
holder in due course because policy considerations militate against according
finance companies the rights of a holder in due course.18 Otherwise, consumers
who purchase appliances on installment, giving their promissory notes or checks
to the seller, will have no defense against the finance company should the
appliances later turn out to be defective. Thus, the endorsement does not
operate to make the finance company a holder in due course. For its own
protection, therefore, the finance company usually requires the assignor, in a
separate and distinct contract, to pay the finance company in the event of
dishonor of the notes or checks.
As endorsee of Great Asian, Bancasia had the option to proceed against Great
Asian under the Negotiable Instruments Law. Had it so proceeded, the
Negotiable Instruments Law would have governed Bancasia’s cause of action.
Bancasia, however, did not choose this route. Instead, Bancasia decided to sue
Great Asian for breach of contract under the Civil Code, a right that Bancasia had
under the express with recourse stipulation in the Deeds of Assignment.
The exercise by Bancasia of its option to sue for breach of contract under the
Civil Code will not leave Great Asian holding an empty bag. Great Asian, after
paying Bancasia, is subrogated back as creditor of the receivables. Great Asian
can then proceed against the drawers who issued the checks. Even if Bancasia
failed to give timely notice of dishonor, still there would be no prejudice whatever
to Great Asian. Under the Negotiable Instruments Law, notice of dishonor is not
required if the drawer has no right to expect or require the bank to honor the
check, or if the drawer has countermanded payment.19 In the instant case, all the
checks were dishonored for any of the following reasons: "account closed",
"account under garnishment", insufficiency of funds", or "payment stopped". In
the first three instances, the drawers had no right to expect or require the bank to
honor the checks, and in the last instance, the drawers had countermanded
payment.
Moreover, under common law, delay in notice of dishonor, where such notice is
required, discharges the drawer only to the extent of the loss caused by the
delay.20 This rule finds application in this jurisdiction pursuant to Section 196 of

the Negotiable Instruments Law which states, "Any case not provided for in this
Act shall be governed by the provisions of existing legislation, or in default
thereof, by the rules of the Law Merchant." Under Section 186 of the Negotiable
Instruments Law, delay in the presentment of checks discharges the drawer.
However, Section 186 refers only to delay in presentment of checks but is silent
on delay in giving notice of dishonor. Consequently, the common law or Law
Merchant can supply this gap in accordance with Section 196 of the Negotiable
Instruments Law.
One other issue raised by Great Asian, that of lack of consideration for the Deeds
of Assignment, is completely unsubstantiated. The Deeds of Assignment
uniformly provide that the fifteen postdated checks were assigned to Bancasia
"for valuable consideration." Moreover, Article 1354 of the Civil Code states that,
"Although the cause is not stated in the contract, it is presumed that it exists and
is lawful, unless the debtor proves the contrary." The record is devoid of any
showing on the part of Great Asian rebutting this presumption. On the other
hand, Bancasia’s Loan Section Manager, Cynthia Maclan, testified that Bancasia
paid Great Asian a consideration at the discount rate of less than 24% of the face
value of the postdated checks.21 Moreover, in its verified petition for voluntary
insolvency, Great Asian admitted its debt to Bancasia when it listed Bancasia as
one of its creditors, an extra-judicial admission that Bancasia proved when it
formally offered in evidence the verified petition for insolvency.22 The Insolvency
Law requires the petitioner to submit a schedule of debts that must "contain a full
and true statement of all his debts and liabilities."23 The Insolvency Law even
requires the petitioner to state in his verification that the schedule of debts
contains "a full, correct and true discovery of all my debts and liabilities x x
x."24 Great Asian cannot now claim that the listing of Bancasia as a creditor was
not an admission of its debt to Bancasia but merely an acknowledgment that
Bancasia had sent a demand letter to Great Asian.
Great Asian, moreover, claims that the assignment of the checks is not a loan
accommodation but a sale of the checks. With the sale, ownership of the checks
passed to Bancasia, which must now, according to Great Asian, sue the drawers
and indorser of the check who are the parties primarily liable on the checks.
Great Asian forgets that under the Deeds of Assignment, Great Asian expressly
undertook to pay the full value of the checks in case of dishonor. Again, we
reiterate that this obligation of Great Asian is separate and distinct from its
warranties as indorser under the Negotiable Instruments Law.
Great Asian is, however, correct in saying that the assignment of the checks is a
sale, or more properly a discounting, of the checks and not a loan
accommodation. However, it is precisely because the transaction is a sale or a

discounting of receivables, embodied in separate Deeds of Assignment, that the
relevant provisions of the Civil Code are applicable and not the Negotiable
Instruments Law.
At any rate, there is indeed a fine distinction between a discounting line and a
loan accommodation. If the accounts receivable, like postdated checks, are sold
for a consideration less than their face value, the transaction is one of
discounting, and is subject to the provisions of the Financing Company Act. The
assignee is immediately subrogated as creditor of the accounts receivable.
However, if the accounts receivable are merely used as collateral for the loan,
the transaction is only a simple loan, and the lender is not subrogated as creditor
until there is a default and the collateral is foreclosed.
In summary, Great Asian’s four contracts assigning its fifteen postdated checks
to Bancasia expressly stipulate the suspensive condition that in the event the
drawers of the checks fail to pay, Great Asian itself will pay Bancasia. Since the
common condition in the contracts had transpired, an obligation on the part of
Great Asian arose from the four contracts, and that obligation is to pay Bancasia
the full value of the checks, including the stipulated penalty and attorney’s fees.
Third Issue: The liability of surety Tan Chong Lin
Tan Chong Lin, the President of Great Asian, is being sued in his personal
capacity based on the Surety Agreements he signed wherein he solidarily held
himself liable with Great Asian for the payment of its debts to Bancasia. The
Surety Agreements contain the following common condition:
"Upon failure of the Principal to pay at maturity, with or without demand,

any of the obligations above mentioned, or in case of the Principal’s
failure promptly to respond to any other lawful demand made by the
Creditor, its successors, administrators or assigns, both the Principal and
the Surety/ies shall be considered in default and the Surety/ies agree/s to
pay jointly and severally to the Creditor all outstanding obligations of the
Principal, whether due or not due, and whether held by the Creditor as
Principal or agent, and it is agreed that a certified statement by the
Creditor as to the amount due from the Principal shall be accepted by the
Surety/ies as correct and final for all legal intents and purposes."
Indisputably, Tan Chong Lin explicitly and unconditionally bound himself to pay
Bancasia, solidarily with Great Asian, if the drawers of the checks fail to pay on
due date. The condition on which Tan Chong Lin’s obligation hinged had

happened. As surety, Tan Chong Lin automatically became liable for the entire
obligation to the same extent as Great Asian.
Tan Chong Lin, however, contends that the following warranties in the Deeds of
Assignment enlarge or increase his risks under the Surety Agreements:
"The ASSIGNOR warrants:
1. the soundness of the receivables herein assigned;
2. that said receivables are duly noted in its books and are supported by
appropriate documents;
3. that said receivables are genuine, valid and subsisting;
4. that said receivables represent bona fide sale of goods, merchandise,

and/or services rendered in the ordinary course of its business
transactions;
5. that the obligors of the receivables herein assigned are solvent;
6. that it has valid and genuine title to and indefeasible right to dispose of
said accounts;
7. that said receivables are free from all liens and encumbrances;
8. that the said receivables are freely and legally transferable, and that
the obligor/s therein will not interpose any objection to this assignment,
and has in fact given his/their consent hereto."
Tan Chong Lin maintains that these warranties in the Deeds of Assignment
materially altered his obligations under the Surety Agreements, and therefore he
is released from any liability to Bancasia. Under Article 1215 of the Civil Code,
what releases a solidary debtor is a "novation, compensation, confusion or
remission of the debt" made by the creditor with any of the solidary debtors.
These warranties, however, are the usual warranties made by one who discounts
receivables with a financing company or bank. The Surety Agreements, written
on the letter head of "Bancasia Finance & Investment Corporation," uniformly
state that "Great Asian Sales Center x x x has obtained and/or desires to obtain
loans, overdrafts, discounts and/or other forms of credits from" Bancasia. Tan
Chong Lin was clearly on notice that he was holding himself as surety of Great

Asian which was discounting postdated checks issued by its buyers of goods and
merchandise. Moreover, Tan Chong Lin, as President of Great Asian, cannot
feign ignorance of Great Asian’s business activities or discounting transactions
with Bancasia. Thus, the warranties do not increase or enlarge the risks of Tan
Chong Lin under the Surety Agreements. There is, moreover, no novation of the
debt of Great Asian that would warrant release of the surety.
In any event, the provisions of the Surety Agreements are broad enough to
include the obligations of Great Asian to Bancasia under the warranties. The first
Surety Agreement states that:
"x x x herein Surety/ies, jointly and severally among themselves and

likewise with principal, hereby agree/s and bind/s himself/themselves to
pay at maturity all the notes, drafts, bills of exchange, overdraft and other
obligations of every kind which the Principal may now or may hereafter
owe the Creditor, including extensions or renewals thereof in the sum ***
ONE MILLION ONLY*** PESOS (P1,000,000.00), Philippine Currency,
plus stipulated interest thereon at the rate of sixteen percent (16%) per
annum, or at such increased rate of interest which the Creditor may
charge on the Principal’s obligations or renewals or the reduced amount
thereof, plus all the costs and expenses which the Creditor may incur in
connection therewith.
xxx
Upon failure of the Principal to pay at maturity, with or without demand,

any of the obligations above mentioned, or in case of the Principal’s
failure promptly to respond to any other lawful demand made by the
Creditor, its successors, administrators or assigns, both the Principal and
the Surety/ies shall be considered in default and the Surety/ies agree/s to
pay jointly and severally to the Creditor all outstanding obligations of the
Principal, whether due or not due, and whether held by the Creditor as
Principal or agent, and it is agreed that a certified statement by the
Creditor as to the amount due from the Principal shall be accepted by the
Surety/ies as correct and final for all legal intents and purposes.
(Emphasis supplied)
The second Surety Agreement contains the following provisions:
"x x x herein Surety/ies, jointly and severally among themselves and

likewise with PRINCIPAL, hereby agree and bind themselves to pay at
maturity all the notes, drafts, bills of exchange, overdraft and other

obligations of every kind which the PRINCIPAL may now or may hereafter
owe the Creditor, including extensions and/or renewals thereof in the
principal sum not to exceed TWO MILLION (P2,000,000.00) PESOS,
Philippine Currency, plus stipulated interest thereon, or such increased or
decreased rate of interest which the Creditor may charge on the principal
sum outstanding pursuant to the rules and regulations which the
Monetary Board may from time to time promulgate, together with all the
cost and expenses which the CREDITOR may incur in connection
therewith.
If for any reason whatsoever, the PRINCIPAL should fail to pay at

maturity any of the obligations or amounts due to the CREDITOR, or if for
any reason whatsoever the PRINCIPAL fails to promptly respond to and
comply with any other lawful demand made by the CREDITOR, or if for
any reason whatsoever any obligation of the PRINCIPAL in favor of any
person or entity should be considered as defaulted, then both the
PRINCIPAL and the SURETY/IES shall be considered in default under
the terms of this Agreement. Pursuant thereto, the SURETY/IES agree/s
to pay jointly and severally with the PRINCIPAL, all outstanding
obligations of the CREDITOR, whether due or not due, and whether
owing to the PRINCIPAL in its personal capacity or as agent of any
person, endorsee, assignee or transferee. x x x. (Emphasis supplied)
Article 1207 of the Civil Code provides, "xxx There is a solidary liability only when
the obligation expressly so states, or when the law or nature of the obligation
requires solidarity." The stipulations in the Surety Agreements undeniably
mandate the solidary liability of Tan Chong Lin with Great Asian. Moreover, the
stipulations in the Surety Agreements are sufficiently broad, expressly
encompassing "all the notes, drafts, bills of exchange, overdraft and other
obligations of every kind which the PRINCIPAL may now or may hereafter owe
the Creditor". Consequently, Tan Chong Lin must be held solidarily liable with
Great Asian for the nonpayment of the fifteen dishonored checks, including
penalty and attorney’s fees in accordance with the Deeds of Assignment.
The Deeds of Assignment stipulate that in case of suit Great Asian shall pay
attorney’s fees equivalent to 25% of the outstanding debt. The award of
attorney’s fees in the instant case is justified,25 not only because of such
stipulation, but also because Great Asian and Tan Chong Lin acted in gross and
evident bad faith in refusing to pay Bancasia’s plainly valid, just and demandable
claim. We deem it just and equitable that the stipulated attorney’s fee should be
awarded to Bancasia.

The Deeds of Assignment also provide for a 3% penalty on the total amount due
in case of failure to pay, but the Deeds are silent on whether this penalty is a
running monthly or annual penalty. Thus, the 3% penalty can only be considered
as a one-time penalty. Moreover, the Deeds of Assignment do not provide for
interest if Great Asian fails to pay. We can only award Bancasia legal interest at
12% interest per annum, and only from the time it filed the complaint because the
records do not show that Bancasia made a written demand on Great Asian prior
to filing the complaint.26 Bancasia made an extrajudicial demand on Tan Chong
Lin, the surety, but not on the principal debtor, Great Asian.
WHEREFORE, the assailed Decision of the Court of Appeals in CA-G.R. CV No.

20167 is AFFIRMED with MODIFICATION. Petitioners are ordered to pay,
solidarily, private respondent the following amounts: (a) P1,042,005.00 plus 3%
penalty thereon, (b) interest on the total outstanding amount in item (a) at the
legal rate of 12% per annum from the filing of the complaint until the same is fully
paid, (c) attorney’s fees equivalent to 25% of the total amount in item (a),
including interest at 12% per annum on the outstanding amount of the attorney’s
fees from the finality of this judgment until the same is fully paid, and (c) costs of
suit.
SO ORDERED.

FIRST DIVISION
G.R. No. 154469 December 6, 2006
METROPOLITAN BANK AND TRUST COMPANY, petitioners,

vs.
RENATO D. CABILZO, respondent.
DECISION
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari, filed by petitioner

Metropolitan Bank and Trust Company (Metrobank) seeking to reverse and set
aside the Decision1 of the Court of Appeals dated 8 March 2002 and its
Resolution dated 26 July 2002 affirming the Decision of the Regional Trial Court
(RTC) of Manila, Branch 13 dated 4 September 1998. The dispositive portion of
the Court of Appeals Decision reads:
WHEREFORE, the assailed decision dated September 4, 1998 is

AFFIRMED with modifications (sic) that the awards for exemplary
damages and attorney’s fees are hereby deleted.
Petitioner Metrobank is a banking institution duly organized and existing as such

under Philippine laws.2
Respondent Renato D. Cabilzo (Cabilzo) was one of Metrobank’s clients who

maintained a current account with Metrobank Pasong Tamo Branch.3
On 12 November 1994, Cabilzo issued a Metrobank Check No. 985988, payable

to "CASH" and postdated on 24 November 1994 in the amount of One Thousand
Pesos (P1,000.00). The check was drawn against Cabilzo’s Account with
Metrobank Pasong Tamo Branch under Current Account No. 618044873-3 and
was paid by Cabilzo to a certain Mr. Marquez, as his sales commission.4
Subsequently, the check was presented to Westmont Bank for payment.

Westmont Bank, in turn, indorsed the check to Metrobank for appropriate
clearing. After the entries thereon were examined, including the availability of
funds and the authenticity of the signature of the drawer, Metrobank cleared the
check for encashment in accordance with the Philippine Clearing House
Corporation (PCHC) Rules.

On 16 November 1994, Cabilzo’s representative was at Metrobank Pasong
Tamo Branch to make some transaction when he was asked by a bank
personnel if Cabilzo had issued a check in the amount of P91,000.00 to which
the former replied in the negative. On the afternoon of the same date, Cabilzo
himself called Metrobank to reiterate that he did not issue a check in the amount
of P91,000.00 and requested that the questioned check be returned to him for
verification, to which Metrobank complied.5
Upon receipt of the check, Cabilzo discovered that Metrobank Check No. 985988
which he issued on 12 November 1994 in the amount of P1,000.00 was altered
to P91,000.00 and the date 24 November 1994 was changed to 14 November
1994.6
Hence, Cabilzo demanded that Metrobank re-credit the amount of P91,000.00 to

his account. Metrobank, however, refused reasoning that it has to refer the
matter first to its Legal Division for appropriate action. Repeated verbal demands
followed but Metrobank still failed to re-credit the amount of P91,000.00 to
Cabilzo’s account.7
On 30 June 1995, Cabilzo, thru counsel, finally sent a letter-demand8 to

Metrobank for the payment of P90,000.00, after deducting the original value of
the check in the amount of P1,000.00. Such written demand notwithstanding,
Metrobank still failed or refused to comply with its obligation.
Consequently, Cabilzo instituted a civil action for damages against Metrobank

before the RTC of Manila, Branch 13. In his Complaint docketed as Civil Case
No. 95-75651, Renato D. Cabilzo v. Metropolitan Bank and Trust
Company,Cabilzo prayed that in addition to his claim for reimbursement, actual
and moral damages plus costs of the suit be awarded in his favor.9
For its part, Metrobank countered that upon the receipt of the said check through
the PCHC on 14 November 1994, it examined the genuineness and the
authenticity of the drawer’s signature appearing thereon and the technical entries
on the check including the amount in figures and in words to determine if there
were alterations, erasures, superimpositions or intercalations thereon, but none
was noted. After verifying the authenticity and propriety of the aforesaid entries,
including the indorsement of the collecting bank located at the dorsal side of the
check which stated that, "all prior indorsements and lack of indorsement
guaranteed," Metrobank cleared the check.10
Anent thereto, Metrobank claimed that as a collecting bank and the last indorser,
Westmont Bank should be held liable for the value of the check. Westmont Bank

indorsed the check as the an unqualified indorser, by virtue of which it assumed
the liability of a general indorser, and thus, among others, warranted that the
instrument is genuine and in all respect what it purports to be.
In addition, Metrobank, in turn, claimed that Cabilzo was partly responsible in

leaving spaces on the check, which, made the fraudulent insertion of the amount
and figures thereon, possible. On account of his negligence in the preparation
and issuance of the check, which according to Metrobank, was the proximate
cause of the loss, Cabilzo cannot thereafter claim indemnity by virtue of the
doctrine of equitable estoppel.
Thus, Metrobank demanded from Cabilzo, for payment in the amount

of P100,000.00 which represents the cost of litigation and attorney’s fees, for
allegedly bringing a frivolous and baseless suit. 11
On 19 April 1996, Metrobank filed a Third-Party Complaint12 against Westmont

Bank on account of its unqualified indorsement stamped at the dorsal side of the
check which the former relied upon in clearing what turned out to be a materially
altered check.
Subsequently, a Motion to Dismiss13 the Third-Party Complaint was then filed by

Westmont bank because another case involving the same cause of action was
pending before a different court. The said case arose from an action for
reimbursement filed by Metrobank before the Arbitration Committee of the PCHC
against Westmont Bank, and now the subject of a Petition for Review before the
RTC of Manila, Branch 19.
In an Order14 dated 4 February 1997, the trial court granted the Motion to
Dismiss the Third-Party Complaint on the ground of litis pendentia.
On 4 September 1998, the RTC rendered a Decision15 in favor of Cabilzo and

thereby ordered Metrobank to pay the sum of P90,000.00, the amount of the
check. In stressing the fiduciary nature of the relationship between the bank and
its clients and the negligence of the drawee bank in failing to detect an apparent
alteration on the check, the trial court ordered for the payment of exemplary
damages, attorney’s fees and cost of litigation. The dispositive portion of the
Decision reads:
WHEREFORE, judgment is rendered ordering defendant Metropolitan

Bank and Trust Company to pay plaintiff Renato Cabilzo the sum
of P90,000 with legal interest of 6 percent per annum from November 16,

1994 until payment is made plus P20,000 attorney’s fees, exemplary
damages of P50,000, and costs of the suit.16
Aggrieved, Metrobank appealed the adverse decision to the Court of Appeals

reiterating its previous argument that as the last indorser, Westmont Bank shall
bear the loss occasioned by the fraudulent alteration of the check. Elaborating,
Metrobank maintained that by reason of its unqualified indorsement, Westmont
Bank warranted that the check in question is genuine, valid and subsisting and
that upon presentment the check shall be accepted according to its tenor.
Even more, Metrobank argued that in clearing the check, it was not remiss in the
performance of its duty as the drawee bank, but rather, it exercised the highest
degree of diligence in accordance with the generally accepted banking practice.
It further insisted that the entries in the check were regular and authentic and
alteration could not be determined even upon close examination.
In a Decision17 dated 8 March 2002, the Court of Appeals affirmed with

modification the Decision of the court a quo, similarly finding Metrobank liable for
the amount of the check, without prejudice, however, to the outcome of the case
between Metrobank and Westmont Bank which was pending before another
tribunal. The decretal portion of the Decision reads:
WHEREFORE, the assailed decision dated September 4, 1998 is

AFFIRMED with the modifications (sic) that the awards for exemplary
damages and attorney’s fees are hereby deleted.18
Similarly ill-fated was Metrobank’s Motion for Reconsideration which was also
denied by the appellate court in its Resolution19 issued on 26 July 2002, for lack
of merit.
Metrobank now poses before this Court this sole issue:
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN

HOLDING METROBANK, AS DRAWEE BANK, LIABLE FOR THE
ALTERATIONS ON THE SUBJECT CHECK BEARING THE AUTHENTIC
SIGNATURE OF THE DRAWER THEREOF.
We resolve to deny the petition.
An alteration is said to be material if it changes the effect of the instrument. It

means that 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.20 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:
Section 1. Form of negotiable instruments. - An instrument to be

negotiable must conform to the following requirements:
(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 determinable future time;
(e) Where the instrument is addressed to a drawee, he must be named or

otherwise indicated therein with reasonable certainty.
Also pertinent is the following provision in the Negotiable Instrument Law which
states:
Section 125. What constitutes 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 relation of the parties;
(e) The medium or currency in which payment is to be made;

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.
In the case at bar, the check was altered so that the amount was increased
from P1,000.00 to P91,000.00 and the date was changed from 24 November
1994 to 14 November 1994. Apparently, since the entries altered were among
those enumerated under Section 1 and 125, namely, the sum of money payable
and the date of the check, the instant controversy therefore squarely falls within
the purview of material alteration.
Now, having laid the premise that the present petition is a case of material
alteration, it is now necessary for us to determine the effect of a materially altered
instrument, as well as the rights and obligations of the parties thereunder. The
following provision of the Negotiable Instrument Law will shed us some light in
threshing out this issue:
Section 124. Alteration of instrument; effect of. – Where a negotiable

instrument is materially altered without the assent of all parties liable
thereon, it is avoided, except as against a party who has
himself made,authorized, and assented to the alteration and subsequent
indorsers.
But when the instrument has been materially altered and is in the hands
of a holder in due course not a party to the alteration, he may enforce the
payment thereof according to its original tenor. (Emphasis ours.)
Indubitably, Cabilzo was not the one who made nor authorized the alteration.
Neither did he assent to the alteration by his express or implied acts. There is no
showing that he failed to exercise such reasonable degree of diligence required
of a prudent man which could have otherwise prevented the loss. As correctly
ruled by the appellate court, Cabilzo was never remiss in the preparation and
issuance of the check, and there were no indicia of evidence that would prove
otherwise. Indeed, Cabilzo placed asterisks before and after the amount in words
and figures in order to forewarn the subsequent holders that nothing follows
before and after the amount indicated other than the one specified between the
asterisks.
The degree of diligence required of a reasonable man in the exercise of his tasks
and the performance of his duties has been faithfully complied with by Cabilzo. In
fact, he was wary enough that he filled with asterisks the spaces between and
after the amounts, not only those stated in words, but also those in numerical

figures, in order to prevent any fraudulent insertion, but unfortunately, the check
was still successfully altered, indorsed by the collecting bank, and cleared by the
drawee bank, and encashed by the perpetrator of the fraud, to the damage and
prejudice of Cabilzo.
Verily, Metrobank cannot lightly impute that Cabilzo was negligent and is
therefore prevented from asserting his rights under the doctrine of equitable
estoppel when the facts on record are bare of evidence to support such
conclusion. The doctrine of equitable estoppel states that when one of the two
innocent persons, each guiltless of any intentional or moral wrong, must suffer a
loss, it must be borne by the one whose erroneous conduct, either by omission or
commission, was the cause of injury.21 Metrobank’s reliance on this dictum, is
misplaced. For one, Metrobank’s representation that it is an innocent party is
flimsy and evidently, misleading. At the same time, Metrobank cannot asseverate
that Cabilzo was negligent and this negligence was the proximate cause22 of the
loss in the absence of even a scintilla proof to buttress such claim. Negligence is
not presumed but must be proven by the one who alleges it.23
Undoubtedly, Cabilzo was an innocent party in this instant controversy. He was

just an ordinary businessman who, in order to facilitate his business transactions,
entrusted his money with a bank, not knowing that the latter would yield a
substantial amount of his deposit to fraud, for which Cabilzo can never be
faulted.
We never fail to stress the remarkable significance of a banking institution to

commercial transactions, in particular, and to the country’s economy in general.
The banking system is an indispensable institution in the modern world and plays
a vital role in the economic life of every civilized nation. Whether as mere passive
entities for the safekeeping and saving of money or as active instruments of
business and commerce, banks have become an ubiquitous presence among the
people, who have come to regard them with respect and even gratitude and,
most of all, confidence.24
Thus, even the humble wage-earner does not hesitate to entrust his life's savings
to the bank of his choice, knowing that they will be safe in its custody and will
even earn some interest for him. The ordinary person, with equal faith, usually
maintains a modest checking account for security and convenience in the settling
of his monthly bills and the payment of ordinary expenses. As for a businessman
like the respondent, the bank is a trusted and active associate that can help in
the running of his affairs, not only in the form of loans when needed but more
often in the conduct of their day-to-day transactions like the issuance or
encashment of checks.25

In every case, the depositor expects the bank to treat his account with the utmost
fidelity, whether such account consists only of a few hundred pesos or of millions.
The bank must record every single transaction accurately, down to the last
centavo, and as promptly as possible. This has to be done if the account is to
reflect at any given time the amount of money the depositor can dispose of as he
sees fit, confident that the bank will deliver it as and to whomever he directs. 26
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. The appropriate degree of diligence required of a bank must be
a high degree of diligence, if not the utmost diligence.27
In the present case, it is obvious that Metrobank was remiss in that duty and
violated that relationship. As observed by the Court of Appeals, there are
material alterations on the check that are visible to the naked eye. Thus:
x x x The number "1" in the date is clearly imposed on a white figure in

the shape of the number "2". The appellant’s employees who examined
the said check should have likewise been put on guard as to why at the
end of the amount in words, i.e., after the word "ONLY", there are 4
asterisks, while at the beginning of the line or before said phrase, there is
none, even as 4 asterisks have been placed before and after the word
"CASH" in the space for payee. In addition, the 4 asterisks before the
words "ONE THOUSAND PESOS ONLY" have noticeably been erased
with typing correction paper, leaving white marks, over which the word
"NINETY" was superimposed. The same can be said of the numeral "9" in
the amount "91,000", which is superimposed over a whitish mark,
obviously an erasure, in lieu of the asterisk which was deleted to insert
the said figure. The appellant’s employees should have again noticed why
only 2 asterisks were placed before the amount in figures, while 3
asterisks were placed after such amount. The word "NINETY" is also
typed differently and with a lighter ink, when compared with the words
"ONE THOUSAND PESOS ONLY." The letters of the word "NINETY" are
likewise a little bigger when compared with the letters of the words "ONE
THOUSAND PESOS ONLY".28
Surprisingly, however, Metrobank failed to detect the above alterations which

could not escape the attention of even an ordinary person. This negligence was
exacerbated by the fact that, as found by the trial court, the check in question
was examined by the cash custodian whose functions do not include the
examinations of checks indorsed for payment against drawer’s

accounts.29 Obviously, the employee allowed by Metrobank to examine the check
was not verse and competent to handle such duty. These factual findings of the
trial court is conclusive upon this court especially when such findings was
affirmed the appellate court.30
Apropos thereto, we need to reiterate that by the very nature of their work the
degree of responsibility, care and trustworthiness expected of their employees
and officials is far better than those of ordinary clerks and employees. Banks are
expected to exercise the highest degree of diligence in the selection and
supervision of their employees.31
In addition, the bank on which the check is drawn, known as the drawee bank, is
under strict liability to pay to the order of the payee in accordance with the
drawer’s instructions as reflected on the face and by the terms of the check.
Payment made under materially altered instrument is not payment done in
accordance with the instruction of the drawer.
When the drawee bank pays a materially altered check, it violates the terms of
the check, as well as its duty to charge its client’s account only for bona fide
disbursements he had made. Since the drawee bank, in the instant case, did not
pay according to the original tenor of the instrument, as directed by the drawer,
then it has no right to claim reimbursement from the drawer, much less, the right
to deduct the erroneous payment it made from the drawer’s account which it was
expected to treat with utmost fidelity.
Metrobank vigorously asserts that the entries in the check were carefully
examined: The date of the instrument, the amount in words and figures, as well
as the drawer’s signature, which after verification, were found to be proper and
authentic and was thus cleared. We are not persuaded. Metrobank’s negligence
consisted in the omission of that degree of diligence required of a bank owing to
the fiduciary nature of its relationship with its client. Article 1173 of the Civil Code
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 circumstances of the persons, of the time and of the
place. x x x.
Beyond question, Metrobank failed to comply with the degree required by the
nature of its business as provided by law and jurisprudence. If indeed it was not
remiss in its obligation, then it would be inconceivable for it not to detect an
evident alteration considering its vast knowledge and technical expertise in the

intricacies of the banking business. This Court is not completely unaware of
banks’ practices of employing devices and techniques in order to detect
forgeries, insertions, intercalations, superimpositions and alterations in checks
and other negotiable instruments so as to safeguard their authenticity and
negotiability. Metrobank cannot now feign ignorance nor claim diligence; neither
can it point its finger at the collecting bank, in order to evade liability.
Metrobank argues that Westmont Bank, as the collecting bank and the last
indorser, shall bear the loss. Without ruling on the matter between the drawee
bank and the collecting bank, which is already under the jurisdiction of another
tribunal, we find that Metrobank cannot rely on such indorsement, in clearing the
questioned check. The corollary liability of such indorsement, if any, is separate
and independent from the liability of Metrobank to Cabilzo.
The reliance made by Metrobank on Westmont Bank’s indorsement is clearly

inconsistent, if not totally offensive to the dictum that being impressed with public
interest, banks should exercise the highest degree of diligence, if not utmost
diligence in dealing with the accounts of its own clients. It owes the highest
degree fidelity to its clients and should not therefore lightly rely on the judgment
of other banks on occasions where its clients money were involve, no matter how
small or substantial the amount at stake.
Metrobank’s contention that it relied on the strength of collecting bank’s

indorsement may be merely a lame excuse to evade liability, or may be indeed
an actual banking practice. In either case, such act constitutes a deplorable
banking practice and could not be allowed by this Court bearing in mind that the
confidence of public in general is of paramount importance in banking business.
What is even more deplorable is that, having been informed of the alteration,
Metrobank did not immediately re-credit the amount that was erroneously debited
from Cabilzo’s account but permitted a full blown litigation to push through, to the
prejudice of its client. Anyway, Metrobank is not left with no recourse for it can
still run after the one who made the alteration or with the collecting bank, which it
had already done. It bears repeating that the records are bare of evidence to
prove that Cabilzo was negligent. We find no justifiable reason therefore why
Metrobank did not immediately reimburse his account. Such ineptness comes
within the concept of wanton manner contemplated under the Civil Code which
warrants the imposition of exemplary damages, "by way of example or correction
for the public good," in the words of the law. It is expected that this ruling will
serve as a stern warning in order to deter the repetition of similar acts of
negligence, lest the confidence of the public in the banking system be further
eroded. 32

WHEREFORE, premises considered, the instant Petition is DENIED. The
Decision dated 8 March 2002 and the Resolution dated 26 July 2002 of the Court
of Appeals are AFFIRMED with modification that exemplary damages in the
amount of P50,000.00 be awarded. Costs against the petitioner.
SO ORDERED.

THIRD DIVISION
G.R. No. 129910 September 5, 2006
THE INTERNATIONAL CORPORATE BANK, INC., petitioner,

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

respondent which petitioner accepted for deposit on various dates. The checks
are as follows:
Check Number Date Payee Amount

7-3694621-4 7-20-81 Trade Factors, Inc. P 97,500.00
7-3694609-6 7-27-81 Romero D. Palmares 98,500.50
7-3666224-4 8-03-81 Trade Factors, Inc. 99,800.00
7-3528348-4 8-07-81 Trade Factors, Inc. 98,600.00
7-3666225-5 8-10-81 Antonio Lisan 98,900.00
7-3688945-6 8-10-81 Antonio Lisan 97,700.00
7-4535674-1 8-21-81 Golden City Trading 95,300.00
7-4535675-2 8-21-81 Red Arrow Trading 96,400.00

7-4535699-5 8-24-81 Antonio Lisan 94,200.00
7-4535700-6 8-24-81 Antonio Lisan 95,100.00
7-4697902-2 9-18-81 Ace Enterprises, Inc. 96,000.00
7-4697925-6 9-18-81 Golden City Trading 93,030.00
7-4697011-6 10-02-81 Wintrade Marketing 90,960.00
7-4697909-4 10-02-81 ABC Trading, Inc. 99,300.00
7-4697922-3 10-05-81 Golden Enterprises 96,630.00
The checks were deposited on the following dates for the following accounts:
Check Number Date Deposited Account Deposited

7-3694621-4 7-23-81 CA 0060 02360 3
7-3694609-6 7-28-81 CA 0060 02360 3
7-3666224-4 8-4-81 CA 0060 02360 3
7-3528348-4 8-11-81 CA 0060 02360 3
7-3666225-5 8-11-81 SA 0061 32331 7
7-3688945-6 8-17-81 CA 0060 30982 5
7-4535674-1 8-26-81 CA 0060 02360 3
7-4535675-2 8-27-81 CA 0060 02360 3
7-4535699-5 8-31-81 CA 0060 30982 5
7-4535700-6 8-24-81 SA 0061 32331 7
7-4697902-2 9-23-81 CA 0060 02360 3
7-4697925-6 9-23-81 CA 0060 30982 5
7-4697011-6 10-7-81 CA 0060 02360 3
7-4697909-4 10-7-81 CA 0060 30982 56
After 24 hours from submission of the checks to respondent for clearing,

petitioner paid the value of the checks and allowed the withdrawals of the
deposits. However, on 14 October 1981, respondent returned all the checks to
petitioner without clearing them on the ground that they were materially altered.
Thus, petitioner instituted an action for collection of sums of money against
respondent to recover the value of the checks.
The Ruling of the Trial Court
The trial court ruled that respondent is expected to use reasonable business
practices in accepting and paying the checks presented to it. Thus, respondent
cannot be faulted for the delay in clearing the checks considering the ingenuity in
which the alterations were effected. The trial court observed that there was no

attempt from petitioner to verify the status of the checks before petitioner paid the
value of the checks or allowed withdrawal of the deposits. According to the trial
court, petitioner, as collecting bank, could have inquired by telephone from
respondent, as drawee bank, about the status of the checks before paying their
value. Since the immediate cause of petitioner’s loss was the lack of caution of
its personnel, the trial court held that petitioner is not entitled to recover the value
of the checks from respondent.
The dispositive portion of the trial court’s Decision reads:
WHEREFORE, judgment is hereby rendered dismissing both the

complaint and the counterclaim. Costs shall, however be assessed
against the plaintiff.
SO ORDERED.7
Petitioner appealed the trial court’s Decision before the Court of Appeals.
The Ruling of the Court of Appeals
In its 10 October 1991 Decision,8 the Court of Appeals reversed the trial court’s
Decision. Applying Section 4(c) of Central Bank Circular No. 580, series of
1977,9 the Court of Appeals held that checks that have been materially altered
shall be returned within 24 hours after discovery of the alteration. However, the
Court of Appeals ruled that even if the drawee bank returns a check with material
alterations after discovery of the alteration, the return would not relieve the
drawee bank from any liability for its failure to return the checks within the 24-
hour clearing period. The Court of Appeals explained:
Does this mean that, as long as the drawee bank returns a check with
material alteration within 24 hour[s] after discovery of such alteration,
such return would have the effect of relieving the bank of any liability
whatsoever despite its failure to return the check within the 24- hour
clearing house rule?
We do not think so.
Obviously, such bank cannot be held liable for its failure to return the
check in question not later than the next regular clearing. However, this
Court is of the opinion and so holds that it could still be held liable if it fails
to exercise due diligence in verifying the alterations made. In other words,

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

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

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

REVERSED and the defendant-appellee Philippine National Bank is
declared liable for the value of the fifteen checks specified and
enumerated in the decision of the trial court (page 3) in the amount
of P1,447,920.00
SO ORDERED.11
Respondent filed a motion for reconsideration of the 10 October 1991 Decision.

In its 9 August 1994 Amended Decision, the Court of Appeals reversed itself and
affirmed the Decision of the trial court dismissing the complaint.
In reversing itself, the Court of Appeals held that its 10 October 1991 Decision
failed to appreciate that the rule on the return of altered checks within 24 hours
from the discovery of the alteration had been duly passed by the Central Bank
and accepted by the members of the banking system. Until the rule is repealed or
amended, the rule has to be applied.
Petitioner moved for the reconsideration of the Amended Decision. In its 16 July
1997 Resolution, the Court of Appeals denied the motion for lack of merit.
Hence, the recourse to this Court.
The Issues
Petitioner raises the following issues in its Memorandum:
1. Whether the checks were materially altered;
2. Whether respondent was negligent in failing to recognize within a

reasonable period the altered checks and in not returning the checks
within the period; and
3. Whether the motion for reconsideration filed by respondent was out of

time thus making the 10 October 1991 Decision final and executory.12

The Ruling of This Court
Filing of the Petition under both Rules 45 and 65
Respondent asserts that the petition should be dismissed outright since petitioner
availed of a wrong mode of appeal. Respondent cites Ybañez v. Court of
Appeals13 where the Court ruled that "a petition cannot be subsumed
simultaneously under Rule 45 and Rule 65 of the Rules of Court, and neither
may petitioners delegate upon the court the task of determining under which rule
the petition should fall."
The remedies of appeal and certiorari are mutually exclusive and not alternative
or successive.14 However, this Court may set aside technicality for justifiable
reasons. The petition before the Court is clearly meritorious. Further, the petition
was filed on time both under Rules 45 and 65.15 Hence, in accordance with the
liberal spirit which pervades the Rules of Court and in the interest of justice,16 we
will treat the petition as having been filed under Rule 45.
Alteration of Serial Number Not Material
The alterations in the checks were made on their serial numbers.
Sections 124 and 125 of Act No. 2031, otherwise known as the Negotiable
Instruments Law, provide:
SEC. 124. Alteration of instrument; effect of. ― Where a negotiable

instrument is materially altered without the assent of all parties liable
thereon, it is avoided, except as against a party who has himself made,
authorized, or assented to the alteration and subsequent indorsers.
But when an instrument has been materially altered and is in the hands of
a holder in due course, not a party to the alteration, he may enforce
payment thereof according to its original tenor.
SEC. 125. What constitutes a material alteration. ― Any alteration which

changes:
(a) The date;
(b) The sum payable, either for principal or interest;

(c) The time or place of payment;
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
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.
The question on whether an alteration of the serial number of a check is a

material alteration under the Negotiable Instruments Law is already a settled
matter. In Philippine National Bank v. Court of Appeals, this Court ruled that the
alteration on the serial number of a check is not a material alteration. Thus:
An alteration is said to be material if it alters the effect of the instrument. It

means an unauthorized change in an instrument that purports to modify in
any respect the obligation of a party or an unauthorized addition of words
or numbers or other change to an incomplete instrument relating to the
obligation of a party. In other words, a material alteration is one which
changes the items which are required to be stated under Section 1 of the
Negotiable Instrument[s] Law.
Section 1 of the Negotiable Instruments Law provides:
Section 1. ― Form of negotiable instruments. An instrument to be

negotiable must conform to the following requirements:
(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;
(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.
xxxx
The case at the bench is unique in the sense that what was altered is the
serial number of the check in question, an item which, it can readily be
observed, is not an essential requisite for negotiability under Section 1 of
the Negotiable Instruments Law. The aforementioned alteration did not
change the relations between the parties. The name of the drawer and
the drawee were not altered. The intended payee was the same. The sum
of money due to the payee remained the same. x x x
xxxx
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. x x x
xxxx
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.17
Likewise, in the present case the alterations of the serial numbers do not
constitute material alterations on the checks.
Incidentally, we agree with the petitioner’s observation that the check in

the PNB case appears to belong to the same batch of checks as in the present
case. The check in the PNB case was also issued by the Ministry of Education
and Culture. It was also drawn against PNB, respondent in this case. The serial
number of the check in the PNB case is 7-3666-223-3 and it was issued on 7
August 1981.

Timeliness of Filing of Respondent’s Motion for Reconsideration
Respondent filed its motion for reconsideration of the 10 October 1991 Decision
on 6 November 1991. Respondent’s motion for reconsideration states that it
received a copy of the 10 October 1991 Decision on 22 October 1991. 18 Thus, it
appears that the motion for reconsideration was filed on time. However, the
Registry Return Receipt shows that counsel for respondent or his agent received
a copy of the 10 October 1991 Decision on 16 October 1991,19 not on 22 October
1991 as respondent claimed. Hence, the Court of Appeals is correct when it
noted that the motion for reconsideration was filed late. Despite its late filing, the
Court of Appeals resolved to admit the motion for reconsideration "in the interest
of substantial justice."20
There are instances when rules of procedure are relaxed in the interest of justice.
However, in this case, respondent did not proffer any explanation for the late
filing of the motion for reconsideration. Instead, there was a deliberate attempt to
deceive the Court of Appeals by claiming that the copy of the 10 October 1991
Decision was received on 22 October 1991 instead of on 16 October 1991. We
find no justification for the posture taken by the Court of Appeals in admitting the
motion for reconsideration. Thus, the late filing of the motion for reconsideration
rendered the 10 October 1991 Decision final and executory.
The 24-Hour Clearing Time
The Court will not rule on the proper application of Central Bank Circular No. 580
in this case. Since there were no material alterations on the checks, respondent
as drawee bank has no right to dishonor them and return them to petitioner, the
collecting bank.21 Thus, respondent is liable to petitioner for the value of the
checks, with legal interest from the time of filing of the complaint on 16 March
1982 until full payment.22 Further, considering that respondent’s motion for
reconsideration was filed late, the 10 October 1991 Decision, which held
respondent liable for the value of the checks amounting to P1,447,920, had
become final and executory.
WHEREFORE, we SET ASIDE the 9 August 1994 Amended Decision and the 16
July 1997 Resolution of the Court of Appeals. We rule that respondent Philippine
National Bank is liable to petitioner International Corporate Bank, Inc. for the
value of the checks amounting to P1,447,920, with legal interest from 16 March
1982 until full payment. Costs against respondent.
SO ORDERED.


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Negotiable Instruments Law Cases

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FIRST DIVISION

G.R. No. 154127 December 8, 2003

Novation cannot be presumed. It must be clearly shown either by the express

The antecedents of the case are narrated by the CA as follows:

Negotiable Instruments Law Page 1

"Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he

"[Respondent] tendered a reply to [Petitioner] Garcia’s answer, thereunder

Negotiable Instruments Law Page 2

"Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in default and

"WHEREFORE, premises considered, judgment on the pleadings is hereby

‘1) ₱400,000.00 representing the principal amount plus 5% interest

‘2) ₱100,000.00 as attorney’s fees plus appearance fee of ₱2,000.00 for

‘3) Cost of this suit.’"6

Ruling of the Court of Appeals

Negotiable Instruments Law Page 3

As to petitioner, the CA treated his case as a summary judgment, because his

Hence, this Petition.7

Petitioner submits the following issues for our consideration:

a) Issuance by x x x de Jesus of a check in payment of the full amount of

b) Acceptance of the check by the x x x respondent x x x which resulted

c) x x x de Jesus having paid interests on the loan in the total amount of

Negotiable Instruments Law Page 4

Whether or not judgment on the pleadings or summary judgment was properly

The Court’s Ruling

The Petition has no merit.

Negotiable Instruments Law Page 5

We now come to the main issue of whether novation took place.

Novation is a mode of extinguishing an obligation by changing its objects or

Novation may also be extinctive or modificatory. It is extinctive when an old

1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.

Negotiable Instruments Law Page 6

4) There must be a valid new contract.15

Neither could the payment of interests -- which, in petitioner’s view, also

Negotiable Instruments Law Page 7

It must be noted that in a solidary obligation, the creditor is entitled to demand

Petitioner avers that he signed the promissory note merely as an accommodation

This reasoning is misplaced, because the note herein is not a negotiable

Negotiable Instruments Law Page 8

Propriety of Summary Judgment

Negotiable Instruments Law Page 9

"Although Garcia’s [A]nswer tendered some issues, by way of affirmative

Negotiable Instruments Law Page 10

WHEREFORE, this Petition is hereby DENIED and the assailed Decision

Negotiable Instruments Law Page 11

G.R. No. 105836 March 7, 1994

SPOUSES GEORGE MORAN and LIBRADA P. MORAN, petitioners,

xxx xxx xxx

1. The transfer may be effected on the day following the

Negotiable Instruments Law Page 12

3. This is merely an accommodation on our part and we have the

xxx xxx xxx

On December 12, 1983, petitioners, through Librada Moran, drew a check

On December 14, 1983, Petrophil Corporation deposited the two aforementioned

Negotiable Instruments Law Page 13

Negotiable Instruments Law Page 14

Negotiable Instruments Law Page 15

As explained by respondent court in its decision, Gerard E. Rionisto, head of the

Q: Let me again re-phase the question. Most of

A: So these checks will now be presented by PNB

Considering the clearing process adopted, as explained in the aforequoted

Negotiable Instruments Law Page 16

Petitioners argue that public respondent, by relying heavily on Rionisto's