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Petitioner then requested the respondent bank to credit back and restore

RAMON K. ILUSORIO, petitioner, vs. HON. COURT OF APPEALS, and to its account the value of the checks which were wrongfully encashed but
THE MANILA BANKING CORPORATION,respondents. respondent bank refused. Hence, petitioner filed the instant case.[6]
QUISUMBING, J.: At the trial, petitioner testified on his own behalf, attesting to the truth of
the circumstances as narrated above, and how he discovered the alleged
The facts as summarized by the Court of Appeals are as follows: forgeries. Several employees of Manila Bank were also called to the witness
stand as hostile witnesses. They testified that it is the banks standard
Petitioner is a prominent businessman who, at the time material to this
operating procedure that whenever a check is presented for encashment or
case, was the Managing Director of Multinational Investment Bancorporation
clearing, the signature on the check is first verified against the specimen
and the Chairman and/or President of several other corporations. He was a
signature cards on file with the bank.
depositor in good standing of respondent bank, the Manila Banking
Corporation, under current Checking Account No. 06-09037-0. As he was then Manila Bank also sought the expertise of the National Bureau of
running about 20 corporations, and was going out of the country a number of Investigation (NBI) in determining the genuineness of the signatures appearing
times, petitioner entrusted to his secretary, Katherine[2] E. Eugenio, his credit on the checks. However, in a letter dated March 25, 1987, the NBI informed
cards and his checkbook with blank checks. It was also Eugenio who verified the trial court that they could not conduct the desired examination for the
and reconciled the statements of said checking account.[3] reason that the standard specimens submitted were not sufficient for purposes
of rendering a definitive opinion. The NBI then suggested that petitioner be
Between the dates September 5, 1980 and January 23, 1981, Eugenio
asked to submit seven (7) or more additional standard signatures executed
was able to encash and deposit to her personal account about seventeen (17)
before or about, and immediately after the dates of the questioned
checks drawn against the account of the petitioner at the respondent bank,
checks. Petitioner, however, failed to comply with this request.
with an aggregate amount of P119,634.34. Petitioner did not bother to check
his statement of account until a business partner apprised him that he saw After evaluating the evidence on both sides, the court a quo rendered
Eugenio use his credit cards. Petitioner fired Eugenio immediately, and judgment on May 12, 1994 with the following dispositive portion:
instituted a criminal action against her for estafa thru falsification before the
Office of the Provincial Fiscal of Rizal. Private respondent, through an affidavit WHEREFORE, finding no sufficient basis for plaintiff's cause herein against
executed by its employee, Mr. Dante Razon, also lodged a complaint defendant bank, in the light of the foregoing considerations and established
for estafa thru falsification of commercial documents against Eugenio on the facts, this case would have to be, as it is hereby DISMISSED.
basis of petitioners statement that his signatures in the checks were Defendants counterclaim is likewise DISMISSED for lack of sufficient basis.
forged.[4] Mr. Razons affidavit states: SO ORDERED.[7]

That I have examined and scrutinized the following checks in accordance Aggrieved, petitioner elevated the case to the Court of Appeals by way of
with prescribed verification procedures with utmost care and diligence by a petition for review but without success. The appellate court held that
comparing the signatures affixed thereat against the specimen signatures of petitioners own negligence was the proximate cause of his loss. The appellate
Mr. Ramon K. Ilusorio which we have on file at our said office on such dates, court disposed as follows:

xxx WHEREFORE, the judgment appealed from is AFFIRMED. Costs against the
That the aforementioned checks were among those issued by Manilabank in SO ORDERED.[8]
favor of its client MR. RAMON K. ILUSORIO,
That the same were personally encashed by KATHERINE E. ESTEBAN, an Before us, petitioner ascribes the following errors to the Court of Appeals:
verifier when she personally encashed the above-mentioned checks at our PETITIONER IN THE CHECK BECAUSE THE RESPONDENT FILED
his signature appearing on the checks further alleged to have not authorized USING THE AFFIDAVIT OF PETITIONER STATING THAT HIS
the issuance and encashment of the same.[5]
SIGNATURES WERE FORGED AS PART OF THE AFFIDAVIT- burden to prove forgery was upon the plaintiff, which burden he failed to
COMPLAINT.[9] discharge. Aside from his own testimony, the appellant presented no other
B. THE COURT OF APPEALS ERRED IN NOT APPLYING SEC. 23, evidence to prove the fact of forgery. He did not even submit his own
NEGOTIABLE INSTRUMENTS LAW.[10] specimen signatures, taken on or about the date of the questioned checks,
for examination and comparison with those of the subject checks. On the
C. THE COURT OF APPEALS ERRED IN NOT HOLDING THE BURDEN other hand, the appellee presented specimen signature cards of the
OF PROOF IS WITH THE RESPONDENT BANK TO PROVE THE DUE appellant, taken at various years, namely, in 1976, 1979 and 1981 (Exhibits
1, 2, 3 and 7), showing variances in the appellants unquestioned
SUPERVISION OF ITS EMPLOYEES.[11] signatures. The evidence further shows that the appellee, as soon as it was
informed by the appellant about his questioned signatures, sought to borrow
D. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT the questioned checks from the appellant for purposes of analysis and
RESPONDENT BANK SHOULD BEAR THE LOSS, AND SHOULD BE examination (Exhibit 9), but the same was denied by the appellant. It was
MADE TO PAY PETITIONER, WITH RECOURSE AGAINST also the former which sought the assistance of the NBI for an expert analysis
of the signatures on the questioned checks, but the same was unsuccessful
Essentially the issues in this case are: (1) whether or not petitioner has a for lack of sufficient specimen signatures.[15]
cause of action against private respondent; and (2) whether or not private Moreover, petitioners contention that Manila Bank was remiss in the
respondent, in filing an estafa case against petitioners secretary, is barred exercise of its duty as drawee lacks factual basis. Consistently, the CA and
from raising the defense that the fact of forgery was not established. the RTC found that Manila Bank employees exercised due diligence in cashing
Petitioner contends that Manila Bank is liable for damages for its the checks. The banks employees in the present case did not have a hint as
negligence in failing to detect the discrepant checks. He adds that as a general to Eugenios modus operandi because she was a regular customer of the bank,
rule a bank which has obtained possession of a check upon an unauthorized having been designated by petitioner himself to transact in his
or forged endorsement of the payees signature and which collects the amount behalf. According to the appellate court, the employees of the bank exercised
of the check from the drawee is liable for the proceeds thereof to the due diligence in the performance of their duties. Thus, it found that:
payee. Petitioner invokes the doctrine of estoppel, saying that having itself The evidence on both sides indicates that TMBCs employees exercised due
instituted a forgery case against Eugenio, Manila Bank is now estopped from diligence before encashing the checks. Its verifiers first verified the drawers
asserting that the fact of forgery was never proven. signatures thereon as against his specimen signature cards, and when in
For its part, Manila Bank contends that respondent appellate court did not doubt, the verifier went further, such as by referring to a more experienced
depart from the accepted and usual course of judicial proceedings, hence verifier for further verification. In some instances the verifier made a
there is no reason for the reversal of its ruling. Manila Bank additionally points confirmation by calling the depositor by phone. It is only after taking such
out that Section 23[13] of the Negotiable Instruments Law is inapplicable, precautionary measures that the subject checks were given to the teller for
considering that the fact of forgery was never proven. Lastly, the bank negates payment.
petitioners claim of estoppel.[14] Of course it is possible that the verifiers of TMBC might have made a mistake
in failing to detect any forgery -- if indeed there was. However, a mistake is
On the first issue, we find that petitioner has no cause of action against not equivalent to negligence if they were honest mistakes. In the instant
Manila Bank. To be entitled to damages, petitioner has the burden of proving case, we believe and so hold that if there were mistakes, the same were not
negligence on the part of the bank for failure to detect the discrepancy in the deliberate, since the bank took all the precautions.[16]
signatures on the checks. It is incumbent upon petitioner to establish the fact
of forgery, i.e., by submitting his specimen signatures and comparing them As borne by the records, it was petitioner, not the bank, who was
with those on the questioned checks. Curiously though, petitioner failed to negligent. Negligence is the omission to do something which a reasonable
submit additional specimen signatures as requested by the National Bureau of man, guided by those considerations which ordinarily regulate the conduct of
Investigation from which to draw a conclusive finding regarding forgery. The human affairs, would do, or the doing of something which a prudent and
Court of Appeals found that petitioner, by his own inaction, was precluded from reasonable man would do.[17] In the present case, it appears that petitioner
setting up forgery. Said the appellate court: accorded his secretary unusual degree of trust and unrestricted access to his
credit cards, passbooks, check books, bank statements, including custody and
We cannot fault the court a quo for such declaration, considering that the possession of cancelled checks and reconciliation of accounts.Said the Court
plaintiffs evidence on the alleged forgery is not convincing enough. The of Appeals on this matter:
Moreover, the appellant had introduced his secretary to the bank for be acquired through or under such signature. However, the rule does provide
purposes of reconciliation of his account, through a letter dated July 14, 1980 for an exception, namely: unless the party against whom it is sought to
(Exhibit 8). Thus, the said secretary became a familiar figure in the enforce such right is precluded from setting up the forgery or want of
bank. What is worse, whenever the bank verifiers call the office of the authority. In the instant case, it is the exception that applies. In our view,
appellant, it is the same secretary who answers and confirms the checks. petitioner is precluded from setting up the forgery, assuming there is forgery,
The trouble is, the appellant had put so much trust and confidence in the said due to his own negligence in entrusting to his secretary his credit cards and
secretary, by entrusting not only his credit cards with her but also his checkbook including the verification of his statements of account.
checkbook with blank checks. He also entrusted to her the verification and
reconciliation of his account. Further adding to his injury was the fact that Petitioners reliance on Associated Bank vs. Court of
while the bank was sending him the monthly Statements of Accounts, he was Appeals[23] and Philippine Bank of Commerce vs. CA[24] to buttress his
not personally checking the same. His testimony did not indicate that he was contention that respondent Manila Bank as the collecting or last endorser
out of the country during the period covered by the checks. Thus, he had all generally suffers the loss because it has the duty to ascertain the genuineness
the opportunities to verify his account as well as the cancelled checks issued of all prior endorsements is misplaced. In the cited cases, the fact of forgery
thereunder -- month after month. But he did not, until his partner asked him was not in issue. In the present case, the fact of forgery was not established
whether he had entrusted his credit card to his secretary because the said with certainty. In those cited cases, the collecting banks were held to be
partner had seen her use the same. It was only then that he was minded to negligent for failing to observe precautionary measures to detect the forgery.
verify the records of his account. [18] In the case before us, both courts below uniformly found that Manila Banks
personnel diligently performed their duties, having compared the signature in
The abovecited findings are binding upon the reviewing court. We stress the checks from the specimen signatures on record and satisfied themselves
the rule that the factual findings of a trial court, especially when affirmed by the that it was petitioners.
appellate court, are binding upon us[19] and entitled to utmost respect[20] and
even finality. We find no palpable error that would warrant a reversal of the On the second issue, the fact that Manila Bank had filed a case
appellate courts assessment of facts anchored upon the evidence on record. for estafa against Eugenio would not estop it from asserting the fact that
forgery has not been clearly established. Petitioner cannot hold private
Petitioners failure to examine his bank statements appears as the respondent in estoppel for the latter is not the actual party to the criminal
proximate cause of his own damage. Proximate cause is that cause, which, in action. In a criminal action, the State is the plaintiff, for the commission of a
natural and continuous sequence, unbroken by any efficient intervening cause, felony is an offense against the State.[25] Thus, under Section 2, Rule 110 of
produces the injury, and without which the result would not have the Rules of Court the complaint or information filed in court is required to be
occurred.[21] In the instant case, the bank was not shown to be remiss in its brought in the name of the People of the Philippines. [26]
duty of sending monthly bank statements to petitioner so that any error or
discrepancy in the entries therein could be brought to the banks attention at Further, as petitioner himself stated in his petition, respondent bank filed
the earliest opportunity. But, petitioner failed to examine these bank the estafa case against Eugenio on the basis of petitioners own
statements not because he was prevented by some cause in not doing so, but affidavit,[27] but without admitting that he had any personal knowledge of the
because he did not pay sufficient attention to the matter. Had he done so, he alleged forgery. It is, therefore, easy to understand that the filing of
could have been alerted to any anomaly committed against him. In other the estafa case by respondent bank was a last ditch effort to salvage its ties
words, petitioner had sufficient opportunity to prevent or detect any with the petitioner as a valuable client, by bolstering the estafa case which he
misappropriation by his secretary had he only reviewed the status of his filed against his secretary.
accounts based on the bank statements sent to him regularly. In view of Article All told, we find no reversible error that can be ascribed to the Court of
2179 of the New Civil Code,[22] when the plaintiffs own negligence was the Appeals.
immediate and proximate cause of his injury, no recovery could be had for
damages. WHEREFORE, the instant petition is DENIED for lack of merit. The
assailed decision of the Court of Appeals dated January 28, 1999 in CA-G.R.
Petitioner further contends that under Section 23 of the Negotiable CV No. 47942, is AFFIRMED.
Instruments Law a forged check is inoperative, and that Manila Bank had no
authority to pay the forged checks. True, it is a rule that when a signature is Costs against petitioner.
forged or made without the authority of the person whose signature it purports
to be, the check is wholly inoperative. No right to retain the instrument, or to
give a discharge therefor, or to enforce payment thereof against any party, can
BANK OF AMERICA NT & SA, G.R. No. 150228 corresponding voucher and thereafter complete the entries on the
Petitioner, pre-signed checks.

It turned out that on December 16, 1988, a John Doe

-versus- Promulgated: presented to defendant-appellant bank for encashment a couple of
plaintiff-appellee corporations checks (Nos. 401116 and 401117)
July 30, 2009 with the indicated value of P110,000.00 each. It is admitted that
PHILIPPINE RACING CLUB, these 2 checks were among those presigned by plaintiff-appellee
Respondent. corporations authorized signatories.

x-----------------------------------------------------------------------------------------x The two (2) checks had similar entries with similar
infirmities and irregularities. On the space where the name of the
DECISION payee should be indicated (Pay To The Order Of) the following 2-
line entries were instead typewritten: on the upper line was the word
LEONARDO-DE CASTRO, J.: CASH while the lower line had the following typewritten words,
This is a petition for review on certiorari under Rule 45 of the Rules of Court from the the highly irregular entries on the face of the checks, defendant-
Decision[1] promulgated on July 16, 2001 by the former Second Division of the Court appellant bank, without as much as verifying and/or confirming the
of Appeals (CA), in CA-G.R. CV No. 45371 entitled Philippine Racing Club, Inc. v. legitimacy of the checks considering the substantial amount
Bank of America NT & SA, affirming the Decision[2] dated March 17, 1994 of the involved and the obvious infirmity/defect of the checks on their
Regional Trial Court (RTC) of Makati, Branch 135 in Civil Case No. 89-5650, in favor faces, encashed said checks. A verification process, even by was of
of the respondent. Likewise, the present petition assails the Resolution[3] promulgated a telephone call to PRCI office, would have taken less than ten (10)
on September 28, 2001, denying the Motion for Reconsideration of the CA Decision. minutes. But this was not done by BA. Investigation conducted by
plaintiff-appellee corporation yielded the fact that there was no
The facts of this case as narrated in the assailed CA Decision are as follows: transaction involving PRCI that call for the payment of P220,000.00
to anyone. The checks appeared to have come into the hands of an
Plaintiff-appellee PRCI is a domestic corporation which employee of PRCI (one Clarita Mesina who was subsequently
maintains several accounts with different banks in the Metro Manila criminally charged for qualified theft) who eventually completed
area. Among the accounts maintained was Current Account No. without authority the entries on the pre-signed checks. PRCIs
58891-012 with defendant-appellant BA (Paseo de Roxas demand for defendant-appellant to pay fell on deaf ears. Hence, the
Branch). The authorized joint signatories with respect to said complaint.[4]
Current Account were plaintiff-appellees President (Antonia Reyes)
and Vice President for Finance (Gregorio Reyes). After due proceedings, the trial court rendered a Decision in favor of
respondent, the dispositive portion of which reads:
On or about the 2nd week of December 1988, the President
and Vice President of plaintiff-appellee corporation were scheduled PREMISES CONSIDERED, judgment is hereby rendered
to go out of the country in connection with the corporations in favor of plaintiff and against the defendant, and the latter is
business. In order not to disrupt operations in their absence, they ordered to pay plaintiff:
pre-signed several checks relating to Current Account No. 58891- (1) The sum of Two Hundred Twenty Thousand
012. The intention was to insure continuity of plaintiff-appellees (P220,000.00) Pesos, with legal interest to be computed from date
operations by making available cash/money especially to settle of the filing of the herein complaint;
obligations that might become due. These checks were entrusted to (2) The sum of Twenty Thousand (P20,000.00) Pesos by
the accountant with instruction to make use of the same as the need way of attorneys fees;
arose. The internal arrangement was, in the event there was need to (3) The sum of Ten Thousand (P10,000.00) Pesos for
make use of the checks, the accountant would prepare the litigation expenses, and
(4) To pay the costs of suit.
Petitioner insists that it merely fulfilled its obligation under law and contract
SO ORDERED.[5] when it encashed the aforesaid checks. Invoking Sections 126[7] and 185[8] of the
Negotiable Instruments Law (NIL), petitioner claims that its duty as a drawee bank to
Petitioner appealed the aforesaid trial court Decision to the CA which, a drawer-client maintaining a checking account with it is to pay orders for checks
however, affirmed said decision in toto in its July 16, 2001 Decision. Petitioners bearing the drawer-clients genuine signatures. The genuine signatures of the clients
Motion for Reconsideration of the CA Decision was subsequently denied on duly authorized signatories affixed on the checks signify the order for payment. Thus,
September 28, 2001. pursuant to the said obligation, the drawee bank has the duty to determine whether the
signatures appearing on the check are the drawer-clients or its duly authorized
Petitioner now comes before this Court arguing that: signatories. If the signatures are genuine, the bank has the unavoidable legal and
contractual duty to pay. If the signatures are forged and falsified, the drawee bank has
I. The Court of Appeals gravely erred in holding that the the corollary, but equally unavoidable legal and contractual, duty not to pay. [9]
proximate cause of respondents loss was petitioners
encashment of the checks. Furthermore, petitioner maintains that there exists a duty on the drawee bank
to inquire from the drawer before encashing a check only when the check bears a
A. The Court of Appeals gravely erred in holding that material alteration. A material alteration is defined in Section 125 of the NIL to be one
petitioner was liable for the amount of the checks which changes the date, the sum payable, the time or place of payment, the number or
despite the fact that petitioner was merely fulfilling its relations of the parties, the currency in which payment is to be made or one which adds
obligation under law and contract. a place of payment where no place of payment is specified, or any other change or
B. The Court of Appeals gravely erred in holding that addition which alters the effect of the instrument in any respect. With respect to the
petitioner had a duty to verify the encashment, despite checks at issue, petitioner points out that they do not contain any material
the absence of any obligation to do so. alteration.[10] This is a fact which was affirmed by the trial court itself.[11]
C. The Court of Appeals gravely erred in not applying
Section 14 of the Negotiable Instruments Law, despite There is no dispute that the signatures appearing on the subject checks were
its clear applicability to this case; genuine signatures of the respondents authorized joint signatories; namely, Antonia
Reyes and Gregorio Reyes who were respondents President and Vice-President for
II. The Court of Appeals gravely erred in not holding that Finance, respectively. Both pre-signed the said checks since they were both scheduled
the proximate cause of respondents loss was its own to go abroad and it was apparently their practice to leave with the company accountant
grossly negligent practice of pre-signing checks without checks signed in black to answer for company obligations that might fall due during
payees and amounts and delivering these pre-signed checks the signatories absence. It is likewise admitted that neither of the subject checks
to its employees (other than their signatories). contains any material alteration or erasure.
However, on the blank space of each check reserved for the payee, the
III. The Court of Appeals gravely erred in affirming the trial following typewritten words appear: ONE HUNDRED TEN THOUSAND PESOS
courts award of attorneys fees despite the absence of any ONLY. Above the same is the typewritten word, CASH. On the blank reserved for the
applicable ground under Article 2208 of the Civil Code. amount, the same amount of One Hundred Ten Thousand Pesos was indicated with
the use of a check writer. The presence of these irregularities in each check should
IV. The Court of Appeals gravely erred in not awarding have alerted the petitioner to be cautious before proceeding to encash them which it
attorneys fees, moral and exemplary damages, and costs of did not do.
suit in favor of petitioner, who clearly deserves them.[6]
It is well-settled that banks are engaged in a business impressed with public
From the discussions of both parties in their pleadings, the key issue to be interest, and it is their duty to protect in return their many clients and depositors who
resolved in the present case is whether the proximate cause of the wrongful transact business with them. They have the obligation to treat their clients account
encashment of the checks in question was due to (a) petitioners failure to make a meticulously and with the highest degree of care, considering the fiduciary nature of
verification regarding the said checks with the respondent in view of the misplacement their relationship. The diligence required of banks, therefore, is more than that of a
of entries on the face of the checks or (b) the practice of the respondent of pre-signing good father of a family.[12]
blank checks and leaving the same with its employees.
Petitioner asserts that it was not duty-bound to verify with the respondent deposits and each client has the right to expect that every centavo he entrusts to a bank
since the amount below the typewritten word CASH, expressed in words, is the very would be handled with the same degree of care as the accounts of other
same amount indicated in figures by means of a check writer on the amount portion of clients. Perforce, we find that petitioner plainly failed to adhere to the high standard
the check. The amount stated in words is, therefore, a mere reiteration of the amount of diligence expected of it as a banking institution.
stated in figures. Petitioner emphasizes that a reiteration of the amount in words is
merely a repetition and that a repetition is not an alteration which if present and In defense of its cashier/tellers questionable action, petitioner insists that
material would have enjoined it to commence verification with respondent. [13] pursuant to Sections 14[16] and 16[17] of the NIL, it could validly presume, upon
presentation of the checks, that the party who filled up the blanks had authority and
We do not agree with petitioners myopic view and carefully crafted that a valid and intentional delivery to the party presenting the checks had taken
defense. Although not in the strict sense material alterations, the misplacement of the place. Thus, in petitioners view, the sole blame for this debacle should be shifted to
typewritten entries for the payee and the amount on the same blank and the repetition respondent for having its signatories pre-sign and deliver the subject
of the amount using a check writer were glaringly obvious irregularities on the face of checks.[18] Petitioner argues that there was indeed delivery in this case because,
the check. Clearly, someone made a mistake in filling up the checks and the repetition following American jurisprudence, the gross negligence of respondents accountant in
of the entries was possibly an attempt to rectify the mistake. Also, if the check had safekeeping the subject checks which resulted in their theft should be treated as a
been filled up by the person who customarily accomplishes the checks of respondent, voluntary delivery by the maker who is estopped from claiming non-delivery of the
it should have occurred to petitioners employees that it would be unlikely such instrument.[19]
mistakes would be made. All these circumstances should have alerted the bank to the
possibility that the holder or the person who is attempting to encash the checks did not Petitioners contention would have been correct if the subject checks were
have proper title to the checks or did not have authority to fill up and encash the correctly and properly filled out by the thief and presented to the bank in good order. In
same. As noted by the CA, petitioner could have made a simple phone call to its client that instance, there would be nothing to give notice to the bank of any infirmity in the
to clarify the irregularities and the loss to respondent due to the encashment of the title of the holder of the checks and it could validly presume that there was proper
stolen checks would have been prevented. delivery to the holder. The bank could not be faulted if it encashed the checks under
those circumstances. However, the undisputed facts plainly show that there were
In the case at bar, extraordinary diligence demands that petitioner should have circumstances that should have alerted the bank to the likelihood that the checks were
ascertained from respondent the authenticity of the subject checks or the accuracy of not properly delivered to the person who encashed the same. In all, we see no reason
the entries therein not only because of the presence of highly irregular entries on the to depart from the finding in the assailed CA Decision that the subject checks are
face of the checks but also of the decidedly unusual circumstances surrounding their properly characterized as incomplete and undelivered instruments thus making Section
encashment. Respondents witness testified that for checks in amounts greater than 15[20] of the NIL applicable in this case.
Twenty Thousand Pesos (P20,000.00) it is the companys practice to ensure that the
payee is indicated by name in the check.[14] This was not rebutted by petitioner. Indeed, However, we do agree with petitioner that respondents officers practice of
it is highly uncommon for a corporation to make out checks payable to CASH for pre-signing of blank checks should be deemed seriously negligent behavior and a
substantial amounts such as in this case. If each irregular circumstance in this case highly risky means of purportedly ensuring the efficient operation of businesses. It
were taken singly or isolated, the banks employees might have been justified in should have occurred to respondents officers and managers that the pre-signed blank
ignoring them. However, the confluence of the irregularities on the face of the checks checks could fall into the wrong hands as they did in this case where the said checks
and circumstances that depart from the usual banking practice of respondent should were stolen from the company accountant to whom the checks were entrusted.
have put petitioners employees on guard that the checks were possibly not issued by
the respondent in due course of its business. Petitioners subtle sophistry cannot Nevertheless, even if we assume that both parties were guilty of negligent
exculpate it from behavior that fell extremely short of the highest degree of care and acts that led to the loss, petitioner will still emerge as the party foremost liable in this
diligence required of it as a banking institution. case. In instances where both parties are at fault, this Court has consistently applied
the doctrine of last clear chance in order to assign liability.
Indeed, taking this with the testimony of petitioners operations manager that
in case of an irregularity on the face of the check (such as when blanks were not In Westmont Bank v. Ong,[21] we ruled:
properly filled out) the bank may or may not call the client depending on how busy
the bank is on a particular day,[15]we are even more convinced that petitioners [I]t is petitioner [bank] which had the last clear chance to stop the
safeguards to protect clients from check fraud are arbitrary and subjective. Every client fraudulent encashment of the subject checks had it exercised due
should be treated equally by a banking institution regardless of the amount of his diligence and followed the proper and regular banking procedures
in clearing checks. As we had earlier ruled, the one who had a last guarantee the non-disruption of respondents business. As testified to by petitioners
clear opportunity to avoid the impending harm but failed to do expert witness, other corporations would ordinarily have another set of authorized
so is chargeable with the consequences thereof.[22] (emphasis bank signatories who would be able to sign checks in the absence of the preferred
ours) signatories.[26] Indeed, if not for the fortunate happenstance that the thief failed to
properly fill up the subject checks, respondent would expectedly take the blame for
In the case at bar, petitioner cannot evade responsibility for the loss by the entire loss since the defense of forgery of a drawers signature(s) would be
attributing negligence on the part of respondent because, even if we concur that the unavailable to it. Considering that respondent knowingly took the risk that the pre-
latter was indeed negligent in pre-signing blank checks, the former had the last clear signed blank checks might fall into the hands of wrongdoers, it is but just that
chance to avoid the loss. To reiterate, petitioners own operations manager admitted respondent shares in the responsibility for the loss.
that they could have called up the client for verification or confirmation before
honoring the dubious checks. Verily, petitioner had the final opportunity to avert the We also cannot ignore the fact that the person who stole the pre-signed checks
injury that befell the respondent. Failing to make the necessary verification due to the subject of this case from respondents accountant turned out to be another employee,
volume of banking transactions on that particular day is a flimsy and unacceptable purportedly a clerk in respondents accounting department. As the employer of the
excuse, considering that the banking business is so impressed with public interest thief, respondent supposedly had control and supervision over its own employee. This
where the trust and confidence of the public in general is of paramount importance gives the Court more reason to allocate part of the loss to respondent.
such that the appropriate standard of diligence must be a high degree of diligence, if
not the utmost diligence.[23] Petitioners negligence has been undoubtedly established Following established jurisprudential precedents,[27] we believe the allocation
and, thus, pursuant to Art. 1170 of the NCC,[24] it must suffer the consequence of said of sixty percent (60%) of the actual damages involved in this case (represented by the
negligence. amount of the checks with legal interest) to petitioner is proper under the
premises. Respondent should, in light of its contributory negligence, bear forty percent
In the interest of fairness, however, we believe it is proper to consider respondents (40%) of its own loss.
own negligence to mitigate petitioners liability. Article 2179 of the Civil Code
provides: Finally, we find that the awards of attorneys fees and litigation expenses in
favor of respondent are not justified under the circumstances and, thus, must be
Art. 2179. When the plaintiffs own negligence was the immediate deleted. The power of the court to award attorneys fees and litigation expenses under
and proximate cause of his injury, he cannot recover damages. But Article 2208 of the NCC[28] demands factual, legal, and equitable justification.
if his negligence was only contributory, the immediate and
proximate cause of the injury being the defendants lack of due care, An adverse decision does not ipso facto justify an award of attorneys fees to
the plaintiff may recover damages, but the courts shall mitigate the the winning party.[29] Even when a claimant is compelled to litigate with third persons
damages to be awarded. or to incur expenses to protect his rights, still attorneys fees may not be awarded where
no sufficient showing of bad faith could be reflected in a partys persistence in a case
Explaining this provision in Lambert v. Heirs of Ray Castillon,[25] the Court other than an erroneous conviction of the righteousness of his cause. [30]
WHEREFORE, the Decision of the Court of Appeals dated July 16, 2001
The underlying precept on contributory negligence is that a plaintiff and its Resolution dated September 28, 2001 are AFFIRMED with the following
who is partly responsible for his own injury should not be entitled MODIFICATIONS: (a) petitioner Bank of America NT & SA shall pay to respondent
to recover damages in full but must bear the consequences of his Philippine Racing Club sixty percent (60%) of the sum of Two Hundred Twenty
own negligence. The defendant must thus be held liable only for the Thousand Pesos (P220,000.00) with legal interest as awarded by the trial court and (b)
damages actually caused by his negligence. xxx xxx xxx the awards of attorneys fees and litigation expenses in favor of respondent are deleted.

As we previously stated, respondents practice of signing checks in blank Proportionate costs.

whenever its authorized bank signatories would travel abroad was a dangerous policy,
especially considering the lack of evidence on record that respondent had appropriate SO ORDERED.
safeguards or internal controls to prevent the pre-signed blank checks from falling into
the hands of unscrupulous individuals and being used to commit a fraud against the
company. We cannot believe that there was no other secure and reasonable way to
THE INTERNATIONAL CORPORATE BANK, INC., petitioner, before petitioner paid the value of the checks or allowed withdrawal of the
vs. deposits. According to the trial court, petitioner, as collecting bank, could
COURT OF APPEALS and PHILIPPINE NATIONAL BANK, respondents. have inquired by telephone from respondent, as drawee bank, about the
status of the checks before paying their value. Since the immediate cause of
DECISION 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
CARPIO, J.: respondent.

The Case The dispositive portion of the trial court’s Decision reads:

WHEREFORE, judgment is hereby rendered dismissing both the

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 complaint and the counterclaim. Costs shall, however be assessed
in CA-G.R. CV No. 25209. against the plaintiff.

The Antecedent Facts SO ORDERED.7

The case originated from an action for collection of sum of money filed on 16 Petitioner appealed the trial court’s Decision before the Court of Appeals.
March 1982 by the International Corporate Bank, Inc.4 ("petitioner") against
the Philippine National Bank ("respondent"). The case was raffled to the then The Ruling of the Court of Appeals
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 In its 10 October 1991 Decision,8 the Court of Appeals reversed the trial
Regional Trial Court of Manila, Branch 52 ("trial court"). 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
The Ministry of Education and Culture issued 15 checks 5 drawn against materially altered shall be returned within 24 hours after discovery of the
respondent which petitioner accepted for deposit on various dates. The alteration. However, the Court of Appeals ruled that even if the drawee bank
checks are as follows: xxx 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
The checks were deposited on the following dates for the following accounts:

After 24 hours from submission of the checks to respondent for clearing, Does this mean that, as long as the drawee bank returns a check
with material alteration within 24 hour[s] after discovery of such
petitioner paid the value of the checks and allowed the withdrawals of the
alteration, such return would have the effect of relieving the bank of
deposits. However, on 14 October 1981, respondent returned all the checks
any liability whatsoever despite its failure to return the check within
to petitioner without clearing them on the ground that they were materially
the 24- hour clearing house rule?
altered. Thus, petitioner instituted an action for collection of sums of money
against respondent to recover the value of the checks.
We do not think so.
The Ruling of the Trial Court
Obviously, such bank cannot be held liable for its failure to return the
The trial court ruled that respondent is expected to use reasonable business check in question not later than the next regular clearing. However,
practices in accepting and paying the checks presented to it. Thus, 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
respondent cannot be faulted for the delay in clearing the checks considering
made. In other words, such bank would still be expected, nay
the ingenuity in which the alterations were effected. The trial court observed
required, to make the proper verification before the 24-hour regular
that there was no attempt from petitioner to verify the status of the checks
clearing period lapses, or in cases where such lapses may be
deemed inevitable, that the required verification should be made PREMISES CONSIDERED, the decision appealed from is hereby
within a reasonable time. REVERSED and the defendant-appellee Philippine National Bank is
declared liable for the value of the fifteen checks specified and
The implication of the rule that a check shall be returned within the enumerated in the decision of the trial court (page 3) in the amount
24-hour clearing period is that if the collecting bank paid the check of P1,447,920.00
before the end of the aforesaid 24-hour clearing period, it would be
responsible therefor such that if the said check is dishonored and SO ORDERED.11
returned within the 24-hour clearing period, the drawee bank cannot
be held liable. Would such an implication apply in the case of Respondent filed a motion for reconsideration of the 10 October 1991
materially altered checks returned within 24 hours after discovery? Decision. In its 9 August 1994 Amended Decision, the Court of Appeals
This Court finds nothing in the letter of the above-cited C.B. Circular reversed itself and affirmed the Decision of the trial court dismissing the
that would justify a negative answer. Nonetheless, the drawee bank complaint.
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 In reversing itself, the Court of Appeals held that its 10 October 1991
be shown that the drawee bank had been patently negligent in the
Decision failed to appreciate that the rule on the return of altered checks
performance of its verification function, this Court finds no reason
within 24 hours from the discovery of the alteration had been duly passed by
why the said bank should be relieved of liability.
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.
Although banking practice has it that the presumption of clearance is
conclusive when it comes to the application of the 24-hour clearing
Petitioner moved for the reconsideration of the Amended Decision. In its 16
period, the same principle may not be applied to the 24-hour period
July 1997 Resolution, the Court of Appeals denied the motion for lack of
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 Hence, the recourse to this Court.
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 The Issues
drawee bank resulting in an unreasonable delay in detecting the
alterations. While it is true that the pertinent proviso in C.B. Circular Petitioner raises the following issues in its Memorandum:
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 1. Whether the checks were materially altered;
mean that this would entitle or allow the drawee bank to be grossly
negligent and, inspite thereof, avail itself of the maximum period
2. Whether respondent was negligent in failing to recognize within a
allowed by the above-cited Circular. The discovery must be made
reasonable period the altered checks and in not returning the checks
within a reasonable time taking into consideration the facts and
within the period; 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 3. Whether the motion for reconsideration filed by respondent was
from raising available defenses even if the check is properly returned out of time thus making the 10 October 1991 Decision final and
within the 24-hour period after discovery of the material alteration.10 executory.12

The Court of Appeals rejected the trial court’s opinion that petitioner could The Ruling of This Court
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 Filing of the Petition under both Rules 45 and 65
October 1991 Decision reads:
Respondent asserts that the petition should be dismissed outright since or which adds a place of payment where no place of payment is
petitioner availed of a wrong mode of appeal. Respondent cites Ybañez v. specified, or any other change or addition which alters the effect of
Court of Appeals13 where the Court ruled that "a petition cannot be the instrument in any respect, is a material alteration.
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 The question on whether an alteration of the serial number of a check is a
under which rule the petition should fall." 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 remedies of appeal and certiorari are mutually exclusive and not the alteration on the serial number of a check is not a material alteration.
alternative or successive.14 However, this Court may set aside technicality for Thus:
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, An alteration is said to be material if it alters the effect of the
in accordance with the liberal spirit which pervades the Rules of Court and in instrument. It means an unauthorized change in an instrument that
the interest of justice,16 we will treat the petition as having been filed under purports to modify in any respect the obligation of a party or an
Rule 45. unauthorized addition of words or numbers or other change to an
incomplete instrument relating to the obligation of a party. In other
Alteration of Serial Number Not Material words, a material alteration is one which changes the items which
are required to be stated under Section 1 of the Negotiable
The alterations in the checks were made on their serial numbers. Instrument[s] Law.

Sections 124 and 125 of Act No. 2031, otherwise known as the Negotiable Section 1 of the Negotiable Instruments Law provides:
Instruments Law, provide:
Section 1. ― Form of negotiable instruments. An instrument to be
SEC. 124. Alteration of instrument; effect of. ― Where a negotiable negotiable must conform to the following requirements:
instrument is materially altered without the assent of all parties liable
thereon, it is avoided, except as against a party who has himself (a) It must be in writing and signed by the maker or drawer;
made, authorized, or assented to the alteration and subsequent (b) Must contain an unconditional promise or order to pay a
indorsers. sum certain in money;
(c) Must be payable on demand, or at a fixed or
But when an instrument has been materially altered and is in the determinable future time;
hands of a holder in due course, not a party to the alteration, he may (d) Must be payable to order or to bearer; and
enforce payment thereof according to its original tenor. (e) Where the instrument is addressed to a drawee, he must
be named or otherwise indicated therein with reasonable
SEC. 125. What constitutes a material alteration. ― Any alteration certainty.
which changes:
In his book entitled "Pandect of Commercial Law and
Jurisprudence," Justice Jose C. Vitug opines that "an innocent
(a) The date;
alteration (generally, changes on items other than those required to
be stated under Sec. 1, N.I.L.) and spoliation (alterations done by a
(b) The sum payable, either for principal or interest; stranger) will not avoid the instrument, but the holder may enforce it
only according to its original tenor.
(c) The time or place of payment;
(d) The number or the relations of the parties;
The case at the bench is unique in the sense that what was altered is
(e) The medium or currency in which payment is to be made; the serial number of the check in question, an item which, it can
readily be observed, is not an essential requisite for negotiability There are instances when rules of procedure are relaxed in the interest of
under Section 1 of the Negotiable Instruments Law. The justice. However, in this case, respondent did not proffer any explanation for
aforementioned alteration did not change the relations between the the late filing of the motion for reconsideration. Instead, there was a
parties. The name of the drawer and the drawee were not altered. deliberate attempt to deceive the Court of Appeals by claiming that the copy
The intended payee was the same. The sum of money due to the of the 10 October 1991 Decision was received on 22 October 1991 instead of
payee remained the same. x x x 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
xxxx filing of the motion for reconsideration rendered the 10 October 1991
Decision final and executory.
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 The 24-Hour Clearing Time
government agency which issued the subject check was prominently
printed therein. The check’s issuer was therefore sufficiently The Court will not rule on the proper application of Central Bank Circular No.
identified, rendering the referral to the serial number redundant and 580 in this case. Since there were no material alterations on the checks,
inconsequential. x x x 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
xxxx 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
Petitioner, thus cannot refuse to accept the check in question on the respondent’s motion for reconsideration was filed late, the 10 October 1991
Decision, which held respondent liable for the value of the checks amounting
ground that the serial number was altered, the same being an
to P1,447,920, had become final and executory.
immaterial or innocent one.17

WHEREFORE, we SET ASIDE the 9 August 1994 Amended Decision and

Likewise, in the present case the alterations of the serial numbers do not
constitute material alterations on the checks. 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
Incidentally, we agree with the petitioner’s observation that the check in from 16 March 1982 until full payment. Costs against respondent.
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
G.R. No. 154469 December 6, 2006 the amount of P91,000.00 and requested that the questioned check be
returned to him for verification, to which Metrobank complied.5
vs. Upon receipt of the check, Cabilzo discovered that Metrobank Check No.
RENATO D. CABILZO, respondent. 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
CHICO-NAZARIO, J.: 14 November 1994.6

Before this Court is a Petition for Review on Certiorari, filed by petitioner Hence, Cabilzo demanded that Metrobank re-credit the amount
Metropolitan Bank and Trust Company (Metrobank) seeking to reverse and of P91,000.00 to his account. Metrobank, however, refused reasoning that it
set aside the Decision1 of the Court of Appeals dated 8 March 2002 and its has to refer the matter first to its Legal Division for appropriate action.
Resolution dated 26 July 2002 affirming the Decision of the Regional Trial Repeated verbal demands followed but Metrobank still failed to re-credit the
Court (RTC) of Manila, Branch 13 dated 4 September 1998. The dispositive amount of P91,000.00 to Cabilzo’s account.7
portion of the Court of Appeals Decision reads:
On 30 June 1995, Cabilzo, thru counsel, finally sent a letter-demand8 to
WHEREFORE, the assailed decision dated September 4, 1998 is Metrobank for the payment of P90,000.00, after deducting the original value
AFFIRMED with modifications (sic) that the awards for exemplary of the check in the amount of P1,000.00. Such written demand
damages and attorney’s fees are hereby deleted. notwithstanding, Metrobank still failed or refused to comply with its obligation.

Petitioner Metrobank is a banking institution duly organized and existing as Consequently, Cabilzo instituted a civil action for damages against
such under Philippine laws.2 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
Respondent Renato D. Cabilzo (Cabilzo) was one of Metrobank’s clients who
reimbursement, actual and moral damages plus costs of the suit be awarded
maintained a current account with Metrobank Pasong Tamo Branch.3
in his favor.9
On 12 November 1994, Cabilzo issued a Metrobank Check No. 985988,
payable to "CASH" and postdated on 24 November 1994 in the amount of 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
One Thousand Pesos (P1,000.00). The check was drawn against Cabilzo’s
the authenticity of the drawer’s signature appearing thereon and the technical
Account with Metrobank Pasong Tamo Branch under Current Account No.
entries on the check including the amount in figures and in words to
618044873-3 and was paid by Cabilzo to a certain Mr. Marquez, as his sales
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
Subsequently, the check was presented to Westmont Bank for payment. collecting bank located at the dorsal side of the check which stated that, "all
Westmont Bank, in turn, indorsed the check to Metrobank for appropriate prior indorsements and lack of indorsement guaranteed," Metrobank cleared
clearing. After the entries thereon were examined, including the availability of the check.10
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. 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
On 16 November 1994, Cabilzo’s representative was at Metrobank Pasong of which it assumed the liability of a general indorser, and thus, among
Tamo Branch to make some transaction when he was asked by a bank others, warranted that the instrument is genuine and in all respect what it
personnel if Cabilzo had issued a check in the amount of P91,000.00 to purports to be.
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
In addition, Metrobank, in turn, claimed that Cabilzo was partly responsible in indorsement, Westmont Bank warranted that the check in question is
leaving spaces on the check, which, made the fraudulent insertion of the genuine, valid and subsisting and that upon presentment the check shall be
amount and figures thereon, possible. On account of his negligence in the accepted according to its tenor.
preparation and issuance of the check, which according to Metrobank, was
the proximate cause of the loss, Cabilzo cannot thereafter claim indemnity by Even more, Metrobank argued that in clearing the check, it was not remiss in
virtue of the doctrine of equitable estoppel. the performance of its duty as the drawee bank, but rather, it exercised the
highest degree of diligence in accordance with the generally accepted
Thus, Metrobank demanded from Cabilzo, for payment in the amount banking practice. It further insisted that the entries in the check were regular
of P100,000.00 which represents the cost of litigation and attorney’s fees, for and authentic and alteration could not be determined even upon close
allegedly bringing a frivolous and baseless suit. 11 examination.

On 19 April 1996, Metrobank filed a Third-Party Complaint12 against In a Decision17 dated 8 March 2002, the Court of Appeals affirmed with
Westmont Bank on account of its unqualified indorsement stamped at the modification the Decision of the court a quo, similarly finding Metrobank liable
dorsal side of the check which the former relied upon in clearing what turned for the amount of the check, without prejudice, however, to the outcome of
out to be a materially altered check. the case between Metrobank and Westmont Bank which was pending before
another tribunal. The decretal portion of the Decision reads:
Subsequently, a Motion to Dismiss13 the Third-Party Complaint was then filed
by Westmont bank because another case involving the same cause of action WHEREFORE, the assailed decision dated September 4, 1998 is
was pending before a different court. The said case arose from an action for AFFIRMED with the modifications (sic) that the awards for exemplary
reimbursement filed by Metrobank before the Arbitration Committee of the damages and attorney’s fees are hereby deleted.18
PCHC against Westmont Bank, and now the subject of a Petition for Review
before the RTC of Manila, Branch 19. 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,
In an Order14 dated 4 February 1997, the trial court granted the Motion to for lack of merit.
Dismiss the Third-Party Complaint on the ground of litis pendentia.
Metrobank now poses before this Court this sole issue:
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 HONORABLE COURT OF APPEALS GRAVELY ERRED IN
the check. In stressing the fiduciary nature of the relationship between the HOLDING METROBANK, AS DRAWEE BANK, LIABLE FOR THE
bank and its clients and the negligence of the drawee bank in failing to detect ALTERATIONS ON THE SUBJECT CHECK BEARING THE
an apparent alteration on the check, the trial court ordered for the payment of AUTHENTIC SIGNATURE OF THE DRAWER THEREOF.
exemplary damages, attorney’s fees and cost of litigation. The dispositive
portion of the Decision reads: We resolve to deny the petition.

WHEREFORE, judgment is rendered ordering defendant

An alteration is said to be material if it changes the effect of the instrument. It
Metropolitan Bank and Trust Company to pay plaintiff Renato
means that an unauthorized change in an instrument that purports to modify
Cabilzo the sum of P90,000 with legal interest of 6 percent per in any respect the obligation of a party or an unauthorized addition of words
annum from November 16, 1994 until payment is made plus P20,000 or numbers or other change to an incomplete instrument relating to the
attorney’s fees, exemplary damages of P50,000, and costs of 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.
Aggrieved, Metrobank appealed the adverse decision to the Court of Appeals
reiterating its previous argument that as the last indorser, Westmont Bank Section 1 of the Negotiable Instruments Law provides:
shall bear the loss occasioned by the fraudulent alteration of the check.
Elaborating, Metrobank maintained that by reason of its unqualified
Section 1. Form of negotiable instruments. - An instrument to be himself made,authorized, and assented to the
negotiable must conform to the following requirements: alteration and subsequent indorsers.

(a) It must be in writing and signed by the maker or drawer; But when the instrument has been materially altered and is in the
(b) Must contain an unconditional promise or order to pay a sum hands of a holder in due course not a party to the alteration, he may
certain in money; enforce the payment thereof according to its original tenor.
(c) Must be payable on demand or at a fixed determinable future (Emphasis ours.)
(d) Must be payable to order or to bearer; and Indubitably, Cabilzo was not the one who made nor authorized the alteration.
(e) Where the instrument is addressed to a drawee, he must be Neither did he assent to the alteration by his express or implied acts. There is
named or otherwise indicated therein with reasonable certainty. 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
Also pertinent is the following provision in the Negotiable Instrument Law correctly ruled by the appellate court, Cabilzo was never remiss in the
which states: preparation and issuance of the check, and there were no indicia of evidence
that would prove otherwise. Indeed, Cabilzo placed asterisks before and after
Section 125. What constitutes material alteration. – Any alteration the amount in words and figures in order to forewarn the subsequent holders
which changes: that nothing follows before and after the amount indicated other than the one
specified between the asterisks.
(a) The date;
(b) The sum payable, either for principal or interest; The degree of diligence required of a reasonable man in the exercise of his
(c) The time or place of payment; tasks and the performance of his duties has been faithfully complied with by
(d) The number or the relation of the parties; Cabilzo. In fact, he was wary enough that he filled with asterisks the spaces
(e) The medium or currency in which payment is to be made; 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
Or which adds a place of payment where no place of payment is
collecting bank, and cleared by the drawee bank, and encashed by the
specified, or any other change or addition which alters the effect of
perpetrator of the fraud, to the damage and prejudice of Cabilzo.
the instrument in any respect is a material alteration.

Verily, Metrobank cannot lightly impute that Cabilzo was negligent and is
In the case at bar, the check was altered so that the amount was increased
therefore prevented from asserting his rights under the doctrine of equitable
from P1,000.00 to P91,000.00 and the date was changed from 24 November
estoppel when the facts on record are bare of evidence to support such
1994 to 14 November 1994. Apparently, since the entries altered were
conclusion. The doctrine of equitable estoppel states that when one of the
among those enumerated under Section 1 and 125, namely, the sum of
money payable and the date of the check, the instant controversy therefore two innocent persons, each guiltless of any intentional or moral wrong, must
squarely falls within the purview of material alteration. 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
Now, having laid the premise that the present petition is a case of material innocent party is flimsy and evidently, misleading. At the same time,
alteration, it is now necessary for us to determine the effect of a materially Metrobank cannot asseverate that Cabilzo was negligent and this negligence
altered instrument, as well as the rights and obligations of the parties was the proximate cause22 of the loss in the absence of even a scintilla proof
thereunder. The following provision of the Negotiable Instrument Law will to buttress such claim. Negligence is not presumed but must be proven by
shed us some light in threshing out this issue: the one who alleges it.23

Section 124. Alteration of instrument; effect of. – Where a negotiable Undoubtedly, Cabilzo was an innocent party in this instant controversy. He
instrument is materially altered without the assent of all parties liable was just an ordinary businessman who, in order to facilitate his business
thereon, it is avoided, except as against a party who has 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 phrase, there is none, even as 4 asterisks have been placed before
can never be faulted. and after the word "CASH" in the space for payee. In addition, the 4
asterisks before the words "ONE THOUSAND PESOS ONLY" have
We never fail to stress the remarkable significance of a banking institution to noticeably been erased with typing correction paper, leaving white
commercial transactions, in particular, and to the country’s economy in marks, over which the word "NINETY" was superimposed. The same
general. The banking system is an indispensable institution in the modern can be said of the numeral "9" in the amount "91,000", which is
world and plays a vital role in the economic life of every civilized nation. superimposed over a whitish mark, obviously an erasure, in lieu of
Whether as mere passive entities for the safekeeping and saving of money the asterisk which was deleted to insert the said figure. The
or as active instruments of business and commerce, banks have become an appellant’s employees should have again noticed why only 2
ubiquitous presence among the people, who have come to regard them with asterisks were placed before the amount in figures, while 3 asterisks
respect and even gratitude and, most of all, confidence.24 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
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 "NINETY" are likewise a little bigger when compared with the letters
and will even earn some interest for him. The ordinary person, with equal of the words "ONE THOUSAND PESOS ONLY".28
faith, usually maintains a modest checking account for security and
convenience in the settling of his monthly bills and the payment of ordinary Surprisingly, however, Metrobank failed to detect the above alterations which
expenses. As for a businessman like the respondent, the bank is a trusted could not escape the attention of even an ordinary person. This negligence
and active associate that can help in the running of his affairs, not only in the was exacerbated by the fact that, as found by the trial court, the check in
form of loans when needed but more often in the conduct of their day-to-day question was examined by the cash custodian whose functions do not
transactions like the issuance or encashment of checks.25 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
In every case, the depositor expects the bank to treat his account with the
findings of the trial court is conclusive upon this court especially when such
utmost fidelity, whether such account consists only of a few hundred pesos
or of millions. The bank must record every single transaction accurately, findings was affirmed the appellate court.30
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 Apropos thereto, we need to reiterate that by the very nature of their work the
can dispose of as he sees fit, confident that the bank will deliver it as and to degree of responsibility, care and trustworthiness expected of their
whomever he directs.26 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
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 In addition, the bank on which the check is drawn, known as the drawee
nature of their relationship. The appropriate degree of diligence required of a bank, is under strict liability to pay to the order of the payee in accordance
bank must be a high degree of diligence, if not the utmost diligence. 27 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.
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: 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,
x x x The number "1" in the date is clearly imposed on a white figure
did not pay according to the original tenor of the instrument, as directed by
in the shape of the number "2". The appellant’s employees who
the drawer, then it has no right to claim reimbursement from the drawer,
examined the said check should have likewise been put on guard as
much less, the right to deduct the erroneous payment it made from the
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 drawer’s account which it was expected to treat with utmost fidelity.
Metrobank vigorously asserts that the entries in the check were carefully What is even more deplorable is that, having been informed of the alteration,
examined: The date of the instrument, the amount in words and figures, as Metrobank did not immediately re-credit the amount that was erroneously
well as the drawer’s signature, which after verification, were found to be debited from Cabilzo’s account but permitted a full blown litigation to push
proper and authentic and was thus cleared. We are not persuaded. through, to the prejudice of its client. Anyway, Metrobank is not left with no
Metrobank’s negligence consisted in the omission of that degree of diligence recourse for it can still run after the one who made the alteration or with the
required of a bank owing to the fiduciary nature of its relationship with its collecting bank, which it had already done. It bears repeating that the records
client. Article 1173 of the Civil Code provides: are bare of evidence to prove that Cabilzo was negligent. We find no
justifiable reason therefore why Metrobank did not immediately reimburse his
The fault or negligence of the obligor consists in the omission of that account. Such ineptness comes within the concept of wanton manner
diligence which is required by the nature of the obligation and contemplated under the Civil Code which warrants the imposition of
corresponds with the circumstances of the persons, of the time and exemplary damages, "by way of example or correction for the public good,"
of the place. x x x. 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
Beyond question, Metrobank failed to comply with the degree required by the confidence of the public in the banking system be further eroded. 32
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 WHEREFORE, premises considered, the instant Petition is DENIED. The
an evident alteration considering its vast knowledge and technical expertise Decision dated 8 March 2002 and the Resolution dated 26 July 2002 of the
in the intricacies of the banking business. This Court is not completely Court of Appeals are AFFIRMED with modification that exemplary damages
unaware of banks’ practices of employing devices and techniques in order to in the amount of P50,000.00 be awarded. Costs against the petitioner.
detect forgeries, insertions, intercalations, superimpositions and alterations in
checks and other negotiable instruments so as to safeguard their authenticity SO ORDERED.
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.
G.R. No. 180144 September 24, 2014 and International Bank Exchange (IBE) Check No. 00012522, dated July 30,
1997, in the amount of P54,600.00 as renewal fee.
vs. On the excuse that she needs to bring home the loan documents for the
RRI LENDING CORPORATION, represented by its General Manager, Bognot siblings’ signatures and replacement, Mrs. Bognot asked the
DARIO J. BERNARDEZ, Respondent. respondent’s clerk to release to her the promissory note, the disclosure
statement, and the check dated July 30, 1997. Mrs. Bognot, however, never
Background Facts returned these documents nor issued a new post-dated check.
Consequently, the respondent sent the petitioner follow-up letters demanding
payment of the loan, plus interest and penalty charges. These demands went
RRI Lending Corporation (respondent) is an entity engaged in the business
of lending money to its borrowers within Metro Manila. It is duly represented
by its General Manager, Mr. Dario J. Bernardez (Bernardez).
On November 27, 1997, the respondent, through Bernardez, filed a
complaint for sum of money before the Regional Trial Court (RTC) against
Sometime in September 1996, the petitioner and his younger brother,
the Bognot siblings. The respondent mainly alleged that the loan renewal
Rolando A. Bognot (collectively referred to as the "Bognot siblings"), applied
payable on June 30, 1997 which the Bognot siblings applied for remained
for and obtained a loan of Five Hundred Thousand Pesos (P500,000.00)
unpaid; that before June30, 1997, Mrs. Bognot applied for another loan
from the respondent, payable on November 30, 1996.4 The loan was
evidenced by a promissory note and was secured by a post dated extension and issued IBE Check No. 00012522 as payment for the renewal
check5 dated November 30, 1996. fee; that Mrs. Bognot convinced the respondent’s clerk to release to her the
promissory note and the other loan documents; that since Mrs. Bognot never
issued any replacement check, no loanextension took place and the loan,
Evidence on record shows that the petitioner renewed the loan several times originally payable on June 30, 1997, became due on this date; and despite
on a monthly basis. He paid a renewal fee of P54,600.00 for each renewal, repeated demands, the Bognot siblings failed to pay their joint and solidary
issued a new post-dated checkas security, and executed and/or renewed the obligation.
promissory note previouslyissued. The respondent on the other hand,
cancelled and returned to the petitioner the post-dated checks issued prior to
Summons were served on the Bognotsiblings. However, only the petitioner
their renewal.
filed his answer.
Sometime in March 1997, the petitioner applied for another loan renewal. He
In his Answer,10 the petitioner claimed that the complaint states no cause of
again executed as principal and signed Promissory Note No. 97-
action because the respondent’s claim had been paid, waived, abandoned or
0356 payable on April 1, 1997; his co-maker was again Rolando. As security
otherwise extinguished. He denied being a party to any loan application
for the loan, the petitioner also issued BPI Check No. 0595236,7 post dated
and/or renewal in May 1997. He also denied having issued the BPI check
to April 1, 1997.8
post-dated to June 30, 1997, as well as the promissory note dated June 30,
1997, claiming that this note had been tampered. He claimed that the one (1)
Subsequently, the loan was again renewed on a monthly basis (until June month loan contracted by Rolando and his wife in November 1996 which was
30, 1997), as shown by the Official Receipt No. 7979 dated May 5, 1997, and lastly renewed in March 1997 had already been fully paid and extinguished in
the Disclosure Statement dated May 30, 1997 duly signed by Bernardez. The April 1997.11
petitioner purportedly paid the renewal fees and issued a post-dated check
dated June 30, 1997 as security. As had been done in the past, the
respondent superimposed the date "June 30, 1997" on the upper right RTC ruled in the respondent’s favor and ordered the Bognot siblings to pay
the amount of the loan, plus interest and penalty charges. It considered the
portion of Promissory Note No. 97-035 to make it appear that it would mature
wordings of the promissory note and found that the loan they contracted was
on the said date.
joint and solidary. It also noted that the petitioner signed the promissory note
as a principal (and not merely as a guarantor), while Rolando was the co-
Several days before the loan’s maturity, Rolando’s wife, Julieta Bognot (Mrs. maker. It brushed the petitioner’s defense of full payment aside, ruling that
Bognot), went to the respondent’s office and applied for another renewal of
the loan. She issued in favor of the respondent Promissory Note No. 97-051,
the respondent had successfully proven, by preponderance of evidence, the If only to lay the issues raised - both factual and legal – to rest, we shall
nonpayment of the loan. The trial court said: proceed to discuss their merits and demerits.

Records likewise reveal that while he claims that the obligation had been fully No Evidence Was Presented to Establish the Fact of Payment
paid in his Answer, he did not, in order to protect his right filed (sic) a cross-
claim against his co-defendant Rolando Bognot despite the fact that the latter Jurisprudence tells us that one who pleads payment has the burden of
did not file any responsive pleading. proving it;17 the burden rests on the defendant to prove payment, rather than
on the plaintiff to prove non-payment.18 Indeed, once the existence of an
In fine, defendants are liable solidarily to plaintiff and must pay the loan indebtedness is duly established by evidence, the burden of showing with
of P500,000.00 plus 5% interest monthly as well as 10% monthly penalty legal certainty that the obligation has been discharged by payment rests on
charges from the filing of the complaint on December 3, 1997 until fully paid. the debtor.19
As plaintiff was constrained to engage the services of counsel in order to
protect his right,defendants are directed to pay the former jointly and In the present case, the petitioner failed to satisfactorily prove that his
severally the amount of P50,000.00 as and by way of attorney’s fee. obligation had already been extinguished by payment. As the CA correctly
noted, the petitioner failed to present any evidence that the respondent had
CA affirmed the RTC’s findings in fact encashed his check and applied the proceeds to the payment of the
loan. Neither did he present official receipts evidencing payment, nor any
The Issues proof that the check had been dishonored.

2. Whether the petitioner is relieved from liability by reason of the We note that the petitioner merely relied on the respondent’s cancellation
material alteration in the promissory note; and and return to him of the check dated April 1, 1997. The evidence shows that
this check was issued to secure the indebtedness. The acts imputed on the
Our Ruling respondent, standing alone, do not constitute sufficient evidence of payment.

Article 1249, paragraph 2 of the Civil Code provides:

We find the petition partly meritorious.

As a rule, the Court’s jurisdiction in a Rule 45 petition is limited to the review xxxx
of pure questions of law.14Appreciation of evidence and inquiry on the
correctness of the appellate court's factual findings are not the functions of The delivery of promissory notes payable to order, or bills of exchange or
this Court; we are not a trier of facts.15 other mercantile documents shall produce the effect of payment only when
they have been cashed, or when through the fault of the creditor they have
been impaired. (Emphasis supplied)
A question of law exists when the doubt or dispute relates to the application
of the law on given facts. On the other hand, a question of fact exists when
the doubt or dispute relates to the truth or falsity of the parties’ factual Also, we held in Bank of the Philippine Islands v. Spouses Royeca:20
Settled is the rule that payment must be made in legal tender. A check is not
As the respondent correctly pointedout, the petitioner’s allegations are factual legal tender and, therefore, cannot constitute a valid tender of payment.
issuesthat are not proper for the petition he filed. In the absence of Since a negotiable instrument is only a substitute for money and not money,
compelling reasons, the Court cannot re-examine, review or re-evaluate the the delivery of such an instrument does not, by itself, operate as payment.
evidence and the lower courts’ factual conclusions. This is especially true Mere delivery of checks does not discharge the obligation under a judgment.
when the CA affirmed the lower court’s findings, as in this case. Since the The obligation is not extinguished and remains suspended until the payment
CA’s findings of facts affirmed those of the trial court, they are binding on this by commercial document is actually realized.(Emphasis supplied)
Court, rendering any further factual review unnecessary.
Although Article 1271 of the Civil Code provides for a legal presumption of In light of these exchanges, wefind that the petitioner failed to discharge his
renunciation of action (in cases where a private document evidencing a credit burden ofproving payment.
was voluntarily returned by the creditor to the debtor), this presumption is
merely prima facieand is not conclusive; the presumption loses efficacy when The Alteration of the Promissory Note
faced with evidence to the contrary.
Did Not Relieve the Petitioner From Liability
Moreover, the cited provision merely raises a presumption, not of payment,
but of the renunciation of the credit where more convincing evidence would We now come to the issue of material alteration. The petitioner raised as
be required than what normally would be called for to prove payment. 21Thus,
defense the alleged material alteration of Promissory Note No. 97-035 as
reliance by the petitioner on the legal presumption to prove payment is
basis to claim release from his loan. He alleged that the respondent’s
superimposition of the due date "June 30, 1997" on the promissory note
without his consent effectively relieved him of liability.
To reiterate, no cash payment was proven by the petitioner. The cancellation
and return of the check dated April 1, 1997, simply established his renewal of
We find this defense untenable.
the loan – not the fact of payment. Furthermore, it has been established
during trial, through repeated acts, that the respondent cancelled and
surrendered the post-dated check previously issued whenever the loan is Although the respondent did not dispute the fact of alteration, he
renewed. We trace whatwould amount to a practice under the facts of this nevertheless denied that the alteration was done without the petitioner’s
case, to the following testimonial exchanges: consent. The parties’ Pre-Trial Order dated November 3, 199824 states that:

Civil Case No. 97-0572 xxx There being no possibility of a possible compromise agreement,
TSN December 14, 1998, Page 13. stipulations, admissions, and denials were made, to wit:
Atty. Almeda:
Q: In the case of the renewal of the loan you admitted that a renewal fee is FOR DEFENDANT LEONARDO BOGNOT
charged to the debtor which he or she must pay before a renewal is allowed.
I show you Exhibit "3" official receipt of plaintiff dated July 3, 1997, would this 13. That the promissory note subject of this case marked as Annex "A" of the
be your official receipt which you issued to your client which they make complaint was originally dated April 1, 1997 with a superimposed rubber
renewal of the loan? stamp mark "June 30, 1997" to which the plaintiff admitted the
A: Yes, sir. superimposition.
xxx xxx xxx
Q: And naturally when a loan has been renewed, the old one which is 14. The superimposition was done without the knowledge, consent or prior
replaced by the renewal has already been cancelled, is that correct? consultation with Leonardo Bognot which was denied by
A: Yes, sir. plaintiff."25 (Emphasis supplied)
Q: It is also true to say that all promissory notes and all postdated checks
covered by the old loan which have been the subject of the renewal are
Significantly, the respondent also admitted in the Pre-Trial Order that part of
deemed cancelled and replaced is that correct?
its company practice is to rubber stamp, or make a superimposition through a
A: Yes, sir. xxx22
rubber stamp, the old promissory note which has been renewed to make it
Civil Case No. 97-0572
appear that there is a new loan obligation. The petitioner did not rebut this
TSN November 27, 1998, Page 27.
statement. To our mind, the failure to rebut is tantamount to an admission of
Q: What happened to the check that Mr. Bognot issued?
the respondent’s allegations:
Court: There are two Bognots. Who in particular?
Q: Leonardo Bognot, Your Honor.
A: Every month, they were renewed, he issued a new check, sir. "22. That it is the practice of plaintiff to just rubber stamp or make
Q: Do you have a copy of the checks? superimposition through a rubber stamp on old promissory note which has
A: We returned the check upon renewing the loan.23 been renewed to make it appear that there is a new loan obligation to which
the plaintiff admitted." (Emphasis Supplied).26
Even assuming that the note had indeed been tampered without the It has not escaped the Court’s attention that the petitioner raised the
petitioner’s consent, the latter cannot totally avoid payment of his obligation argument that the obligation had been extinguished by novation. The
to the respondent based on the contract of loan. petitioner never raised this issue before the lower courts.

Based on the records, the Bognot Siblings had applied for and were granted It is a settled principle of law thatno issue may be raised on appeal unless it
a loan of P500,000.00 by the respondent. The loan was evidenced by a has been brought before the lower tribunal for its consideration.34 Matters
promissory note and secured by a post-dated check27 dated November 30, neither alleged in the pleadingsnor raised during the proceedings below
1996. In fact, the petitioner himself admitted his loan application was cannot be ventilated for the first time on appeal before the Supreme Court.35
evidenced by the Promissory Note dated April 1, 1997. 28 This loan was
renewed several times by the petitioner, after paying the renewal fees, as In any event, we find no merit in the defense of novation as we discuss at
shown by the Official Receipt Nos. 79729 and 58730 dated May 5 and July 3, length below. Novation cannot be presumed and must be clearly and
1997, respectively. These official receipts were issued in the name of the unequivocably proven.
petitioner. Although the petitioner had insisted that the loan had been
extinguished, no other evidence was presented to prove payment other than Novation is a mode of extinguishing an obligation by changing its objects or
the cancelled and returnedpost-dated check.
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. 36
Under this evidentiary situation, the petitioner cannot validly deny his
obligation and liability to the respondent solely on the ground that the Article 1293 of the Civil Code defines novation as follows:
Promissory Note in question was tampered. Notably, the existence of the
obligation, as well as its subsequent renewals, have been duly established
by: first, the petitioner’s application for the loan; second, his admission that "Art. 1293. Novation which consists insubstituting a new debtor in the place
the loan had been obtained from the respondent; third, the post-dated checks of the originalone, may be made even without the knowledge or against the
issued by the petitioner to secure the loan; fourth, the testimony of Mr. will of the latter, but not without the consent of the creditor. Payment by the
Bernardez on the grant, renewal and non-payment of the loan; fifth, proof of new debtor gives him rights mentioned in Articles 1236 and 1237."
non-payment of the loan; sixth, the loan renewals; and seventh, the approval
and receipt of the loan renewals. To give novation legal effect, the original debtor must be expressly released
from the obligation, and the new debtor must assume the original debtor’s
In Guinsatao v. Court of Appeals,31 this Court pointed out that while a place in the contractual relationship. Depending on who took the initiative,
promissory note is evidence of an indebtedness, it is not the only evidence, novation by substitution of debtor has two forms – substitution by
for the existence of the obligation can be proven by other documentary expromision and substitution by delegacion. The difference between these
evidence such as a written memorandum signed by the parties. In Pacheco two was explained in Garcia v. Llamas:37
v. Court of Appeals,32 this Court likewise expressly recognized that a check
constitutes anevidence of indebtedness and is a veritable proof of an "In expromision, the initiative for the change does not come from -- and may
obligation. It canbe used in lieu of and for the same purpose as a promissory even be made without the knowledge of -- the debtor, since it consists of a
note and can therefore be presented to establish the existence of third person’s assumption of the obligation. As such, it logically requires the
indebtedness.33 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
In the present petition, we find that the totality of the evidence on record assumes the obligation; thus, the consent of these three persons are
sufficiently established the existence of the petitioner’s indebtedness (and necessary."
liability) based on the contract ofloan. Even with the tampered promissory
note, we hold that the petitioner can still be held liable for the unpaid loan. In both cases, the original debtor must be released from the obligation;
otherwise, there can be no valid novation.38 Furthermore, novation by
The Petitioner’s BelatedClaim of Novation by Substitution May no Longer be substitution of debtor must alwaysbe made with the consent of the creditor. 39
The petitioner contends thatnovation took place through a substitution of
debtors when Mrs. Bognot renewed the loan and assumed the debt. He
alleged that Mrs. Bognot assumed the obligation by paying the renewal fees In this case, both the RTC and the CA found the petitioner solidarily liable
and charges, and by executing a new promissory note. He further claimed with Rolando based on Promissory Note No. 97-035 dated June 30, 1997.
that she issued her own check 40 to cover the renewal fees, which fact, Under the promissory note, the Bognot Siblings defined the parameters of
according to the petitioner, was done with the respondent’s consent. their obligation as follows:

Contrary to the petitioner’s contention, Mrs. Bognot did not substitute the "FOR VALUE RECEIVED, I/WE, jointly and severally, promise to pay to
petitioner as debtor. She merely attempted to renew the original loan by READY RESOURCES INVESTORS RRI LENDING CORPO. or Order, its
executing a new promissory note41 and check. The purported one month office at Paranaque, M.M. the principal sum of Five Hundred Thousand
renewal of the loan, however, did not push through, as Mrs. Bognot did not PESOS (P500,000.00), PhilippineCurrency, with interest thereon at the rate
return the documents or issue a new post dated check. Since the loan was of Five percent (5%) per month/annum, payable in One Installment (01)
not renewed for another month, the originaldue date, June 30,1997, equal daily/weekly/semi-monthly/monthly of PESOS Five Hundred Thousand
continued to stand. Pesos (P500,000.00), first installment to become due on June 30, 1997.
xxx"44 (Emphasis Ours).
More importantly, the respondent never agreed to release the petitioner from
his obligation. That the respondent initially allowed Mrs. Bognot to bring Although the phrase "jointly and severally" in the promissory note clearly and
home the promissory note, disclosure statement and the petitioner’s previous unmistakably provided for the solidary liability of the parties, we note and
check dated June 30, 1997, does not ipso factoresult in novation. Neither will stress that the promissory note is merely a photocopyof the original, which
this acquiescence constitute an implied acceptance of the substitution of the was never produced.
Under the best evidence rule, whenthe subject of inquiry is the contents of a
In order to give novation legal effect, the creditor should consent to the document, no evidence isadmissible other than the original document itself
substitution of a new debtor. Novation must be clearly and unequivocally except in the instances mentioned in Section 3, Rule 130 of the Revised
shown, and cannot be presumed. Rules of Court.45

Since the petitioner failed to show thatthe respondent assented to the The records show that the respondenthad the custody of the original
substitution, no valid novation took place with the effect of releasing the promissory note dated April 1, 1997, with a superimposed rubber stamp mark
petitioner from his obligation to the respondent. "June 30, 1997", and that it had been given every opportunity to present it.
The respondent even admitted during pre-trial that it could not present the
Moreover, in the absence of showing that Mrs. Bognot and the respondent original promissory note because it is in the custody of its cashier who is
had agreed to release the petitioner, the respondent can still enforce the stranded in Bicol.46 Since the respondent never produced the original of the
payment of the obligation against the original debtor. Mere acquiescence to promissory note, much less offered to produce it, the photocopy of the
the renewal of the loan, when there is clearly no agreement to release the promissory note cannot be admitted as evidence. Other than the promissory
petitioner from his responsibility, does not constitute novation. note in question, the respondent has not presented any other evidence to
support a finding of solidary liability. As we earlier noted, both lower courts
completely relied on the note when they found the Bognot siblingssolidarily
The Nature of the Petitioner’s Liability
On the nature of the petitioner’s liability, we rule however, that the CA erred
in holding the petitioner solidarily liable with Rolando. The well-entrenched rule is that solidary obligation cannot be inferred lightly.
It must be positively and clearly expressed and cannot be presumed.47
A solidary obligation is one in which each of the debtors is liable for the entire
In view of the inadmissibility of the promissory note, and in the absence of
obligation, and each of the creditors is entitled to demand the satisfaction of
evidence showing that the petitioner had bound himself solidarily with
the whole obligation from any or all of the debtors.42 There is solidary liability
when the obligation expressly so states, when the law so provides, or when Rolando for the payment of the loan, we cannot but conclude that the
the nature of the obligation so requires.43 Thus, when the obligor undertakes obligation to pay is only joint.48
to be "jointly and severally" liable, the obligation is solidary,
The 5% Monthly Interest Stipulated in the Promissory Note is
Unconscionable and Should be Equitably Reduced

Finally, on the issue of interest, while we agree with the CA that the petitioner
is liable to the respondentfor the unpaid loan, we find the imposition of the
5% monthly interest to be excessive, iniquitous, unconscionable and
exorbitant, and hence, contrary to morals and jurisprudence. Although parties
to a loan agreement have wide latitude to stipulate on the applicable interest
rate under Central Bank Circular No. 905 s. 1982 (which suspended the
Usury Law ceiling on interest effective January 1, 1983), we stress that
unconscionable interest rates may still be declared illegal.49

In several cases, we haveruled that stipulations authorizing iniquitous or

unconscionable interests are contrary to morals and are illegal. In Medel v.
Court of Appeals,50 we annulled a stipulated 5.5% per month or 66% per
annum interest on a P500,000.00 loan, and a 6% per month or 72% per
annum interest on a P60,000.00 loan, respectively, for being excessive,
iniquitous, unconscionableand exorbitant.1âwphi1

We reiterated this ruling in Chua v. Timan,51 where we held that the

stipulated interest rates of 3% per month and higher are excessive,
iniquitous, unconscionable and exorbitant, and must therefore be reduced to
12% per annum.

Applying these cited rulings, we now accordingly hold that the stipulated
interest rate of 5% per month, (or 60% per annum) in the promissory note is
excessive, unconscionable, contrary to morals and is thus illegal. It is void ab
initiofor violating Article 130652 of the Civil Code.1âwphi1 We accordingly find
it equitable to reduce the interest rate from 5% per month to 1% per month or
12% per annum in line with the prevailing jurisprudence.

WHEREFORE, premises considered, the Decision dated March 28, 2007 of

the Court of Appeals in CA-G.R. CV No. 66915 is hereby AFFIRMED with
MODIFICATION, as follows:

1. The petitioner Leonardo A. Bognotand his brother, Rolando A.

Bognot are JOINTLY LIABLE to pay the sum of P500,000.00 plus
12% interest per annum from December 3, 1997 until fully paid.

2. The rest of the Court of Appeals' dispositions are hereby


Costs against petitioner Leonardo A. Bognot.

G.R. No. L-19461 March 28, 1923 against the acceptor, Fernandez Hermanos, and the two individuals named
as defendants in the complaint, in the character of members of said
CHARLES A. FOSSUM, plaintiff-appellant, partnership.
FERNANDEZ HERMANOS, a general partnership, and JOSE F. On the foregoing statement it is evident that the consideration for the draft in
FERNANDEZ Y CASTRO and RAMON FERNANDEZ Y CASTRO, question and for the acceptance placed thereon by Fernandez Hermanos,
members of the said partnership of FERNANDEZ has completely failed; and no action whatever can be maintained on the
HERMANOS, defendants-appellees. instrument by the American Iron Products Company, Inc., or by any other
person against whom the defense of failure of consideration is available. In
Chas. E. Tenney for appellant. recognition of this fact, and considering that the plaintiff Fossum, in whose
Ernesto Zaragoza and Jose Varela Calderon for appellees. name the action is brought, was the individual who had acted for the
American Iron Products Company, Inc., in the making of the contract, the trial
STREET, J.: court held that the action could not be maintained and absolved the
defendants from the complaint. From this judgment the plaintiff appealed.
Prior to the date of the making of the contract which gave rise to this litigation
We are of the opinion that the trial judge has committed no error. To begin
the plaintiff, Charles A. Fossum, was the resident agent in Manila of the
with, the plaintiff himself is far from being a holder of this draft in due course.
American Iron Products Company, Inc., a concern engaged in business in
New York City; and on February 10, 1920, the said Fossum, acting as agent In the fact place, he was himself a party to the contract which supplied the
of that company, procured an order from Fernandez Hermanos, a general consideration for the draft, albeit he there acted in a representative capacity.
In the second place, he procured the instrument to be indorsed by the bank
commercial partnership engaged in business in the Philippine Islands, to
deliver to said firm a tail shaft, to be installed on the ship Romulus, then and delivered to himself without the payment of value, after it was overdue,
and with full notice that, as between the original parties, the consideration
operated by Fernandez Hermanos, as managers of La Compañía Marítima.
had completely failed. Under these circumstance recovery on this draft by the
It was stipulated that said tail shaft would be in accordance with the
specifications contained in a blueprint which had been placed in the hands of plaintiff by virtue of any merit in his own position is out of the question. His
attorney, however, calls attention to the familiar rule that a person who is not
Fossum on or about December 18, 1919; and it was further understood that
himself a holder in due course may yet recover against the person primarily
the shaft should be shipped from New York upon some steamer sailing in
liable where it appears that such holder derives his title through a holder in
March or April of the year 1920.
due course.
Considerable delay seems to have been encountered in the matter of the
The difficulty of the plaintiff's position from this point of view is that there is
manufacture and shipment of the shaft; but in the autumn of 1920 it was
not a line of proof in the record tending to show as a fact that the bank itself
dispatched to Manila, having arrived in January, 1921. Meanwhile the
was ever a holder of this draft in due course. In this connection it was
American Iron Products Company, Inc., had drawn a time draft, at sixty days,
incumbent on the plaintiff to show, as an independent claims, i.e., the bank,
upon Fernandez Hermanos, for the purchase price of the shaft, the same
being in the amount of $2,250, and payable to the Philippine National Bank. was a holder in due course; and upon this point the plaintiff can have no
In due course the draft was presented to Fernandez Hermanos for assistance from the presumption, expressed in section 59 of the Negotiable
Instrument Law, to the effect that every holder is deemed prima facie to be a
acceptance, and was accepted by said firm on December 15, 1920,
holder in due course. The presumption expressed in that section arise only in
according to its tenor.
favor of a person who is a holder in the sense defined in section 191 of the
same Law, that is, a payee or indorsee who is in possession of the draft, or
Upon inspection after arrival in Manila the shaft was found not to be in the bearer thereof. Under this definition, in order to be a holder, one must be
conformity with the specifications and was incapable of use for the purpose in possession of the note or the bearer thereof. (Night & Day
for which it had been intended. Upon discovering this, Fernandez Hermanos Bank vs. Rosenbaum, 191 Mo. App., 559, 574.) If this action had been
refused to pay the draft, and it remained for a time dishonored in the hands instituted by the bank itself, the presumption that the bank was a holder in
of the Philippine National Bank in Manila. Later the bank indorsed the draft in due course would have arisen from the tenor of the draft and the fact that it
blank, without consideration, and delivered it to the plaintiff, Charles A. was in the bank's possession; but when the instrument passed out of the
Fossum, who thereupon instituted the present action on the instrument possession of the bank and into the possession of the present plaintiff, no
presumption arises as to the character in which the bank held the paper. The hands they would not have been subject to the defense which had been
bank's relation to the instrument became past history when it delivered the interposed (54 L. R. A., 678).
document to the plaintiff; and it was incumbent upon the plaintiff in this action
to show that the bank had in fact acquired the instrument for value and under We find nothing in the Negotiable Instrument Law that would interfere with
such conditions as would constitute it a holder in due course. In the entire the application of the doctrine applied in the cases above cited, for the rule
absence of proof on this point, the action must fail. that identifies the agent with the principal, so far as the legal consequences
of certain acts are concerned, is a rule of general jurisprudence that must
There is another circumstance which exerted a decisive influence on the operate in conjunction with that Law. We consider the situation to be the
mind of the trial judge in deciding the case for the defendants. This is found same in practical effect as if the action had been brought in the name of the
in the fact that the plaintiff personally made the contract which constituted the American Iron Products Company, Inc., itself; and the use of the name of
consideration for this draft. He was therefore a party in fact, if not in law, to Fossum strikes us as a mere attempt at an evasion of the rule of law that
the transaction giving origin to the instrument; and it is difficult to see how the would have been fatal to the success of an action instituted by that company.
plaintiff could strip himself of the character to agent with respect to the origin
of the contract and maintain this action in his own name where his principal It appears from statements of Mr. Fossum on the witness stand that the draft
could not. Certainly an agent who actually makes a contract, and who has in question was indorsed and delivered to him by the bank in order that suit
notice of all equities emanating therefrom, can stand on no better footing might be brought thereon in his name for the use and benefit of the bank,
than his principal with respect to commercial paper growing out of the which is said to be the real party in interest. In addition to this it appears that
transaction. To place him on any higher plane would be incompatible with the during the pendency of the cause in this court on appeal a formal transfer, or
fundamental conception underlying the relation of principal and agent. We assignment, to the bank was made by Fossum of all his interest in the draft
note that in the present case there is no proof that the plaintiff Fossum has and in the cause of action.
ceased to be the agent of the American Iron Products Company, Inc.; and in
the absence of proof the presumption must be that he still occupies the
Assuming that the suggestion thus made is true, and that the bank is the real
relation of agent to that company.
party in interest, the result of the lawsuit in this court is not thereby affected,
since it has not been affirmatively shown that the bank is an innocent
it is a well-known rule of law that if the original payee of a note unenforceable purchaser for value. It is therefore unnecessary to discuss the bearing of this
for lack of consideration repurchase the instrument after transferring it to a circumstance on the second feature to the case discussed in this opinion.
holder in due course, the paper again becomes subject in the payee's hands
to the same defenses to which it would have been subject if the paper had
For the reasons stated the judgment appealed from must be affirmed, and it
never passed through the hands of a holder in due course. (Kost vs. Bender,
is so ordered, with costs against the appellant.
25 Mich., 515; Shade vs. Hayes, L. R. A. [1915D], 271; 8 C. J., 470.) The
same is true where the instrument is retransferred to an agent of the payee
(Battersbee vs. Calkins, 128 Mich., 569).

In Dollarhide vs. Hopkins (72 Ill. App., 509), the plaintiff, as agent of a
corporation engaged in manufacturing agricultural implements, sold to the
defendant a separator for threshing small grain, with a general warranty that
the machine, properly handled, would thresh and clean grain as well as any
other separator of like size. The notes in suit were executed by the defendant
in payment of the separator, and were assigned to the plaintiff before
maturity. They were then indorsed by the plaintiff to a bank which became
holder in due course; but afterwards, and before the commencement of the
action, the notes were retransferred by the bank to the plaintiff. In an action
upon the notes the defendant alleged and proved breach of warranty and
showed that the plaintiff knew of the defect in the separator at the time he
purchased the notes. It was held that the plaintiff could not recover,
notwithstanding the fact that the notes had passed through a bank, in whose
G.R. No. L-15126 November 30, 1961 Manuel Gonzales requested defendant Anita C. Gatchalian to give
him (Manuel Gonzales) a check which will be shown to the owner as
VICENTE R. DE OCAMPO & CO., plaintiff-appellee, evidence of buyer's good faith in the intention to purchase the said
vs. car, the said check to be for safekeeping only of Manuel Gonzales
ANITA GATCHALIAN, ET AL., defendants-appellants. and to be returned to defendant Anita C. Gatchalian the following
day when Manuel Gonzales brings the car and the certificate of
registration, but which facts were not known to plaintiff;
The action is for the recovery of the value of a check for P600 payable to the
plaintiff and drawn by defendant Anita C. Gatchalian. The complaint sets
forth the check and alleges that plaintiff received it in payment of the Fourth. — That relying on these representations of Manuel Gonzales
indebtedness of one Matilde Gonzales; that upon receipt of said check, and with his assurance that said check will be only for safekeeping
plaintiff gave Matilde Gonzales P158.25, the difference between the face and which will be returned to said defendant the following day when
value of the check and Matilde Gonzales' indebtedness. The defendants the car and its certificate of registration will be brought by Manuel
admit the execution of the check but they allege in their answer, as Gonzales to defendants, but which facts were not known to plaintiff,
affirmative defense, that it was issued subject to a condition, which was not defendant Anita C. Gatchalian drew and issued a check, Exh. "B";
fulfilled, and that plaintiff was guilty of gross negligence in not taking steps to that Manuel Gonzales executed and issued a receipt for said check,
protect itself. Exh. "1";

At the time of the trial, the parties submitted a stipulation of facts, which Fifth. — That on the failure of Manuel Gonzales to appear the day
reads as follows: following and on his failure to bring the car and its certificate of
registration and to return the check, Exh. "B", on the following day as
previously agreed upon, defendant Anita C. Gatchalian issued a
Plaintiff and defendants through their respective undersigned
"Stop Payment Order" on the check, Exh. "3", with the drawee bank.
attorney's respectfully submit the following Agreed Stipulation of
Said "Stop Payment Order" was issued without previous notice on
plaintiff not being know to defendant, Anita C. Gatchalian and who
furthermore had no reason to know check was given to plaintiff;
First. — That on or about 8 September 1953, in the evening,
defendant Anita C. Gatchalian who was then interested in looking for
Sixth. — That defendants, both or either of them, did not know
a car for the use of her husband and the family, was shown and
offered a car by Manuel Gonzales who was accompanied by Emil personally Manuel Gonzales or any member of his family at any time
Fajardo, the latter being personally known to defendant Anita C. prior to September 1953, but that defendant Hipolito Gatchalian is
personally acquainted with V. R. de Ocampo;

Seventh. — That defendants, both or either of them, had no

Second. — That Manuel Gonzales represented to defend Anita C.
Gatchalian that he was duly authorized by the owner of the car, arrangements or agreement with the Ocampo Clinic at any time prior
Ocampo Clinic, to look for a buyer of said car and to negotiate for to, on or after 9 September 1953 for the hospitalization of the wife of
Manuel Gonzales and neither or both of said defendants had
and accomplish said sale, but which facts were not known to plaintiff;
assumed, expressly or impliedly, with the Ocampo Clinic, the
obligation of Manuel Gonzales or his wife for the hospitalization of
Third. — That defendant Anita C. Gatchalian, finding the price of the the latter;
car quoted by Manuel Gonzales to her satisfaction, requested
Manuel Gonzales to bring the car the day following together with the
Eight. — That defendants, both or either of them, had no obligation
certificate of registration of the car, so that her husband would be
or liability, directly or indirectly with the Ocampo Clinic before, or on 9
able to see same; that on this request of defendant Anita C.
September 1953;
Gatchalian, Manuel Gonzales advised her that the owner of the car
will not be willing to give the certificate of registration unless there is
a showing that the party interested in the purchase of said car is Ninth. — That Manuel Gonzales having received the check Exh. "B"
ready and willing to make such purchase and that for this purpose from defendant Anita C. Gatchalian under the representations and
conditions herein above specified, delivered the same to the not for safekeeping merely, delivery was conditional and the condition was
Ocampo Clinic, in payment of the fees and expenses arising from the not fulfilled.
hospitalization of his wife;
In support of the contention that plaintiff-appellee is not a holder in due
Tenth. — That plaintiff for and in consideration of fees and expenses course, the appellant argues that plaintiff-appellee cannot be a holder in due
of hospitalization and the release of the wife of Manuel Gonzales course because there was no negotiation prior to plaintiff-appellee's
from its hospital, accepted said check, applying P441.75 (Exhibit "A") acquiring the possession of the check; that a holder in due course
thereof to payment of said fees and expenses and delivering to presupposes a prior party from whose hands negotiation proceeded, and in
Manuel Gonzales the amount of P158.25 (as per receipt, Exhibit "D") the case at bar, plaintiff-appellee is the payee, the maker and the payee
representing the balance on the amount of the said check, Exh. "B"; being original parties. It is also claimed that the plaintiff-appellee is not a
holder in due course because it acquired the check with notice of defect in
Eleventh. — That the acts of acceptance of the check and the title of the holder, Manuel Gonzales, and because under the
application of its proceeds in the manner specified above were made circumstances stated in the stipulation of facts there were circumstances that
without previous inquiry by plaintiff from defendants: brought suspicion about Gonzales' possession and negotiation, which
circumstances should have placed the plaintiff-appellee under the duty, to
Twelfth. — That plaintiff filed or caused to be filed with the Office of inquire into the title of the holder. The circumstances are as follows:
the City Fiscal of Manila, a complaint for estafa against Manuel
Gonzales based on and arising from the acts of said Manuel The check is not a personal check of Manuel Gonzales. (Paragraph
Gonzales in paying his obligations with plaintiff and receiving the Ninth, Stipulation of Facts). Plaintiff could have inquired why a
cash balance of the check, Exh. "B" and that said complaint was person would use the check of another to pay his own debt.
subsequently dropped; Furthermore, plaintiff had the "means of knowledge" inasmuch as
defendant Hipolito Gatchalian is personally acquainted with V. R. de
Thirteenth. — That the exhibits mentioned in this stipulation and the Ocampo (Paragraph Sixth, Stipulation of Facts.).
other exhibits submitted previously, be considered as parts of this
stipulation, without necessity of formally offering them in evidence; The maker Anita C. Gatchalian is a complete stranger to Manuel
Gonzales and Dr. V. R. de Ocampo (Paragraph Sixth, Stipulation of
WHEREFORE, it is most respectfully prayed that this agreed
stipulation of facts be admitted and that the parties hereto be given
fifteen days from today within which to submit simultaneously their The maker is not in any manner obligated to Ocampo Clinic nor to
memorandum to discuss the issues of law arising from the facts, Manuel Gonzales. (Par. 7, Stipulation of Facts.)
reserving to either party the right to submit reply memorandum, if
necessary, within ten days from receipt of their main memoranda. The check could not have been intended to pay the hospital fees
(pp. 21-25, Defendant's Record on Appeal). which amounted only to P441.75. The check is in the amount of
P600.00, which is in excess of the amount due plaintiff. (Par. 10,
No other evidence was submitted and upon said stipulation the court Stipulation of Facts).
rendered the judgment already alluded above.
It was necessary for plaintiff to give Manuel Gonzales change in the
In their appeal defendants-appellants contend that the check is not a sum P158.25 (Par. 10, Stipulation of Facts). Since Manuel Gonzales
negotiable instrument, under the facts and circumstances stated in the is the party obliged to pay, plaintiff should have been more cautious
stipulation of facts, and that plaintiff is not a holder in due course. In support and wary in accepting a piece of paper and disbursing cold cash.
of the first contention, it is argued that defendant Gatchalian had no intention
to transfer her property in the instrument as it was for safekeeping merely The check is payable to bearer. Hence, any person who holds it
and, therefore, there was no delivery required by law (Section 16, Negotiable should have been subjected to inquiries. EVEN IN A BANK,
Instruments Law); that assuming for the sake of argument that delivery was CHECKS ARE NOT CASHED WITHOUT INQUIRY FROM THE
BEARER. The same inquiries should have been made by plaintiff. Gonzales with the intention of negotiating the same, or for the purpose of
(Defendants-appellants' brief, pp. 52-53) giving effect thereto, for as the stipulation of facts declares the check was to
remain in the possession Manuel Gonzales, and was not to be negotiated,
Answering the first contention of appellant, counsel for plaintiff-appellee but was to serve merely as evidence of good faith of defendants in their
argues that in accordance with the best authority on the Negotiable desire to purchase the car being sold to them. Admitting that such was the
Instruments Law, plaintiff-appellee may be considered as a holder in due intention of the drawer of the check when she delivered it to Manuel
course, citing Brannan's Negotiable Instruments Law, 6th edition, page 252. Gonzales, it was no fault of the plaintiff-appellee drawee if Manuel Gonzales
On this issue Brannan holds that a payee may be a holder in due course and delivered the check or negotiated it. As the check was payable to the plaintiff-
says that to this effect is the greater weight of authority, thus: appellee, and was entrusted to Manuel Gonzales by Gatchalian, the delivery
to Manuel Gonzales was a delivery by the drawer to his own agent; in other
words, Manuel Gonzales was the agent of the drawer Anita Gatchalian
Whether the payee may be a holder in due course under the N. I. L.,
insofar as the possession of the check is concerned. So, when the agent of
as he was at common law, is a question upon which the courts are in
drawer Manuel Gonzales negotiated the check with the intention of getting its
serious conflict. There can be no doubt that a proper interpretation of
the act read as a whole leads to the conclusion that a payee may be value from plaintiff-appellee, negotiation took place through no fault of the
a holder in due course under any circumstance in which he meets plaintiff-appellee, unless it can be shown that the plaintiff-appellee should be
considered as having notice of the defect in the possession of the holder
the requirements of Sec. 52.
Manuel Gonzales. Our resolution of this issue leads us to a consideration of
the last question presented by the appellants, i.e., whether the plaintiff-
The argument of Professor Brannan in an earlier edition of this work appellee may be considered as a holder in due course.
has never been successfully answered and is here repeated.
Section 52, Negotiable Instruments Law, defines holder in due course, thus:
Section 191 defines "holder" as the payee or indorsee of a bill or
note, who is in possession of it, or the bearer thereof. Sec. 52
A holder in due course is a holder who has taken the instrument
defendants defines a holder in due course as "a holder who has
taken the instrument under the following conditions: 1. That it is under the following conditions:
complete and regular on its face. 2. That he became the holder of it
before it was overdue, and without notice that it had been previously (a) That it is complete and regular upon its face;
dishonored, if such was the fact. 3. That he took it in good faith and
for value. 4. That at the time it was negotiated to him he had no (b) That he became the holder of it before it was overdue, and
notice of any infirmity in the instrument or defect in the title of the without notice that it had been previously dishonored, if such was the
person negotiating it." fact;

Since "holder", as defined in sec. 191, includes a payee who is in (c) That he took it in good faith and for value;
possession the word holder in the first clause of sec. 52 and in the
second subsection may be replaced by the definition in sec. 191 so (d) That at the time it was negotiated to him he had no notice of any
as to read "a holder in due course is a payee or indorsee who is in infirmity in the instrument or defect in the title of the person
possession," etc. (Brannan's on Negotiable Instruments Law, 6th ed., negotiating it.
p. 543).
The stipulation of facts expressly states that plaintiff-appellee was not aware
The first argument of the defendants-appellants, therefore, depends upon of the circumstances under which the check was delivered to Manuel
whether or not the plaintiff-appellee is a holder in due course. If it is such a Gonzales, but we agree with the defendants-appellants that the
holder in due course, it is immaterial that it was the payee and an immediate circumstances indicated by them in their briefs, such as the fact that
party to the instrument. appellants had no obligation or liability to the Ocampo Clinic; that the amount
of the check did not correspond exactly with the obligation of Matilde
The other contention of the plaintiff is that there has been no negotiation of Gonzales to Dr. V. R. de Ocampo; and that the check had two parallel lines
the instrument, because the drawer did not deliver the instrument to Manuel in the upper left hand corner, which practice means that the check could only
be deposited but may not be converted into cash — all these circumstances The above considerations would seem sufficient to justify our ruling that
should have put the plaintiff-appellee to inquiry as to the why and wherefore plaintiff-appellee should not be allowed to recover the value of the check. Let
of the possession of the check by Manuel Gonzales, and why he used it to us now examine the express provisions of the Negotiable Instruments Law
pay Matilde's account. It was payee's duty to ascertain from the holder pertinent to the matter to find if our ruling conforms thereto. Section 52 (c)
Manuel Gonzales what the nature of the latter's title to the check was or the provides that a holder in due course is one who takes the instrument "in good
nature of his possession. Having failed in this respect, we must declare that faith and for value;" Section 59, "that every holder is deemed prima facie to
plaintiff-appellee was guilty of gross neglect in not finding out the nature of be a holder in due course;" and Section 52 (d), that in order that one may be
the title and possession of Manuel Gonzales, amounting to legal absence of a holder in due course it is necessary that "at the time the instrument was
good faith, and it may not be considered as a holder of the check in good negotiated to him "he had no notice of any . . . defect in the title of the person
faith. To such effect is the consensus of authority. negotiating it;" and lastly Section 59, that every holder is deemed prima
facieto be a holder in due course.
In order to show that the defendant had "knowledge of such facts
that his action in taking the instrument amounted to bad faith," it is In the case at bar the rule that a possessor of the instrument is prima faciea
not necessary to prove that the defendant knew the exact fraud that holder in due course does not apply because there was a defect in the title of
was practiced upon the plaintiff by the defendant's assignor, it being the holder (Manuel Gonzales), because the instrument is not payable to him
sufficient to show that the defendant had notice that there was or to bearer. On the other hand, the stipulation of facts indicated by the
something wrong about his assignor's acquisition of title, although he appellants in their brief, like the fact that the drawer had no account with the
did not have notice of the particular wrong that was committed. Paika payee; that the holder did not show or tell the payee why he had the check in
v. Perry, 225 Mass. 563, 114 N.E. 830. his possession and why he was using it for the payment of his own personal
account — show that holder's title was defective or suspicious, to say the
It is sufficient that the buyer of a note had notice or knowledge that least. As holder's title was defective or suspicious, it cannot be stated that
the note was in some way tainted with fraud. It is not necessary that the payee acquired the check without knowledge of said defect in holder's
he should know the particulars or even the nature of the fraud, since title, and for this reason the presumption that it is a holder in due course or
all that is required is knowledge of such facts that his action in taking that it acquired the instrument in good faith does not exist. And having
the note amounted bad faith. Ozark Motor Co. v. Horton (Mo. App.), presented no evidence that it acquired the check in good faith, it (payee)
196 S.W. 395. Accord. Davis v. First Nat. Bank, 26 Ariz. 621, 229 cannot be considered as a holder in due course. In other words, under the
Pac. 391. circumstances of the case, instead of the presumption that payee was a
holder in good faith, the fact is that it acquired possession of the instrument
under circumstances that should have put it to inquiry as to the title of the
Liberty bonds stolen from the plaintiff were brought by the thief, a
boy fifteen years old, less than five feet tall, immature in appearance holder who negotiated the check to it. The burden was, therefore, placed
and bearing on his face the stamp a degenerate, to the defendants' upon it to show that notwithstanding the suspicious circumstances, it
acquired the check in actual good faith.
clerk for sale. The boy stated that they belonged to his mother. The
defendants paid the boy for the bonds without any further inquiry.
Held, the plaintiff could recover the value of the bonds. The term 'bad The rule applicable to the case at bar is that described in the case of Howard
faith' does not necessarily involve furtive motives, but means bad National Bank v. Wilson, et al., 96 Vt. 438, 120 At. 889, 894, where the
faith in a commercial sense. The manner in which the defendants Supreme Court of Vermont made the following disquisition:
conducted their Liberty Loan department provided an easy way for
thieves to dispose of their plunder. It was a case of "no questions Prior to the Negotiable Instruments Act, two distinct lines of cases
asked." Although gross negligence does not of itself constitute bad had developed in this country. The first had its origin in Gill v. Cubitt,
faith, it is evidence from which bad faith may be inferred. The 3 B. & C. 466, 10 E. L. 215, where the rule was distinctly laid down
circumstances thrust the duty upon the defendants to make further by the court of King's Bench that the purchaser of negotiable paper
inquiries and they had no right to shut their eyes deliberately to must exercise reasonable prudence and caution, and that, if the
obvious facts. Morris v. Muir, 111 Misc. Rep. 739, 181 N.Y. Supp. circumstances were such as ought to have excited the suspicion of a
913, affd. in memo., 191 App. Div. 947, 181 N.Y. Supp. 945." (pp. prudent and careful man, and he made no inquiry, he did not stand in
640-642, Brannan's Negotiable Instruments Law, 6th ed.). the legal position of a bona fide holder. The rule was adopted by the
courts of this country generally and seem to have become a fixed
rule in the law of negotiable paper. Later in Goodman v. Harvey, 4 A. For the foregoing considerations, the decision appealed from should be, as it
& E. 870, 31 E. C. L. 381, the English court abandoned its former is hereby, reversed, and the defendants are absolved from the complaint.
position and adopted the rule that nothing short of actual bad faith or With costs against plaintiff-appellee.
fraud in the purchaser would deprive him of the character of a bona
fide purchaser and let in defenses existing between prior parties, that
no circumstances of suspicion merely, or want of proper caution in
the purchaser, would have this effect, and that even gross
negligence would have no effect, except as evidence tending to
establish bad faith or fraud. Some of the American courts adhered to
the earlier rule, while others followed the change inaugurated in
Goodman v. Harvey. The question was before this court in Roth v.
Colvin, 32 Vt. 125, and, on full consideration of the question, a rule
was adopted in harmony with that announced in Gill v. Cubitt, which
has been adhered to in subsequent cases, including those cited
above. Stated briefly, one line of cases including our own had
adopted the test of the reasonably prudent man and the other that of
actual good faith. It would seem that it was the intent of the
Negotiable Instruments Act to harmonize this disagreement by
adopting the latter test. That such is the view generally accepted by
the courts appears from a recent review of the cases concerning
what constitutes notice of defect. Brannan on Neg. Ins. Law, 187-
201. To effectuate the general purpose of the act to make uniform
the Negotiable Instruments Law of those states which should enact
it, we are constrained to hold (contrary to the rule adopted in our
former decisions) that negligence on the part of the plaintiff, or
suspicious circumstances sufficient to put a prudent man on inquiry,
will not of themselves prevent a recovery, but are to be considered
merely as evidence bearing on the question of bad faith. See G. L.
3113, 3172, where such a course is required in construing other
uniform acts.

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

In the case at bar as the payee acquired the check under circumstances
which should have put it to inquiry, why the holder had the check and used it
to pay his own personal account, the duty devolved upon it, plaintiff-appellee,
to prove that it actually acquired said check in good faith. The stipulation of
facts contains no statement of such good faith, hence we are forced to the
conclusion that plaintiff payee has not proved that it acquired the check in
good faith and may not be deemed a holder in due course thereof.
G.R. No. 187769 June 4, 2014 Marasigan sought recovery from Gutierrez, to no avail. He thereafter sent
several demand letters to the petitioner asking for the payment
ALVIN PATRIMONIO, Petitioner, of P200,000.00, but his demands likewise went unheeded. Consequently, he
vs. filed a criminal case for violation of B.P. 22 against the petitioner, docketed
NAPOLEON GUTIERREZ and OCTAVIO MARASIGAN III, Respondents. as Criminal Case No. 42816.

The Factual Background On September 10, 1997, the petitioner filed before the Regional Trial Court
(RTC) a Complaint for Declaration of Nullity of Loan and Recovery of
Damages against Gutierrez and co-respondent Marasigan. He completely
The facts of the case, as shown by the records, are briefly summarized
denied authorizing the loan or the check’s negotiation, and asserted that he
was not privy to the parties’ loan agreement.
The petitioner and the respondent Napoleon Gutierrez (Gutierrez) entered
into a business venture under the name of Slam Dunk Corporation (Slum Only Marasigan filed his answer to the complaint. In the RTC’s order dated
December 22, 1997,Gutierrez was declared in default.
Dunk), a production outfit that produced mini-concerts and shows related to
basketball. Petitioner was already then a decorated professional basketball
player while Gutierrez was a well-known sports columnist. The Ruling of the RTC

In the course of their business, the petitioner pre-signed several checks to The RTC ruled on February 3,2003 in favor of Marasigan.4 It found that the
answer for the expenses of Slam Dunk. Although signed, these checks had petitioner, in issuing the pre-signed blank checks, had the intention of issuing
no payee’s name, date or amount. The blank checks were entrusted to a negotiable instrument, albeit with specific instructions to Gutierrez not to
Gutierrez with the specific instruction not to fill them out without previous negotiate or issue the check without his approval. While under Section 14 of
notification to and approval by the petitioner. According to petitioner, the the Negotiable Instruments Law Gutierrez had the prima facie authority to
arrangement was made so that he could verify the validity of the payment complete the checks by filling up the blanks therein, the RTC ruled that he
and make the proper arrangements to fund the account. deliberately violated petitioner’s specific instructions and took advantage of
the trust reposed in him by the latter.
In the middle of 1993, without the petitioner’s knowledge and consent,
Gutierrez went to Marasigan (the petitioner’s former teammate), to secure a Nonetheless, the RTC declared Marasigan as a holder in due course and
loan in the amount of P200,000.00 on the excuse that the petitioner needed accordingly dismissed the petitioner’s complaint for declaration of nullity of
the money for the construction of his house. In addition to the payment of the the loan. It ordered the petitioner to pay Marasigan the face value of the
principal, Gutierrez assured Marasigan that he would be paid an interest of check with a right to claim reimbursement from Gutierrez.
5% per month from March to May 1994.
The petitioner elevated the case to the Court of Appeals (CA), insisting that
After much contemplation and taking into account his relationship with the Marasigan is not a holder in due course. He contended that when Marasigan
petitioner and Gutierrez, Marasigan acceded to Gutierrez’ request and gave received the check, he knew that the same was without a date, and hence,
him P200,000.00 sometime in February 1994. Gutierrez simultaneously incomplete. He also alleged that the loan was actually between Marasigan
delivered to Marasigan one of the blank checks the petitioner pre-signed with and Gutierrez with his check being used only as a security.
Pilipinas Bank, Greenhills Branch, Check No. 21001764 with the blank
portions filled out with the words "Cash" "Two Hundred Thousand Pesos The Ruling of the CA
Only", and the amount of "P200,000.00". The upper right portion of the check
corresponding to the date was also filled out with the words "May 23, 1994" On September 24, 2008, the CA affirmed the RTC ruling, although premised
but the petitioner contended that the same was not written by Gutierrez. on different factual findings. After careful analysis, the CA agreed with the
petitioner that Marasigan is not a holder in due course as he did not receive
On May 24, 1994, Marasigan deposited the check but it was dishonored for the check in good faith.
the reason "ACCOUNT CLOSED." It was later revealed that petitioner’s
account with the bank had been closed since May 28, 1993.
The CA also concluded that the check had been strictly filled out by Gutierrez We note at the outset that the issues raised in this petition are essentially
in accordance with the petitioner’s authority. It held that the loan may not be factual in nature. The main point of inquiry of whether the contract of loan
nullified since it is grounded on an obligation arising from law and ruled that may be nullified, hinges on the very existence of the contract of loan – a
the petitioner is still liable to pay Marasigan the sum of P200,000.00. question that, as presented, is essentially, one of fact. Whether the petitioner
authorized the borrowing; whether Gutierrez completely filled out the subject
After the CA denied the subsequent motion for reconsideration that followed, check strictly under the petitioner’s authority; and whether Marasigan is a
the petitioner filed the present petition for review on certiorari under Rule 45 holder in due course are also questions of fact, that, as a general rule, are
of the Revised Rules of Court. beyond the scope of a Rule 45 petition.

The Petition The rule that questions of fact are not the proper subject of an appeal by
certiorari, as a petition for review under Rule 45 is limited only to questions of
law, is not an absolute rule that admits of no exceptions. One notable
The petitioner argues that: (1) there was no loan between him and Marasigan
since he never authorized the borrowing of money nor the check’s exception is when the findings off act of both the trial court and the CA are
negotiation to the latter; (2) under Article 1878 of the Civil Code, a special conflicting, making their review necessary.5 In the present case, the tribunals
below arrived at two conflicting factual findings, albeit with the same
power of attorney is necessary for an individual to make a loan or borrow
conclusion, i.e., dismissal of the complaint for nullity of the loan. Accordingly,
money in behalf of another; (3) the loan transaction was between Gutierrez
we will examine the parties’ evidence presented.
and Marasigan, with his check being used only as a security; (4) the check
had not been completely and strictly filled out in accordance with his authority
since the condition that the subject check can only be used provided there is I. Liability Under the Contract of Loan
prior approval from him, was not complied with; (5) even if the check was
strictly filled up as instructed by the petitioner, Marasigan is still not entitled to The petitioner seeks to nullify the contract of loan on the ground that he
claim the check’s value as he was not a holder in due course; and (6) by never authorized the borrowing of money. He points to Article 1878,
reason of the bad faith in the dealings between the respondents, he is paragraph 7 of the Civil Code, which explicitly requires a written authority
entitled to claim for damages. when the loan is contracted through an agent. The petitioner contends that
absent such authority in writing, he should not be held liable for the face
The Issues value of the check because he was not a party or privy to the agreement.

Reduced to its basics, the case presents to us the following issues: Contracts of Agency May be Oral Unless The Law Requires a Specific Form

1. Whether the contract of loan in the amount of P200,000.00 Article 1868 of the Civil Code defines a contract of agency as a contract
granted by respondent Marasigan to petitioner, through respondent whereby a person "binds himself to render some service or to do something
Gutierrez, may be nullified for being void; in representation or on behalf of another, with the consent or authority of the
latter." Agency may be express, or implied from the acts of the principal, from
his silence or lack of action, or his failure to repudiate the agency, knowing
2. Whether there is basis to hold the petitioner liable for the payment
that another person is acting on his behalf without authority.
of the P200,000.00 loan;

3. Whether respondent Gutierrez has completely filled out the As a general rule, a contract of agency may be oral. 6 However, it must be
subject check strictly under the authority given by the petitioner; and written when the law requires a specific form, for example, in a sale of a
piece of land or any interest therein through an agent.
4. Whether Marasigan is a holder in due course.
Article 1878 paragraph 7 of the Civil Code expressly requires a special power
of authority before an agent can loan or borrow money in behalf of the
The Court’s Ruling principal, to wit:

The petition is impressed with merit. Art. 1878. Special powers of attorney are necessary in the following cases:
xxxx ATTY. DE VERA: Did you give Nap Gutierrez any Special Power of Attorney
in writing authorizing him to borrow using your money?
(7) To loan or borrow money, unless the latter act be urgent and
indispensable for the preservation of the things which are under WITNESS: No, sir. (T.S.N., Alvin Patrimonio, Nov. 11, 1999, p. 105)8
administration. (emphasis supplied)
Article 1878 does not state that the authority be in writing. As long as the
mandate is express, such authority may be either oral or written. We Marasigan however submits that the petitioner’s acts of pre-signing the blank
unequivocably declared in Lim Pin v. Liao Tian, et al.,7 that the requirement checks and releasing them to Gutierrez suffice to establish that the petitioner
under Article 1878 of the Civil Code refers to the nature of the authorization had authorized Gutierrez to fill them out and contract the loan in his behalf.
and not to its form. Be that as it may, the authority must be duly established
by competent and convincing evidence other than the self serving assertion Marasigan’s submission fails to persuade us.
of the party claiming that such authority was verbally given, thus:
In the absence of any authorization, Gutierrez could not enter into a contract
The requirements of a special power of attorney in Article 1878 of the Civil
of loan in behalf of the petitioner. As held in Yasuma v. Heirs of De
Code and of a special authority in Rule 138 of the Rules of Court refer to the
Villa,9 involving a loan contracted by de Villa secured by real estate
nature of the authorization and not its form. The requirements are met if there mortgages in the name of East Cordillera Mining Corporation, in the absence
is a clear mandate from the principal specifically authorizing the performance of an SPA conferring authority on de Villa, there is no basis to hold the
of the act. As early as 1906, this Court in Strong v. Gutierrez-Repide (6 Phil.
corporation liable, to wit:
680) stated that such a mandate may be either oral or written, the one vital
thing being that it shall be express. And more recently, We stated that, if the
special authority is not written, then it must be duly established by evidence: The power to borrow money is one of those cases where corporate officers
as agents of the corporation need a special power of attorney. In the case at
bar, no special power of attorney conferring authority on de Villa was ever
x x x the Rules require, for attorneys to compromise the litigation of their
presented. x x x There was no showing that respondent corporation ever
clients, a special authority. And while the same does not state that the
authorized de Villa to obtain the loans on its behalf.
special authority be in writing the Court has every reason to expect that, if not
in writing, the same be duly established by evidence other than the self-
serving assertion of counsel himself that such authority was verbally given xxxx
him.(Home Insurance Company vs. United States lines Company, et al., 21
SCRA 863; 866: Vicente vs. Geraldez, 52 SCRA 210; 225). (emphasis Therefore, on the first issue, the loan was personal to de Villa. There was no
supplied). basis to hold the corporation liable since there was no authority, express,
implied or apparent, given to de Villa to borrow money from petitioner.
The Contract of Loan Entered Into by Gutierrez in Behalf of the Petitioner Neither was there any subsequent ratification of his act.
Should be Nullified for Being Void; Petitioner is Not Bound by the Contract of
Loan. xxxx

A review of the records reveals that Gutierrez did not have any authority to The liability arising from the loan was the sole indebtedness of de Villa (or of
borrow money in behalf of the petitioner.1âwphi1 Records do not show that his estate after his death). (citations omitted; emphasis supplied).
the petitioner executed any special power of attorney (SPA) in favor of
Gutierrez. In fact, the petitioner’s testimony confirmed that he never This principle was also reiterated in the case of Gozun v. Mercado,10 where
authorized Gutierrez (or anyone for that matter), whether verbally or in this court held:
writing, to borrow money in his behalf, nor was he aware of any such
transaction: Petitioner submits that his following testimony suffices to establish that
respondent had authorized Lilian to obtain a loan from him.
xxxx alleging it has the burden of proof to show, not only the fact of its existence,
but also its nature and extent. This is more imperative when it is considered
Petitioner’s testimony failed to categorically state, however, whether the loan that the transaction dealt with involves checks, which are not legal tender,
was made on behalf of respondent or of his wife. While petitioner claims that and the creditor may validly refuse the same as payment of obligation.(at p.
Lilian was authorized by respondent, the statement of account marked as 630). (emphasis supplied)
Exhibit "A" states that the amount was received by Lilian "in behalf of Mrs.
Annie Mercado. The records show that Marasigan merely relied on the words of Gutierrez
without securing a copy of the SPA in favor of the latter and without verifying
It bears noting that Lilian signed in the receipt in her name alone, without from the petitioner whether he had authorized the borrowing of money or
indicating therein that she was acting for and in behalf of respondent. She release of the check. He was thus bound by the risk accompanying his trust
thus bound herself in her personal capacity and not as an agent of on the mere assurances of Gutierrez.
respondent or anyone for that matter.
No Contract of Loan Was Perfected Between Marasigan And Petitioner, as
It is a general rule in the law of agency that, in order to bind the principal by a The Latter’s Consent Was Not Obtained.
mortgage on real property executed by an agent, it must upon its face
purport to be made, signed and sealed in the name of the principal, Another significant point that the lower courts failed to consider is that a
otherwise, it will bind the agent only. It is not enough merely that the agent contract of loan, like any other contract, is subject to the rules governing the
was in fact authorized to make the mortgage, if he has not acted in the name requisites and validity of contracts in general. 13 Article 1318 of the Civil
of the principal. x x x (emphasis supplied). Code14enumerates the essential requisites for a valid contract, namely:

In the absence of any showing of any agency relations or special authority to 1. consent of the contracting parties;
act for and in behalf of the petitioner, the loan agreement Gutierrez entered
into with Marasigan is null and void. Thus, the petitioner is not bound by the 2. object certain which is the subject matter of the contract; and
parties’ loan agreement.
3. cause of the obligation which is established.
Furthermore, that the petitioner entrusted the blank pre-signed checks to
Gutierrez is not legally sufficient because the authority to enter into a loan In this case, the petitioner denied liability on the ground that the contract
can never be presumed. The contract of agency and the special fiduciary
lacked the essential element of consent. We agree with the petitioner. As we
relationship inherent in this contract must exist as a matter of fact. The
explained above, Gutierrez did not have the petitioner’s written/verbal
person alleging it has the burden of proof to show, not only the fact of
authority to enter into a contract of loan. While there may be a meeting of the
agency, but also its nature and extent.11 As we held in People v. Yabut:12
minds between Gutierrez and Marasigan, such agreement cannot bind the
petitioner whose consent was not obtained and who was not privy to the loan
Modesto Yambao's receipt of the bad checks from Cecilia Que Yabut or agreement. Hence, only Gutierrez is bound by the contract of loan.
Geminiano Yabut, Jr., in Caloocan City cannot, contrary to the holding of the
respondent Judges, be licitly taken as delivery of the checks to the
True, the petitioner had issued several pre-signed checks to Gutierrez, one
complainant Alicia P. Andan at Caloocan City to fix the venue there. He did
of which fell into the hands of Marasigan. This act, however, does not
not take delivery of the checks as holder, i.e., as "payee" or "indorsee." And constitute sufficient authority to borrow money in his behalf and neither
there appears to beno contract of agency between Yambao and Andan so as should it be construed as petitioner’s grant of consent to the parties’ loan
to bind the latter for the acts of the former. Alicia P. Andan declared in that
agreement. Without any evidence to prove Gutierrez’ authority, the
sworn testimony before the investigating fiscal that Yambao is but her
petitioner’s signature in the check cannot be taken, even remotely, as
"messenger" or "part-time employee." There was no special fiduciary
sufficient authorization, much less, consent to the contract of loan. Without
relationship that permeated their dealings. For a contract of agency to exist,
the consent given by one party in a purported contract, such contract could
the consent of both parties is essential, the principal consents that the other not have been perfected; there simply was no contract to speak of. 15
party, the agent, shall act on his behalf, and the agent consents so to act. It
must exist as a fact. The law makes no presumption thereof. The person
With the loan issue out of the way, we now proceed to determine whether the the authority he has given and second, Marasigan was not a holder in due
petitioner can be made liable under the check he signed. course.

II. Liability Under the Instrument Marasigan is Not a Holder in Due Course

The answer is supplied by the applicable statutory provision found in Section The Negotiable Instruments Law (NIL) defines a holder in due course, thus:
14 of the Negotiable Instruments Law (NIL) which states:
Sec. 52 — A holder in due course is a holder who has taken the instrument
Sec. 14. Blanks; when may be filled.- Where the instrument is wanting in any under the following conditions:
material particular, the person in possession thereof has a prima facie
authority to complete it by filling up the blanks therein. And a signature on a (a) That it is complete and regular upon its face;
blank paper delivered by the person making the signature in order that the
paper may be converted into a negotiable instrument operates as a prima
(b) That he became the holder of it before it was overdue, and
facie authority to fill it up as such for any amount. In order, however, that any
without notice that it had been previously dishonored, if such was the
such instrument when completed may be enforced against any person who
became a party thereto prior to its completion, it must be filled up strictly in
accordance with the authority given and within a reasonable time. But if any
such instrument, after completion, is negotiated to a holder in due course, it (c) That he took it in good faith and for value;
is valid and effectual for all purposes in his hands, and he may enforce it as if
it had been filled up strictly in accordance with the authority given and within (d) That at the time it was negotiated to him he had no notice of any
a reasonable time. infirmity in the instrument or defect in the title of the person
negotiating it.(emphasis supplied)
This provision applies to an incomplete but delivered instrument. Under this
rule, if the maker or drawer delivers a pre-signed blank paper to another Section 52(c) of the NIL states that a holder in due course is one who takes
person for the purpose of converting it into a negotiable instrument, that the instrument "in good faith and for value." It also provides in Section 52(d)
person is deemed to have prima facie authority to fill it up. It merely requires that in order that one may be a holder in due course, it is necessary that at
that the instrument be in the possession of a person other than the drawer or the time it was negotiated to him he had no notice of any infirmity in the
maker and from such possession, together with the fact that the instrument is instrument or defect in the title of the person negotiating it.
wanting in a material particular, the law presumes agency to fill up the
blanks.16 Acquisition in good faith means taking without knowledge or notice of
equities of any sort which could beset up against a prior holder of the
In order however that one who is not a holder in due course can enforce the instrument.18 It means that he does not have any knowledge of fact which
instrument against a party prior to the instrument’s completion, two requisites would render it dishonest for him to take a negotiable paper. The absence of
must exist: (1) that the blank must be filled strictly in accordance with the the defense, when the instrument was taken, is the essential element of good
authority given; and (2) it must be filled up within a reasonable time. If it was faith.19
proven that the instrument had not been filled up strictly in accordance with
the authority given and within a reasonable time, the maker can set this up As held in De Ocampo v. Gatchalian:20
as a personal defense and avoid liability. However, if the holder is a holder in
due course, there is a conclusive presumption that authority to fill it up had In order to show that the defendant had "knowledge of such facts that his
been given and that the same was not in excess of authority.17 action in taking the instrument amounted to bad faith," it is not necessary to
prove that the defendant knew the exact fraud that was practiced upon the
In the present case, the petitioner contends that there is no legal basis to plaintiff by the defendant's assignor, it being sufficient to show that the
hold him liable both under the contract and loan and under the check defendant had notice that there was something wrong about his assignor's
because: first, the subject check was not completely filled out strictly under acquisition of title, although he did not have notice of the particular wrong
that was committed.
It is sufficient that the buyer of a note had notice or knowledge that the note A: I told him do you know that it is not really Alvin who borrowed money from
was in some way tainted with fraud. It is not necessary that he should know you or what you want to appear…
the particulars or even the nature of the fraud, since all that is required is
knowledge of such facts that his action in taking the note amounted bad faith. xxxx

The term ‘bad faith’ does not necessarily involve furtive motives, but means Q: What was his reply?
bad faith in a commercial sense. The manner in which the defendants
conducted their Liberty Loan department provided an easy way for thieves to A: Yes, it was Nap, pero tseke pa rin ni Alvin ang hawak ko at si Alvin ang
dispose of their plunder. It was a case of "no questions asked." Although
maiipit dito.(T.S.N., Ambet Nabus, July 27, 2000; pp.65-71; emphasis
gross negligence does not of itself constitute bad faith, it is evidence from
which bad faith may be inferred. The circumstances thrust the duty upon the
defendants to make further inquiries and they had no right to shut their eyes
deliberately to obvious facts. (emphasis supplied). Since he knew that the underlying obligation was not actually for the
petitioner, the rule that a possessor of the instrument is prima facie a holder
in due course is inapplicable. As correctly noted by the CA, his inaction and
In the present case, Marasigan’s knowledge that the petitioner is not a party
failure to verify, despite knowledge of that the petitioner was not a party to
or a privy to the contract of loan, and correspondingly had no obligation or
the loan, may be construed as gross negligence amounting to bad faith.
liability to him, renders him dishonest, hence, in bad faith. The following
exchange is significant on this point:
Yet, it does not follow that simply because he is not a holder in due course,
Marasigan is already totally barred from recovery. The NIL does not provide
that a holder who is not a holder in due course may not in any case recover
on the instrument.22 The only disadvantage of a holder who is not in due
Q: Now, I refer to the second call… after your birthday. Tell us what you course is that the negotiable instrument is subject to defenses as if it were
talked about? non-negotiable.23 Among such defenses is the filling up blank not within the
A: Since I celebrated my birthday in that place where Nap and I live together
with the other crew, there were several visitors that included Danny Espiritu. On this point, the petitioner argues that the subject check was not filled up
So a week after my birthday, Bong Marasigan called me up again and he strictly on the basis of the authority he gave. He points to his instruction not
was fuming mad. Nagmumura na siya. Hinahanap niya si… hinahanap niya to use the check without his prior approval and argues that the check was
si Nap, dahil pinagtataguan na siya at sinabi na niya na kailangan I-settle na filled up in violation of said instruction.
niya yung utang ni Nap, dahil…
Check Was Not Completed Strictly Under The Authority Given by The
xxxx Petitioner

WITNESS: Yes. Sinabi niya sa akin na kailangan ayusin na bago pa mauwi Our own examination of the records tells us that Gutierrez has exceeded the
sa kung saan ang tsekeng tumalbog… (He told me that we have to fix it up authority to fill up the blanks and use the check.1âwphi1 To repeat, petitioner
before it…) mauwi pa kung saan… gave Gutierrez pre-signed checks to be used in their business provided that
he could only use them upon his approval. His instruction could not be any
xxxx clearer as Gutierrez’ authority was limited to the use of the checks for the
operation of their business, and on the condition that the petitioner’s prior
Q: What was your reply, if any? approval be first secured.
A: I actually asked him. Kanino ba ang tseke na sinasabi mo?
(Whose check is it that you are referring to or talking about?) While under the law, Gutierrez had a prima facie authority to complete the
Q: What was his answer? check, such prima facie authority does not extend to its use (i.e., subsequent
A: It was Alvin’s check. transfer or negotiation)once the check is completed. In other words, only the
Q: What was your reply, if any? authority to complete the check is presumed. Further, the law used the term
"prima facie" to underscore the fact that the authority which the law accords WHEREFORE, in view of the foregoing, judgment is hereby rendered
to a holder is a presumption juris tantumonly; hence, subject to subject to GRANTING the petitioner Alvin Patrimonio's petition for review on certiorari.
contrary proof. Thus, evidence that there was no authority or that the The appealed Decision dated September 24, 2008 and the Resolution dated
authority granted has been exceeded may be presented by the maker in April 30, 2009 of the Court of Appeals are consequently ANNULLED AND
order to avoid liability under the instrument. SET ASIDE. Costs against the respondents.

In the present case, no evidence is on record that Gutierrez ever secured SO ORDERED.
prior approval from the petitioner to fill up the blank or to use the check. In his
testimony, petitioner asserted that he never authorized nor approved the
filling up of the blank checks, thus:

ATTY. DE VERA: Did you authorize anyone including Nap Gutierrez to write
the date, May 23, 1994?

WITNESS: No, sir.

Q: Did you authorize anyone including Nap Gutierrez to put the word cash?
In the check?

A: No, sir.

Q: Did you authorize anyone including Nap Gutierrez to write the

figure P200,000 in this check?

A: No, sir.

Q: And lastly, did you authorize anyone including Nap Gutierrez to write the
words P200,000 only xx in this check?

A: No, sir. (T.S.N., Alvin Patrimonio, November 11, 1999).24

Notably, Gutierrez was only authorized to use the check for business
expenses; thus, he exceeded the authority when he used the check to pay
the loan he supposedly contracted for the construction of petitioner's house.
This is a clear violation of the petitioner's instruction to use the checks for the
expenses of Slam Dunk. It cannot therefore be validly concluded that the
check was completed strictly in accordance with the authority given by the

Considering that Marasigan is not a holder in due course, the petitioner can
validly set up the personal defense that the blanks were not filled up in
accordance with the authority he gave. Consequently, Marasigan has no
right to enforce payment against the petitioner and the latter cannot be
obliged to pay the face value of the check.