G.R. No.
179952 December 4, 2009
METROPOLITAN BANK AND TRUST COMPANY
(formerly ASIANBANK CORPORATION), Petitioner,
vs.
BA FINANCE CORPORATION and MALAYAN
INSURANCE CO., INC., Respondents.
DECISION
CARPIO MORALES, J.:
Lamberto Bitanga (Bitanga) obtained from respondent
BA Finance Corporation (BA Finance) a ₱329,2801 loan
to secure which, he mortgaged his car to respondent BA
Finance.2 The mortgage contained the following
stipulation:
The MORTGAGOR covenants and agrees that he/it will
cause the property(ies) hereinabove mortgaged to be
insured against loss or damage by accident, theft and
fire for a period of one year from date hereof with an
insurance company or companies acceptable to the
MORTGAGEE in an amount not less than the outstanding
balance of mortgage obligations and that he/it will make
all loss, if any, under such policy or policies, payable to
the MORTGAGEE or its assigns as its interest may
appear x x x.3 (emphasis and underscoring supplied)
Bitanga thus had the mortgaged car insured by
respondent Malayan Insurance Co., Inc. (Malayan
Insurance)4which issued a policy stipulating that, inter
alia,
Loss, if any shall be payable to BA FINANCE CORP. as its
interest may appear. It is hereby expressly understood
that this policy or any renewal thereof, shall not be
cancelled without prior notification and conformity by BA
FINANCE CORPORATION.5 (emphasis and underscoring
supplied)
The car was stolen. On Bitanga’s claim, Malayan
Insurance issued a check payable to the order of "B.A.
Finance Corporation and Lamberto Bitanga" for
₱224,500, drawn against China Banking Corporation
(China Bank). The check was crossed with the notation
"For Deposit Payees’ Account Only."6
Without the indorsement or authority of his co-payee BA
Finance, Bitanga deposited the check to his account with
the Asianbank Corporation (Asianbank), now merged
with herein petitioner Metropolitan Bank and Trust
Company (Metrobank). Bitanga subsequently withdrew
the entire proceeds of the check.
In the meantime, Bitanga’s loan became past due, but
despite demands, he failed to settle it.
BA Finance eventually learned of the loss of the car and
of Malayan Insurance’s issuance of a crossed check
payable to it and Bitanga, and of Bitanga’s depositing it
in his account at Asianbank and withdrawing the entire
proceeds thereof.
BA Finance thereupon demanded the payment of the
value of the check from Asianbank7 but to no avail,
prompting it to file a complaint before the Regional Trial
Court (RTC) of Makati for sum of money and
damages against Asianbank and Bitanga,8 alleging that,
inter alia, it is entitled to the entire proceeds of the
check.
In its Answer with Counterclaim,9 Asianbank alleged that
BA Finance "instituted [the] complaint in bad faith to
coerce [it] into paying the whole amount of the CHECK
knowing fully well that its rightful claim, if any, is
against Malayan [Insurance]."10
Asianbank thereafter filed a cross-claim against
Bitanga,11 alleging that he fraudulently induced its
personnel to release to him the full amount of the
check; and that on being later informed that the entire
amount of the check did not belong to Bitanga, it took
steps to get in touch with him but he had changed
residence without leaving any forwarding address.12
And Asianbank filed a third-party complaint against
Malayan Insurance,13 alleging that Malayan Insurance
was grossly negligent in issuing the check payable to
both Bitanga and BA Finance and delivering it to Bitanga
without the consent of BA Finance.14
Bitanga was declared in default in Asianbank’s cross-
claim.15
Branch 137 of the Makati RTC, finding that Malayan
Insurance was not privy to the contract between BA
Finance and Bitanga, and noting the claim of Malayan
Insurance that it is its policy to issue checks to both the
insured and the financing company, held that Malayan
Insurance cannot be faulted for negligence for issuing
the check payable to both BA Finance and Bitanga.
The trial court, holding that Asianbank was negligent in
allowing Bitanga to deposit the check to his account and
to withdraw the proceeds thereof, without his co-payee
BA Finance having either indorsed it or authorized him
to indorse it in its behalf,16 found Asianbank and Bitanga
jointly and severally liable to BA Finance following
Section 41 of the Negotiable Instruments Law and
Associated Bank v. Court of Appeals.17
Thus the trial court disposed:
WHEREFORE, premises considered, judgment is hereby
rendered ordering defendants Asian Bank Corporation
and Lamberto Bitanga:
1) To pay plaintiff jointly and severally the sum
of P224,500.00 with interest thereon at the
rate of 12% from September 25, 1992 until
fully paid;
2) To pay plaintiff the sum of P50,000.00 as
exemplary damages; P20,000.00 as actual
damages; P30,000.00 as attorney’s fee; and
3) To pay the costs of suit.
1
Asianbank’s and Bitanga’s [sic] counterclaims
dismissed.
The third party complaint of defendant/third party
plaintiff against third-party defendant Malayan
Insurance, Co., Inc. is hereby dismissed. Asianbank is
ordered to pay Malayan attorney’s fee of P50,000.00
and a per appearance fee of P500.00.
On the cross-claim of defendant Asianbank, co-
defendant Lamberto Bitanga is ordered to pay the
former the amounts the latter is ordered to pay
the plaintiff in Nos. 1, 2 and 3 above-mentioned.
SO ORDERED.18 (emphasis and underscoring supplied)
Before the Court of Appeals, Asianbank, in its
Appellant’s Brief, submitted the following issues for
consideration:
3.01.1.1 Whether BA Finance has a cause of action
against Asianbank.
3.01.1.2 Assuming that BA Finance has a valid cause of
action, may it claim from Asianbank more than one-half
of the value of the check considering that it is a mere
co-payee or joint payee of the check?
3.01.1.3 Whether BA Finance is liable to Asianbank for
actual and exemplary damages for wrongfully bringing
the case to court.
3.01.1.4 Whether Malayan is liable to Asianbank for
reimbursement of any sum of money which this
Honorable Court may award to BA Finance in this
case.19 (underscoring supplied)
And it proffered the following arguments:
A. BA Finance has no cause of action against
Asianbank as it has no legal right and title to
the check considering that the check was not
delivered to BA Finance. Hence, BA Finance is
not a holder thereof under the Negotiable
Instruments Law.
B. Asianbank, as collecting bank, is not liable
to BA Finance as there was no privity of
contract between them.
C. Asianbank, as collecting bank, is not liable
to BA Finance, considering that, as the
intermediary between the payee and the
drawee Chinabank, it merely acted on the
instructions of drawee Chinabank to pay the
amount of the check to Bitanga, hence, the
consequent damage to BA Finance was due to
the negligence of Chinabank.
D. Malayan’s act of issuing and delivering the
check solely to Bitanga in violation of the "loss
payee" clause in the Policy, is the proximate
cause of the alleged damage to BA Finance.
are E. Assuming Asianbank is liable, BA Finance
can claim only his proportionate interest on the
check as it is a joint payee thereof.
F. Bitanga alone is liable for the amount to BA
Finance on the ground of unjust enrichment or
solutio indebiti.
G. BA Finance is liable to pay Asianbank actual
and exemplary damages.20 (underscoring
supplied)
The appellate court, "summarizing" the errors attributed
to the trial court by Asianbank to be "whether…BA
Finance has a cause of action against [it] even if the
subject check had not been delivered to…BA Finance by
the issuer itself," held in the affirmative and accordingly
affirmed the trial court’s decision but deleted the award
of ₱20,000 as actual damages.21
Hence, the present Petition for Review on
Certiorari22 filed by Metrobank (hereafter petitioner) to
which Asianbank was, as earlier stated, merged, faulting
the appellate court
I. x x x in applying the case of Associated Bank
v. Court of Appeals, in the absence of factual
similarity and of the legal relationships
necessary for the application of the desirable
shortcut rule. x x x
II. x x x in not finding that x x x the general
rule that the payee has no cause of
action against the collecting bank absent
delivery to him must be applied.
III. x x x in finding that all the elements of a
cause of action by BA Finance Corporation
against Asianbank Corporation are present.
IV. x x x in finding that Article 1208 of the Civil
Code is not applicable.
V. x x x in awarding of exemplary
damages even in the absence of moral,
temperate, liquidated or compensatory
damages and a finding of fact that Asianbank
acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner.
xxxx
VII. x x x in dismissing Asianbank’s
counterclaim and Third Party complaint
[against Malayan Insurance].23(italics in the
original; underscoring supplied)
Petitioner proffers the following arguments against the
application of Associated Bank v. CA to the case:
x x x [T]he rule established in the Associated Bank case
has provided a speedier remedy for the payee to recover
from erring collecting banks despite the absence of
delivery of the negotiable instrument. However, the
2
application of the rule demands careful consideration of
the factual settings and issues raised in the case x x x.
One of the relevant circumstances raised in Associated
Bank is the existence of forgery or unauthorized
indorsement. x x x
xxxx
In the case at bar, Bitanga is authorized to indorse the
check as the drawer names him as one of the payees.
Moreover, his signature is not a forgery nor has he or
anyone forged the signature of the representative of BA
Finance Corporation. No unauthorized indorsement
appears on the check.
xxxx
Absent the indispensable fact of forgery or unauthorized
indorsement, the desirable shortcut rule cannot be
applied,24 (underscoring supplied)
The petition fails.
Section 41 of the Negotiable Instruments Law provides:
Where an instrument is payable to the order of two or
more payees or indorsees who are not partners, all must
indorse unless the one indorsing has authority to indorse
for the others. (emphasis and underscoring supplied)
Bitanga alone endorsed the crossed check, and
petitioner allowed the deposit and release of the
proceeds thereof, despite the absence of authority of
Bitanga’s co-payee BA Finance to endorse it on its
behalf.25
Denying any irregularity in accepting the check,
petitioner maintains that it followed normal banking
procedure. The testimony of Imelda Cruz, Asianbank’s
then accounting head, shows otherwise, however, viz:
Q Now, could you be familiar with a particular
policy of the bank with respect to checks with
joined (sic) payees?
A Yes, sir.
Q And what would be the particular policy of
the bank regarding this transaction?
A The bank policy and procedure
regarding the joint checks. Once it is
deposited to a single account, we are not
accepting joint checks for single account,
depositing to a single account (sic).
Q What happened to the bank employee who
allowed this particular transaction to occur?
A Once the branch personnel, the bank
personnel (sic) accepted it, he is liable.
3
Q What do you mean by the branch personnel
being held liable?
A Because since (sic) the bank policy, we
are not supposed to accept joint checks to
a [single] account, so we mean that
personnel would be held liable in the
sense that (sic) once it is withdrawn or
encashed, it will not be allowed.
Q In your experience, have you encountered
any bank employee who was subjected to
disciplinary action by not following bank
policies?
A The one that happened in that case, since I
really don’t know who that personnel is, he is
no longer connected with the bank.
Q What about in general, do you know of
any disciplinary action, Madam witness?
A Since there’s a negligence on the part of
the bank personnel, it will be a ground for
his separation [from] the
bank.26 (emphasis, italics and underscoring
supplied)
Admittedly, petitioner dismissed the employee who
allowed the deposit of the check in Bitanga’s account.
Petitioner’s argument that since there was neither
forgery, nor unauthorized indorsement because Bitanga
was a co-payee in the subject check, the dictum in
Associated Bank v. CA does not apply in the present
case fails. The payment of an instrument over a missing
indorsement is the equivalent of payment on a forged
indorsement27 or an unauthorized indorsement in itself
in the case of joint payees.28
Clearly, petitioner, through its employee, was negligent
when it allowed the deposit of the crossed check,
despite the lone endorsement of Bitanga, ostensibly
ignoring the fact that the check did not, it bears
repeating, carry the indorsement of BA Finance.29
As has been repeatedly emphasized, the banking
business is imbued with public interest such that the
highest degree of diligence and highest standards of
integrity and performance are expected of banks in
order to maintain the trust and confidence of the public
in general in the banking sector.30 Undoubtedly, BA
Finance has a cause of action against petitioner.
Is petitioner liable to BA Finance for the full value of the
check?
Petitioner, at all events, argue that its liability to BA
Finance should only be one-half of the amount covered
by the check as there is no indication in the check that
Bitanga and BA Finance are solidary creditors to thus
make them presumptively joint creditors under Articles
1207 and 1208 of the Civil Code which respectively
provide:
Art. 1207. The concurrence of two or more creditors or
of two or more debtors in one and the same obligation
does not imply that each one of the former has a right
to demand, or that each one of the latter is bound to
render, entire compliance with the prestations. There is
a solidary liability only when the obligation expressly so
states, or when the law or the nature of the obligation
requires solidarity.
Art. 1208. If from the law, or the nature or wording of
the obligations to which the preceding article refers to
the contrary does not appear, the credit or debt shall be
presumed to be divided into as many equal shares as
there are creditors or debtors, the debts or credits being
considered distinct from one another, subject to the
Rules of Court governing the multiplicity of suits.
Petitioner’s argument is flawed.
The provisions of the Negotiable Instruments Law and
underlying jurisprudential teachings on the black-letter
law provide definitive justification for petitioner’s full
liability on the value of the check.
To be sure, a collecting bank, Asianbank in this case,
where a check is deposited and which indorses the check
upon presentment with the drawee bank, is an
indorser.[31] This is because in indorsing a check to the
drawee bank, a collecting bank stamps the back of the
check with the phrase "all prior endorsements and/or
lack of endorsement guaranteed"32 and, for all intents
and purposes, treats the check as a negotiable
instrument, hence, assumes the warranty of an
indorser.33 Without Asianbank’s warranty, the drawee
bank (China Bank in this case) would not have paid the
value of the subject check.
Petitioner, as the collecting bank or last indorser,
generally suffers the loss because it has the duty to
ascertain the genuineness of all prior indorsements
considering that the act of presenting the check for
payment to the drawee is an assertion that the party
making the presentment has done its duty to ascertain
the genuineness of prior indorsements.34
Accordingly, one who credits the proceeds of a check to
the account of the indorsing payee is liable in conversion
to the non-indorsing payee for the entire amount of the
check.35
It bears noting that in petitioner’s cross-claim against
Bitanga, the trial court ordered Bitanga to return to
petitioner the entire value of the check ─ ₱224,500.00 ─
with interest as well as damages and cost of suit.
Petitioner never questioned this aspect of the trial
court’s disposition, yet it now prays for the modification
of its liability to BA Finance to only one-half of said
amount. To pander to petitioner’s supplication would
certainly amount to unjust enrichment at BA Finance’s
expense. Petitioner’s remedy—which is the
reimbursement for the full amount of the check from the
perpetrator of the irregularity — lies with Bitanga.
Articles 1207 and 1208 of the Civil Code cannot be
applied to the present case as these are completely
irrelevant. The drawer, Malayan Insurance in this case,
4
issued the check to answer for an underlying contractual
obligation (payment of insurance proceeds). The
obligation is merely reflected in the instrument and
whether the payees would jointly share in the proceeds
or not is beside the point.
Moreover, granting petitioner’s appeal for partial liability
would run counter to the existing principles on the
liabilities of parties on negotiable instruments,
particularly on Section 68 of the Negotiable Instruments
Law which instructs that joint payees who indorse are
deemed to indorse jointly and severally.36 Recall that
when the maker dishonors the instrument, the holder
thereof can turn to those secondarily liable — the
indorser — for recovery.37 And since the law explicitly
mandates a solidary liability on the part of the joint
payees who indorse the instrument, the holder thereof
(assuming the check was further negotiated) can turn to
either Bitanga or BA Finance for full recompense.
Respecting petitioner’s challenge to the award by the
appellate court of exemplary damages to BA Finance,
the same fails. Contrary to petitioner’s claim that no
moral, temperate, liquidated or compensatory damages
were awarded by the trial court,38 the RTC did in fact
award compensatory or actual damages of ₱224,500,
the value of the check, plus interest thereon.
Petitioner argues, however, that assuming arguendo
that compensatory damages had been awarded, the
same contravened Article 2232 of the Civil Code which
provides that in contracts or quasi-contracts, the court
may award exemplary damages only if the defendant
acted in a wanton, fraudulent, reckless, oppressive, or
malevolent manner. Since, so petitioner concludes,
there was no finding that it acted in a wanton,
fraudulent, reckless, oppressive, or malevolent
manner,39 it is not liable for exemplary damages.
The argument fails. To reiterate, petitioner’s liability is
based not on contract or quasi-contract but on quasi-
delictsince there is no pre-existing contractual relation
between the parties.40 Article 2231 of the Civil Code,
which provides that in quasi-delict, exemplary damages
may be granted if the defendant acted with gross
negligence, thus applies. For "gross negligence" implies
a want or absence of or failure to exercise even slight
care or diligence, or the entire absence of
care,41 evincing a thoughtless disregard of consequences
without exerting any effort to avoid them.42
x x x The law allows the grant of exemplary damages to
set an example for the public good. The business of a
bank is affected with public interest; thus it makes a
sworn profession of diligence and meticulousness in
giving irreproachable service. For this reason, the bank
should guard against in injury attributable to negligence
or bad faith on its part. The award of exemplary
damages is proper as a warning to [the petitioner] and
all concerned not to recklessly disregard their obligation
to exercise the highest and strictest diligence in serving
their depositors.43(Italics and underscoring supplied)
As for the dismissal by the appellate court of petitioner’s
third-party complaint against Malayan Insurance, the
same is well-taken. Petitioner based its third-party
complaint on Malayan Insurance’s alleged gross
negligence in issuing the check payable to both BA
Finance and Bitanga, despite the stipulation in the
mortgage and in the insurance policy that liability for
loss shall be payable to BA Finance.44 Malayan Insurance
countered, however, that it
x x x paid the amount of ₱224,500 to ‘BA Finance
Corporation and Lamberto Bitanga’ in compliance with
the decision in the case of "Lamberto Bitanga versus
Malayan Insurance Co., Inc., Civil Case No. 88-2802,
RTC-Makati Br. 132, and affirmed on appeal by the
Supreme Court [3rd Division], G.R. no. 101964, April 8,
1992 x x x.45(underscoring supplied)
It is noted that Malayan Insurance, which stated that it
was a matter of company policy to issue checks in the
name of the insured and the financing company,
presented a witness to rebut its supposed
negligence. 46 Perforce, it thus wrote a crossed check
with joint payees so as to serve warning that the check
was issued for a definite purpose.47Petitioner never ever
disputed these assertions.
The Court takes exception, however, to the appellate
court’s affirmance of the trial court’s grant of legal
interest of 12% per annum on the value of the check.
For the obligation in this case did not arise out of a loan
or forbearance of money, goods or credit. While Article
1980 of the Civil Code provides that:
Fixed savings, and current deposits of money in banks
and similar institutions shall be governed by the
provisions concerning simple loan,
said provision does not find application in this case since
the nature of the relationship between BA Finance and
petitioner is one of agency whereby petitioner, as
collecting bank, is to collect for BA Finance the
corresponding proceeds from the check.48 Not being a
loan or forbearance of money, the interest should be 6%
per annum computed from the date of extrajudicial
demand on September 25, 1992 until finality of
judgment; and 12% per annum from finality of
judgment until payment, conformably with Eastern
Shipping Lines, Inc. v. Court of Appeals.[49]
WHEREFORE, the Decision of the Court of Appeals dated
May 18, 2007 is AFFIRMED with MODIFICATION in that
the rate of interest on the judgment obligation of
₱224,500 should be 6% per annum, computed from the
time of extrajudicial demand on September 25, 1992
until its full payment before finality of judgment;
thereafter, if the amount adjudged remains unpaid, the
interest rate shall be 12% per annum computed from
the time the judgment becomes final and executory until
fully satisfied.
Costs against petitioner.
SO ORDERED.
5
G.R. No. 219037, October 19, 2016
RCBC SAVINGS BANK, Petitioner, v. NOEL M.
ODRADA, Respondent.
DECISION
CARPIO, J.:
The Case
Before the Court is a petition for review on
certiorari1 assailing the 26 March 2014 Decision2 and the
18 June 2015 Resolution3 of the Court of Appeals in CA-
G.R. CV No. 94890.
The Facts
In April 2002, respondent Noel M. Odrada (Odrada) sold
a secondhand Mitsubishi Montero (Montero) to Teodoro
L. Lim (Lim) for One Million Five Hundred Ten Thousand
Pesos (P1,510,000). Of the total consideration, Six
Hundred Ten Thousand Pesos (P610,000) was initially
paid by Lim and the balance of Nine Hundred Thousand
Pesos (P900,000) was financed by petitioner RCBC
Savings Bank (RCBC) through a car loan obtained by
Lim.4 As a requisite for the approval of the loan, RCBC
required Lim to submit the original copies of the
Certificate of Registration (CR) and Official Receipt (OR)
in his name. Unable to produce the Montero's OR and
CR, Lim requested RCBC to execute a letter addressed
to Odrada informing the latter that his application for a
car loan had been approved.
On 5 April 2002, RCBC issued a letter that the balance of
the loan would be delivered to Odrada upon submission
of the OR and CR. Following the letter and initial down
payment, Odrada executed a Deed of Absolute Sale on 9
April 2002 in favor of Lim and the latter took possession
of the Montero.5chanrobleslaw
When RCBC received the documents, RCBC issued two
manager's checks dated 12 April 2002 payable to
Odrada for Nine Hundred Thousand Pesos (P900,000)
and Thirteen Thousand Five Hundred Pesos
(P13,500).6 After the issuance of the manager's checks
and their turnover to Odrada but prior to the checks'
presentation, Lim notified Odrada in a letter dated 15
April 2002 that there was an issue regarding the
roadworthiness of the Montero. The letter states:
chanRoblesvirtualLawlibrary
April 15, 2002
Mr. Noel M. Odrada
C/o Kotse Pilipinas
Fronting Ultra, Pasig City
Thru: Shan Mendez;.
Dear Mr. Odrada,
Please be inform[ed] that I am going to cancel or
exchange the (1) one unit Montero that you sold to me
thru Mr. Shan Mendez because it did not match your
representations the way Mr. Shan Mendez explained to
me like:ChanRoblesVirtualawlibrary
1. You told me that the said vehicle has not experience
[d] collision. However, it is hidden, when you open its
engine cover there is a trace of a head-on collision. The
condenser is smashed,; the fender support is not
align[ed], both bumper supports] connecting [the]
chassis were crippled and welded, the hood support was
repaired, etc.
2. The 4-wheel drive shift is not functioning. When Mr.
Mendez was asked about it, he said it would not function
until you can reach the speed of 30 miles.
3. During Mr. Mendez['s] representation, he said the
odometer has still an original mileage data but found
tampered.
4. You represented the vehicle as model 1998 however;
it is indicated in the front left A-pillar inscribed at the
identification plate [as] model 1997.
Therefore, please show your sincerity by personally
inspecting the said vehicle at RCBC, Pacific Bldg. Pearl
Drive, Ortigas Center, Pasig City. Let us meet at the said
bank at 10:00 A.M., April 17, 2002.
Meanwhile, kindly hold or do not encash the manager's
check[s] issued to you by RCBC until you have clarified
and satisfied my complaints.
Sincerely yours,
Teodoro L. Lim
Cc: Dario E. Santiago, RCBC loan
Legal7
Odrada did not go to the slated meeting and instead
deposited the manager's checks with International
Exchange Bank (Ibank) on 16 April 2002 and
redeposited them on 19 April 2002 but the checks were
dishonored both times apparently upon Lim's instruction
to RCBC.8 Consequently, Odrada filed a collection
suit9 against Lim and RCBC in the Regional Trial Court of
Makati.10chanrobleslaw
In his Answer,11 Lim alleged that the cancellation of the
loan was at his instance, upon discovery of the
misrepresentations by Odrada about the Montero's
roadworthiness. Lim claimed that the cancellation was
not done ex parte but through a letter12 dated 15 April
2002.13 He further alleged that the letter was delivered
to Odrada prior to the presentation of the manager's
checks to RCBC.14chanrobleslaw
On the other hand, RCBC contended that the manager's
checks were dishonored because Lim had cancelled the
loan. RCBC claimed that the cancellation of the loan was
prior to the presentation of the manager's checks.
Moreover, RCBC alleged that despite notice of the
defective condition of the Montero, which constituted a
failure of consideration, Odrada still proceeded with
presenting the manager's checks.
It was later disclosed during trial that RCBC also sent a
formal notice of cancellation of the loan on 18 April 2002
to both Odrada and Lim.15chanrobleslaw
The Regional Trial Court's Ruling
In its Decision16 dated 1 October 2009, the trial court
6
ruled in favor of Odrada. The trial court held that Odrada
was the proper party to ask for rescission.17 The lower
court reasoned that the right of rescission is implied in
reciprocal obligations where one party fails to perform
what is incumbent upon him when the other is willing
and ready to comply. The trial court ruled that it was not
proper for Lim to exercise the right of rescission since
Odrada had already complied with the contract of sale
by delivering the Montero while Lim remained delinquent
in payment.18 Since Lim was not ready, willing, and able
to comply with the contract of sale, he was not the
proper party entitled to rescind the contract.
The trial court ruled that the defective condition of the
Montero was not a supervening event that would justify
the dishonor of the manager's checks. The trial court
reasoned that a manager's check is equivalent to cash
and is really the bank's own check. It may be treated as
a promissory note with the bank as maker. Hence, the
check becomes the primary obligation of the bank which
issued it and constitutes a written promise to pay on
demand.19 Being the party primarily liable, the trial court
ruled that RCBC was liable to Odrada for the value of the
manager's checks.
Finally, the trial court found that Odrada suffered
sleepless nights, humiliation, and was constrained to
hire the services of a lawyer meriting the award of
damages.20chanrobleslaw
The dispositive portion of the Decision reads:
chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, judgment is hereby
rendered:ChanRoblesVirtualawlibrary
(a) Directing defendant RCBC to pay plaintiff the amount
of Php 913,500.00 representing the cash equivalent of
the two (2) manager's checks, plus 12% interest from
the date of filing of the case until fully paid;
(b) Directing defendants to solidarity pay moral
damages in the amount of Php 500,000.00 and
exemplary damages in the amount of Php 500,000.00;
(c) Directing defendants to solidarity pay attorney's fees
in the amount of Php 300,000.00.
Finally, granting the cross-claim of defendant RCBC,
Teodoro L. Lim is hereby directed to indemnify RCBC
Savings Bank for the amount adjudged for it to pay
plaintiff.
SO ORDERED.21
RCBC and Lim appealed from the trial court's decision.
The Court of Appeals' Ruling
In its assailed 26 March 2014 Decision, the Court of
Appeals dismissed the appeal and affirmed the trial
court's 1 October 2009 Decision.
The Court of Appeals ruled that the two manager's
checks, which were complete and regular, reached the
hands of Lim who deposited the same in his bank
account with Ibank. RCBC knew that the amount
reflected on the manager's checks represented Lim's
payment for the remaining balance of the Montero's
purchase price. The appellate court held that when RCBC
issued the manager's checks in favor of Odrada, RCBC
admitted the existence of the payee and his then
capacity to endorse, and undertook that on due
presentment the checks which were negotiable
instruments would be accepted or paid, or both
according to its tenor.22 The appellate court held that
the effective delivery of the checks to Odrada made
RCBC liable for the checks.23chanrobleslaw
On RCBC's defense of want of consideration, the Court
of Appeals affirmed the finding of the trial court that
Odrada was a holder in due course. The appellate court
ruled that the defense of want of consideration is not
available against a holder in due course.24chanrobleslaw
Lastly, the Court of Appeals found that the award of
moral and exemplary damages and attorney's fees was
excessive. Hence, modification was proper.
The dispositive portion of the Decision reads:
chanRoblesvirtualLawlibrary
WHEREFORE, the impugned Decision of the court a quo
in Civil Case No. 02-453 is hereby AFFIRMED with
MODIFICATION insofar as the reduction of awards for
moral, exemplary damages and attorney's fees to
P50,000.00, P20,000.00, and P20,000.00 respectively.
SO ORDERED.25cralawred
RCBC and Lim filed a motion for reconsideration26 on 28
April 2014. In its 18 June 2015 Resolution, the Court of
Appeals denied the motion for lack of
merit.27chanrobleslaw
RCBC alone28 filed this petition before the Court. Thus,
the decision of the Court of Appeals became final and
executory as to Lim.
The Issues
RCBC presented the following, issues in this petition:
chanRoblesvirtualLawlibrary
A. The court a quo gravely erred in finding that as
between Odrada as seller and Lim as buyer of the
vehicle, only the former has the right to rescind the
contract of sale finding failure to perform an obligation
under the contract of sale on the part of the latter only
despite the contested roadworthiness of the vehicle,
subject matter of the sale.
1. Whether or not the court a quo erred in holding that
Lim cannot cancel the auto loan despite the failure in
consideration due to the contested roadworthiness of the
vehicle delivered by Odrada to him.29
B. The court a quo gravely erred when it found that
Odrada is a holder in due course of the manager's
checks in question despite being informed of the
cancellation of the auto loan by the borrower, Lim.
1. Whether or not Lim can validly countermand the
manager's checks in the hands of a holder who does not
hold the same in due course.30
Odrada failed to file a comment31 within the period
prescribed by this Court.32chanrobleslaw
The Ruling of this Court
We grant the petition.
Under the law on sales, a contract of sale is perfected
the moment there is a meeting of the minds upon the
7
thing which is the object of the contract and upon the
price which is the consideration. From that moment, the
parties may reciprocally demand
performance.33 Performance may be done through
delivery, actual or constructive. Through delivery,
ownership is transferred to the vendee.34 However, the
obligations between the parties do not cease upon
delivery of the subject matter. The vendor and vendee
remain concurrently bound by specific obligations. The
vendor, in particular, is responsible for an implied
warranty against hidden defects.
Article 1547 of the Civil Code states: "In a contract of
sale, unless a contrary intention appears, there is an
implied warranty that the thing shall be free from any
hidden faults or defects."35 Article 1566 of the Civil Code
provides that "the vendor is responsible to the vendee
for any hidden faults or defects in the thing sold, even
though he was not aware thereof."36 As a consequence,
the law fixes the liability of the vendor for hidden defects
whether known or unknown to him at the time of the
sale.
The law defines a hidden defect as one which would
render the thing sold unfit for the use for which it is
intended, or would diminish its fitness for such use to
such an extent that, had the vendee been aware
thereof, he would not have acquired it or would have
given a lower price for it.37chanrobleslaw
In this case, Odrada and Lim entered into a contract of
sale of the Montero. Following the initial downpayment
and execution of the deed of sale, the Montero was
delivered by Odrada to Lim and the latter took
possession of the Montero. Notably, under the law,
Odrada's warranties against hidden defects continued
even after the Montero's delivery. Consequently, a
misrepresentation as to the Montero's roadworthiness
constitutes a breach of warranty against hidden defects.
In Supercars Management & Development Corporation
v. Flores,38 we held that a breach of warranty against
hidden defects occurred when the vehicle, after it was
delivered to respondent, malfunctioned despite repairs
by petitioner.39 In the present case, when Lim acquired
possession, he discovered that the Montero was not
roadworthy. The engine was misaligned, the automatic
transmission was malfunctioning, and the brake rotor
disks needed refacing.40 However, during the
proceedings in the trial court, Lim's testimony was
stricken off the record because he failed to appear
during cross-examination.41 In effect, Lim was not able
to present clear preponderant evidence of the Montero's
defective condition.
RCBC May Refuse to Pay Manager's Checks
We address the legal question of whether or not the
drawee bank of a manager's check has the option of
refusing payment by interposing a personal defense of
the purchaser of the manager's check who delivered the
check to a third party.
In resolving this legal question, this Court will examine
the nature of a manager's check and its relation to
personal defenses under the Negotiable Instruments
Law.42chanrobleslaw
Jurisprudence defines a manager's check as a check
drawn by the bank's manager upon the bank itself and
accepted in advance by the bank by the act of its
issuance.43 It is really the bank's own check and may be
treated as a promissory note with the bank as its
maker.44 Consequently, upon its purchase, the check
becomes the primary obligation of the bank and
constitutes its written promise to pay the holder upon
demand.45 It is similar to a cashier's check46 both as to
effect and use in that the bank represents that the check
is drawn against sufficient funds.47chanrobleslaw
As a general rule, the drawee bank is not liable until it
accepts.48 Prior to a bill's acceptance, no contractual
relation exists between the holder49 and the drawee.
Acceptance, therefore, creates a privity of contract
between the holder and the drawee so much so that the
latter, once it accepts, becomes the party primarily
liable on the instrument.50 Accordingly, acceptance is
the act which triggers the operation of the liabilities of
the drawee (acceptor) under Section 6251of the
Negotiable Instruments Law. Thus, once he accepts, the
drawee admits the following: (a) existence of the
drawer; (b) genuineness of the drawer's signature; (c)
capacity and authority of the drawer to draw the
instrument; and (d) existence of the payee and his then
capacity to endorse.
As can be gleaned in a long line of cases decided by this
Court, a manager's check is accepted by the bank upon
its issuance. As compared to an ordinary bill of
exchange where acceptance occurs after the bill is
presented to the drawee, the distinct feature of a
manager's check is that it is accepted in advance.
Notably, the mere issuance of a manager's check
creates a privity of contract between the holder and the
drawee bank, the latter primarily binding itself to pay
according to the tenor of its acceptance.
The drawee bank, as a result, has the unconditional
obligation to pay a manager's check to a holder in due
course irrespective of any available personal defenses.
However, while this Court has consistently held that a
manager's check is automatically accepted, a
holder other than a holder in due course is still
subject to defenses. In International Corporate Bank v.
Spouses Gueco,52 which involves a delivered manager's
check, the Court still considered whether the check had
become stale:
chanRoblesvirtualLawlibrary
It has been held that, if the check had become stale, it
becomes imperative that the circumstances that caused
its non-presentment be determined. In the case at bar,
there is no doubt that the petitioner bank held on the
check and refused to encash the same because of the
controversy surrounding the signing of the joint motion
to dismiss. We see no bad faith or negligence in this
position taken by the bank.53
In International Corporate Bank, this Court considered
whether the holder presented the manager's check
within a reasonable time after its issuance - a
circumstance required for holding the instrument in due
course.54chanrobleslaw
Similarly, in Rizal Commercial Banking Corporation v. Hi-
Tri Development Corporation,55 the Court observed that
the mere issuance of a manager's check does not ipso
facto work as an automatic transfer of funds to the
account of the payee.56 In order for the holder to acquire
title to the instrument, there still must have been
effective delivery. Accordingly, the Court, taking
8
exception to the manager's check automatic transfer of
funds to the payee, declared that: "the doctrine that the
deposit represented by a manager's check automatically
passes to the payee is inapplicable, because the
instrument - although accepted in advance remains
undelivered."57 This Court ruled that the holder did not
acquire the instrument in due course since title had not
passed for lack of delivery.58chanrobleslaw
We now address the main legal question: if the holder of
a manager's check is not a holder in due course, can the
drawee bank interpose a personal defense of the
purchaser?
Our rulings in Mesina v. Intermediate Appellate
Court59 and United Coconut Planters Bank v.
Intermediate Appellate Court60 shed light on the matter.
In Mesina, Jose Go purchased a manager's check from
Associated Bank. As he left the bank, Go inadvertently
left the check on top of the desk of the bank manager.
The bank manager entrusted the check for safekeeping
to another bank official who at the time was attending to
a customer named Alexander Lim.61 After the bank
official answered the telephone and returned from the
men's room, the manager's check could no longer be
found. After learning that his manager's check was
missing, Go immediately returned to the bank to give a
stop payment order on the check. A third party named
Marcelo Mesina deposited the manager's check with
Prudential Bank but the drawee bank sent back the
manager's check to the collecting bank with the words
"payment stopped." When asked how he obtained the
manager's check, Mesina claimed it was paid to him by
Lim in a "certain transaction."62chanrobleslaw
While this Court acknowledged the general causes and
effects of a manager's check, it noted that other factors
were needed to be considered, namely the manner by
which Mesina acquired the instrument. This Court
declared:
chanRoblesvirtualLawlibrary
Petitioner's allegations hold no water. Theories and
examples advanced by petitioner on causes and effects
of a cashier's check such as (1) it cannot be
countermanded in the hands of a holder in due course
and (2) a cashier's check is a bill of exchange drawn by
the bank against itself - are general principles which
cannot be aptly applied to the case at bar, without
considering other things. Petitioner failed to substantiate
his claim that he is a holder in due course and for
consideration or value as shown by the established facts
of the case. Admittedly, petitioner became the holder of
the cashier's check as endorsed by Alexander Lim who
stole the check. He refused to say how and why it was
passed to him. He had therefore notice of the defect of
his title over the check from the start.63
Ultimately, the notice of defect affected Mesina's claim
as a holder of the manager's check. This Court ruled
that the issuing bank could validly refuse payment
because Mesina was not a holder in due
course. Unequivocally, the Court declared: "the holder
of a cashier's check who is not a holder in due
course cannot enforce such check against the
issuing bank which dishonors the
same."64chanrobleslaw
In the same manner, in United Coconut Planters
Bank (UCPB),65 this Court ruled that the drawee bank
was legally justified in refusing to pay the holder of a
manager's check who did not hold the check in due
course. In UCPB, Altiura Investors, Inc. purchased a
manager's check from UCPB, which then issued a
manager's check in the amount of Four Hundred Ninety
Four Thousand Pesos (P494,000) to Makati Bel-Air
Developers, Inc. The manager's check represented the
payment of Altiura Investors, Inc. for a condominium
unit it purchased from Makati Bel-Air Developers, Inc.
Subsequently, Altiura Investors, Inc. instructed UCPB to
hold payment due to material misrepresentations by
Makati Bel-Air Developers, Inc. regarding the
condominium unit.66 Pending negotiations; and while the
stop payment order was in effect, Makati Bel-Air
Developers, Inc. insisted that UCPB pay the value of the
manager's check. UCPB refused to pay and filed an
interpleader to allow Altiura Investors, Inc. and Makati
Bel-Air Developers, Inc. to litigate their respective
claims. Makati Bel-Air Developers, Inc. also filed a
counterclaim against UCPB in the amount of Five Million
Pesos (P5,000,000) based on UCPB's violation of its
warranty on its manager's check.67chanrobleslaw
In upholding UCPB's refusal to pay the value of the
manager's check, this Court reasoned that Makati Bel-
Air Developers, Inc.'s title to the instrument became
defective when there arose a partial failure of
consideration.68 We held that UCPB could validly invoke
a personal defense of the purchaser against Makati Bel-
Air Developers, Inc. because the latter was not a holder
in due course of the manager's check:
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There are other considerations supporting the conclusion
reached by this Court that respondent appellate court
had committed reversible error. Makati Bel-Air was a
party to the contract of sale of an office condominium
unit to Altiura, for the payment of which the manager's
check was issued. Accordingly, Makati Bel-Air was fully
aware, at the time it had received the manager's check,
that there was, or had arisen, at least partial failure of
consideration since it was unable to comply with its
obligation to deliver office space amounting to 165
square meters to Altiura. Makati Bel-Air was also aware
that petitioner Bank had been informed by Altiura of the
claimed defect in Makati Bel-Air's title to the manager's
check or its right to the proceeds thereof. Vis-a-vis both
Altiura and petitioner Bank, Makati Bel-Air was not a
holder in due course of the manager's check.69
The foregoing rulings clearly establish that the drawee
bank of a manager's check may interpose personal
defenses of the purchaser of the manager's check if the
holder is not a holder in due course. In short, the
purchaser of a manager's check may validly
countermand payment to a holder who is not a holder in
due course. Accordingly, the drawee bank may refuse to
pay the manager's check by interposing a personal
defense of the purchaser. Hence, the resolution of the
present case requires a determination of the status of
Odrada as holder of the manager's checks.
In this case, the Court of Appeals gravely erred when it
considered Odrada as a holder in due course. Section 52
of the Negotiable Instruments Law defines a holder in
due course as one who has taken the instrument under
the following conditions:
chanRoblesvirtualLawlibrary
(a) That it is complete and regular upon its face;
9
(b) That he became the holder of it before it was
overdue, and without notice that it has been previously
dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no
notice of any infirmity in the instrument or defect in the
title of the person negotiating it. (Emphasis supplied)
To be a holder in due course, the law requires that a
party must have acquired the instrument in good
faith and for value.
Good faith means that the person taking the instrument
has acted with due honesty with regard to the rights of
the parties liable on the instrument and that at the time
he,took the instrument, the holder has no knowledge of
any defect or infirmity of the instrument.70 To constitute
notice of an infirmity in the instrument or defect in the
title of the person negotiating the same, the person to
whom it is negotiated must have had actual knowledge
of the infirmity or defect, or knowledge of such facts
that his action in taking the instrument would amount to
bad faith.71chanrobleslaw
Value, on the other hand, is defined as any
consideration sufficient to support a simple
contract.72chanrobleslaw
In the present case, Odrada attempted to deposit the
manager's checks on 16 April 2002, a day after Lim had
informed him that there was a serious problem with the
Montero. Instead of addressing the issue, Odrada
decided to deposit the manager's checks. Odrada's
actions do not amount to good faith. Clearly, Odrada
failed to make an inquiry even when the circumstances
strongly indicated that there arose, at the very least, a
partial failure of consideration due to the hidden defects
of the Montero. Odrada's action in depositing the
manager's checks despite knowledge of the Montero's
defects amounted to bad faith. Moreover, when Odrada
redeposited the manager's checks on 19 April 2002, he
was already formally notified by RCBC the previous day
of the cancellation of Lim's auto loan transaction.
Following UCPB,73RCBC may refuse payment by
interposing a personal defense of Lim - that the title of
Odrada had become defective when there arose a partial
failure or lack of consideration.74chanrobleslaw
RCBC acted in good faith in following the instructions of
Lim. The records show that Lim notified RCBC of the
defective condition of the Montero before Odrada
presented the manager's checks.75 Lim informed RCBC
of the hidden defects of the Montero including a
misaligned engine, smashed condenser, crippled bumper
support, and defective transmission. RCBC also received
a formal notice of cancellation of the auto loan from Lim
and this prompted RCBC to cancel the manager's checks
since the auto loan was the consideration for issuing the
manager's checks. RCBC acted in good faith in stopping
the payment of the manager's checks.
Section 58 of the Negotiable Instruments Law provides:
"In the hands of any holder other than a holder in due
course, a negotiable instrument is subject to the same
defenses as if it were non-negotiable, x x x." Since
Odrada was not a holder in due course, the instrument
becomes subject to personal defenses under the
Negotiable Instruments Law. Hence, RCBC may legally
act on a countermand by Lim, the purchaser of the
manager's checks.
Lastly, since Lim's testimony involving the Montero's
hidden defects was stricken off the record by the trial
court, Lim failed to prove the existence of the hidden
defects and thus Lim remains liable to Odrada for the
purchase price of the Montero. Lim's failure to file an
appeal from the decision of the Court of Appeals made
the decision of the appellate court final and executory as
to Lim. RCBC cannot be made liable because it acted in
good faith in carrying out the stop payment order of Lim
who presented to RCBC the complaint letter to Odrada
when Lim issued the stop payment order.
WHEREFORE, we GRANT the petition.
We REVERSE and SET ASIDE the 26 March 2014
Decision and the 18 June 2015 Resolution of the Court
of Appeals in CA-G.R. CV No. 94890 only insofar as
RCBC Savings Bank is concerned.
SO ORDERED.
EN BANC
G.R. No. L-15126 November 30, 1961
VICENTE R. DE OCAMPO & CO., plaintiff-appellee,
vs.
ANITA GATCHALIAN, ET AL., defendants-appellants.
Vicente Formoso, Jr. for plaintiff-appellee.
Reyes and Pangalañgan for defendants-appellants.
LABRADOR, J.:
Appeal from a judgment of the Court of First Instance of
Manila, Hon. Conrado M. Velasquez, presiding,
sentencing the defendants to pay the plaintiff the sum of
P600, with legal interest from September 10, 1953 until
paid, and to pay the costs.
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
indebtedness of one Matilde Gonzales; that upon receipt
of said check, plaintiff gave Matilde Gonzales P158.25,
the difference between the face value of the check and
Matilde Gonzales' indebtedness. The defendants admit
the execution of the check but they allege in their
answer, as affirmative defense, that it was issued
subject to a condition, which was not fulfilled, and that
plaintiff was guilty of gross negligence in not taking
steps to protect itself.
At the time of the trial, the parties submitted a
stipulation of facts, which reads as follows:
Plaintiff and defendants through their
respective undersigned attorney's respectfully
submit the following Agreed Stipulation of
Facts;
10
First. — That on or about 8 September 1953,
in the evening, defendant Anita C. Gatchalian
who was then interested in looking for 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 Fajardo, the
latter being personally known to defendant
Anita C. Gatchalian;
Second. — That Manuel Gonzales represented
to defend Anita C. Gatchalian that he was duly
authorized by the owner of the car, Ocampo
Clinic, to look for a buyer of said car and to
negotiate for and accomplish said sale, but
which facts were not known to plaintiff;
Third. — That defendant Anita C. Gatchalian,
finding the price of the car quoted by Manuel
Gonzales to her satisfaction, requested Manuel
Gonzales to bring the car the day following
together with the certificate of registration of
the car, so that her husband would be able to
see same; that on this request of defendant
Anita C. 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 ready and willing to
make such purchase and that for this purpose
Manuel Gonzales requested defendant Anita C.
Gatchalian to give him (Manuel Gonzales) a
check which will be shown to the owner as
evidence of buyer's good faith in the intention
to purchase the said car, the said check to be
for safekeeping only of Manuel Gonzales 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;
Fourth. — That relying on these
representations of Manuel Gonzales and with
his assurance that said check will be only for
safekeeping and which will be returned to said
defendant the following day when the car and
its certificate of registration will be brought by
Manuel Gonzales to defendants, but which
facts were not known to plaintiff, defendant
Anita C. Gatchalian drew and issued a check,
Exh. "B"; that Manuel Gonzales executed and
issued a receipt for said check, Exh. "1";
Fifth. — That on the failure of Manuel Gonzales
to appear the day 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
"Stop Payment Order" on the check, Exh. "3",
with the drawee bank. 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;
Sixth. — That defendants, both or either of
them, did not know personally Manuel
Gonzales or any member of his family at any
time 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 arrangements or agreement with
the Ocampo Clinic at any time prior to, on or
after 9 September 1953 for the hospitalization
of the wife of Manuel Gonzales and neither or
both of said defendants had assumed,
expressly or impliedly, with the Ocampo Clinic,
the obligation of Manuel Gonzales or his wife
for the hospitalization of the latter;
Eight. — That defendants, both or either of
them, had no obligation or liability, directly or
indirectly with the Ocampo Clinic before, or on
9 September 1953;
Ninth. — That Manuel Gonzales having
received the check Exh. "B" from defendant
Anita C. Gatchalian under the representations
and conditions herein above specified,
delivered the same to the Ocampo Clinic, in
payment of the fees and expenses arising from
the hospitalization of his wife;
Tenth. — That plaintiff for and in consideration
of fees and expenses of hospitalization and the
release of the wife of Manuel Gonzales from its
hospital, accepted said check, applying
P441.75 (Exhibit "A") thereof to payment of
said fees and expenses and delivering to
Manuel Gonzales the amount of P158.25 (as
per receipt, Exhibit "D") representing the
balance on the amount of the said check, Exh.
"B";
days from receipt of their main memoranda.
(pp. 21-25, Defendant's Record on Appeal).
No other evidence was submitted and upon said
stipulation the court rendered the judgment already
alluded above.
In their appeal defendants-appellants contend that the
check is not a negotiable instrument, under the facts
and circumstances stated in the stipulation of facts, and
that plaintiff is not a holder in due course. In support 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 and,
therefore, there was no delivery required by law
(Section 16, Negotiable Instruments Law); that
assuming for the sake of argument that delivery was not
for safekeeping merely, delivery was conditional and the
condition was not fulfilled.
In support of the contention that plaintiff-appellee is not
a holder in due course, the appellant argues that
plaintiff-appellee cannot be a holder in due course
because there was no negotiation prior to plaintiff-
appellee's acquiring the possession of the check; that a
holder in due course presupposes a prior party from
whose hands negotiation proceeded, and in the case at
bar, plaintiff-appellee is the payee, the maker and the
payee 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 the title of
the holder, Manuel Gonzales, and because under the
circumstances stated in the stipulation of facts there
were circumstances that brought suspicion about
Gonzales' possession and negotiation, which
circumstances should have placed the plaintiff-appellee
under the duty, to inquire into the title of the holder.
The circumstances are as follows:

Eleventh. — That the acts of acceptance of the

The check is not a personal check of Manuel
check and application of its proceeds in the
Gonzales. (Paragraph Ninth, Stipulation of
manner specified above were made without
Facts). Plaintiff could have inquired why a
previous inquiry by plaintiff from defendants:
person would use the check of another to pay
his own debt. Furthermore, plaintiff had the
Twelfth. — That plaintiff filed or caused to be "means of knowledge" inasmuch as defendant
filed with the Office of the City Fiscal of Manila, Hipolito Gatchalian is personally acquainted
a complaint for estafa against Manuel Gonzales with V. R. de Ocampo (Paragraph Sixth,
based on and arising from the acts of said Stipulation of Facts.).
Manuel Gonzales in paying his obligations with
plaintiff and receiving the cash balance of the
The maker Anita C. Gatchalian is a complete
check, Exh. "B" and that said complaint was
stranger to Manuel Gonzales and Dr. V. R. de
subsequently dropped;
Ocampo (Paragraph Sixth, Stipulation of
Facts).
Thirteenth. — That the exhibits mentioned in
this stipulation and the other exhibits
The maker is not in any manner obligated to
submitted previously, be considered as parts of
Ocampo Clinic nor to Manuel Gonzales. (Par. 7,
this stipulation, without necessity of formally
Stipulation of Facts.)
offering them in evidence;

The check could not have been intended to pay

WHEREFORE, it is most respectfully prayed
the hospital fees which amounted only to
that this agreed stipulation of facts be
P441.75. The check is in the amount of
admitted and that the parties hereto be given
P600.00, which is in excess of the amount due
fifteen days from today within which to submit
plaintiff. (Par. 10, Stipulation of Facts).
simultaneously their memorandum to discuss
the issues of law arising from the facts,
reserving to either party the right to submit It was necessary for plaintiff to give Manuel
reply memorandum, if necessary, within ten Gonzales change in the sum P158.25 (Par. 10,

11
 Stipulation of Facts). Since Manuel Gonzales is
the party obliged to pay, plaintiff should have
been more cautious and wary in accepting a
piece of paper and disbursing cold cash.
The check is payable to bearer. Hence, any
person who holds it should have been
subjected to inquiries. EVEN IN A BANK,
CHECKS ARE NOT CASHED WITHOUT INQUIRY
FROM THE BEARER. The same inquiries should
have been made by plaintiff. (Defendants-
appellants' brief, pp. 52-53)
Answering the first contention of appellant, counsel for
plaintiff-appellee argues that in accordance with the best
authority on the Negotiable Instruments Law, plaintiff-
appellee may be considered as a holder in due course,
citing Brannan's Negotiable Instruments Law, 6th
edition, page 252. On this issue Brannan holds that a
payee may be a holder in due course and says that to
this effect is the greater weight of authority, thus:
Whether the payee may be a holder in due
course under the N. I. L., as he was at
common law, is a question upon which the
courts are in 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 a holder in due course under
any circumstance in which he meets the
requirements of Sec. 52.
The argument of Professor Brannan in an
earlier edition of this work has never been
successfully answered and is here repeated.
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 defendants
defines a holder in due course as "a holder who
has taken the instrument under the following
conditions: 1. That it is 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 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 notice of any infirmity in the
instrument or defect in the title of the person
negotiating it."
Since "holder", as defined in sec. 191, includes
a payee who is in 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 as to read "a holder in due course
is a payee or indorsee who is in possession,"
etc. (Brannan's on Negotiable Instruments
Law, 6th ed., p. 543).
The first argument of the defendants-appellants,
therefore, depends upon whether or not the plaintiff-
appellee is a holder in due course. If it is such a holder
in due course, it is immaterial that it was the payee and
an immediate party to the instrument.
12
The other contention of the plaintiff is that there has
been no negotiation of the instrument, because the
drawer did not deliver the instrument to Manuel
Gonzales with the intention of negotiating the same, or
for the purpose of 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, but was to serve merely as evidence of good
faith of defendants in their desire to purchase the car
being sold to them. Admitting that such was the
intention of the drawer of the check when she delivered
it to Manuel Gonzales, it was no fault of the plaintiff-
appellee drawee if Manuel Gonzales delivered the check
or negotiated it. As the check was payable to the
plaintiff-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 insofar as the possession of the check is
concerned. So, when the agent of drawer Manuel
Gonzales negotiated the check with the intention of
getting its value from plaintiff-appellee, negotiation took
place through no fault of the 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 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-appellee may be considered as a holder in
due course.
Section 52, Negotiable Instruments Law, defines holder
in due course, thus:
A holder in due course is a holder who has
taken the instrument under the following
conditions:
(a) That it is complete and regular upon its
face;
(b) That he became the holder of it before it
was overdue, and without notice that it had
been previously dishonored, if such was the
fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him
he had no notice of any infirmity in the
instrument or defect in the title of the person
negotiating it.
The stipulation of facts expressly states that plaintiff-
appellee was not aware of the circumstances under
which the check was delivered to Manuel Gonzales, but
we agree with the defendants-appellants that the
circumstances indicated by them in their briefs, such as
the fact that 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
Gonzales to Dr. V. R. de Ocampo; and that the check
had two parallel lines 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 should have put the plaintiff-
appellee to inquiry as to the why and wherefore of the
possession of the check by Manuel Gonzales, and why
he used it to pay Matilde's account. It was payee's duty
to ascertain from the holder Manuel Gonzales what the
nature of the latter's title to the check was or the nature
of his possession. Having failed in this respect, we must
declare that plaintiff-appellee was guilty of gross neglect
in not finding out the nature of the title and possession
of Manuel Gonzales, amounting to legal absence of good
faith, and it may not be considered as a holder of the
check in good faith. To such effect is the consensus of
authority.
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 not necessary to prove that the defendant
knew the exact fraud that was practiced upon
the plaintiff by the defendant's assignor, it
being sufficient to show that the defendant had
notice that there was something wrong about
his assignor's acquisition of title, although he
did not have notice of the particular wrong that
was committed. Paika v. Perry, 225 Mass. 563,
114 N.E. 830.
It is sufficient that the buyer of a note had
notice or knowledge that the note was in some
way tainted with fraud. It is not necessary that
he should know 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. Ozark
Motor Co. v. Horton (Mo. App.), 196 S.W. 395.
Accord. Davis v. First Nat. Bank, 26 Ariz. 621,
229 Pac. 391.
Liberty bonds stolen from the plaintiff were
brought by the thief, a boy fifteen years old,
less than five feet tall, immature in appearance
and bearing on his face the stamp a
degenerate, to the defendants' 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 faith' does not necessarily
involve furtive motives, but means bad faith in
a commercial sense. The manner in which the
defendants conducted their Liberty Loan
department provided an easy way for thieves
to dispose of their plunder. It was a case of "no
questions asked." Although 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. Morris v. Muir, 111 Misc. Rep.
739, 181 N.Y. Supp. 913, affd. in memo., 191
App. Div. 947, 181 N.Y. Supp. 945." (pp. 640-
642, Brannan's Negotiable Instruments Law,
6th ed.).
The above considerations would seem sufficient to
justify our ruling that plaintiff-appellee should not be
allowed to recover the value of the check. Let us now
examine the express provisions of the Negotiable
Instruments Law pertinent to the matter to find if our
13
ruling conforms thereto. Section 52 (c) provides that a
holder in due course is one who takes the instrument "in
good faith and for value;" Section 59, "that every holder
is deemed prima facie to be a holder in due course;" and
Section 52 (d), that in order that one may be a holder in
due course it is necessary that "at the time the
instrument was negotiated to him "he had no notice of
any . . . defect in the title of the person negotiating it;"
and lastly Section 59, that every holder is deemed prima
facieto be a holder in due course.
In the case at bar the rule that a possessor of the
instrument is prima faciea holder in due course does not
apply because there was a defect in the title of the
holder (Manuel Gonzales), because the instrument is not
payable to him or to bearer. On the other hand, the
stipulation of facts indicated by the appellants in their
brief, like the fact that the drawer had no account with
the payee; that the holder did not show or tell the payee
why he had the check in 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 least. As holder's title was defective or
suspicious, it cannot be stated that the payee acquired
the check without knowledge of said defect in holder's
title, and for this reason the presumption that it is a
holder in due course or that it acquired the instrument in
good faith does not exist. And having presented no
evidence that it acquired the check in good faith, it
(payee) cannot be considered as a holder in due course.
In other words, under the 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 holder who negotiated the
check to it. The burden was, therefore, placed upon it to
show that notwithstanding the suspicious circumstances,
it acquired the check in actual good faith.
The rule applicable to the case at bar is that described in
the case of Howard National Bank v. Wilson, et al., 96
Vt. 438, 120 At. 889, 894, where the Supreme Court of
Vermont made the following disquisition:
Prior to the Negotiable Instruments Act, two
distinct lines of cases had developed in this
country. The first had its origin in Gill v. Cubitt,
3 B. & C. 466, 10 E. L. 215, where the rule was
distinctly laid down by the court of King's
Bench that the purchaser of negotiable paper
must exercise reasonable prudence and
caution, and that, if the circumstances were
such as ought to have excited the suspicion of
a prudent and careful man, and he made no
inquiry, he did not stand in 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. & E. 870, 31 E. C. L. 381, the English
court abandoned its former position and
adopted the rule that nothing short of actual
bad faith or 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 G.R. No. 175350 June 13, 2012
acquired the check in good faith and may not be deemed
a holder in due course thereof.
EQUITABLE BANKING CORPORATION,
INC. Petitioner,
For the foregoing considerations, the decision appealed vs.
from should be, as it is hereby, reversed, and the SPECIAL STEEL PRODUCTS, and AUGUSTO L.
defendants are absolved from the complaint. With costs PARDO, Respondents.
against plaintiff-appellee.

DECISION

DEL CASTILLO, J.:

A crossed check with the notation "account payee only"

can only be deposited in the named payee’s account. It
is gross negligence for a bank to ignore this rule solely

14
on the basis of a third party’s oral representations of
having a good title thereto.
Before the Court is a Petition for Review on Certiorari of
the October 13, 2006 Decision of the Court of Appeals
(CA) in CA-G.R. CV No. 62425. The dispositive portion of
the assailed Decision reads:
WHEREFORE, premises considered, the May 4, 1998
Decision of the Regional Trial Court of Pasig City, Branch
168, in Civil Case No. 63561, is hereby AFFIRMED.
SO ORDERED.1
Factual Antecedents
Respondent Special Steel Products, Inc. (SSPI) is a
private domestic corporation selling steel products. Its
co-respondent Augusto L. Pardo (Pardo) is SSPI’s
President and majority stockholder.2
International Copra Export Corporation (Interco) is its
regular customer.3
Jose Isidoro4 Uy, alias Jolly Uy (Uy), is an Interco
employee, in charge of the purchasing department, and
the son-in-law of its majority stockholder.5
Petitioner Equitable Banking Corporation (Equitable or
bank) is a private domestic corporation engaged in
banking6and is the depository bank of Interco and of Uy.
In 1991, SSPI sold welding electrodes to Interco, as
evidenced by the following sales invoices:
Sales Invoice No. 65042 dated February 14, 1991 for
₱325,976.347
Sales Invoice No. 65842 dated April 11, 1991 for
₱345,412.808
Sales Invoice No. 65843 dated April 11, 1991 for
₱313,845.849
The due dates for these invoices were March 16, 1991
(for the first sales invoice) and May 11, 1991 (for the
others). The invoices provided that Interco would pay
interest at the rate of 36% per annum in case of delay.
In payment for the above welding electrodes, Interco
issued three checks payable to the order of SSPI on July
10, 1991,10 July 16, 1991,11 and July 29, 1991.12 Each
check was crossed with the notation "account payee
only" and was drawn against Equitable. The records do
not identify the signatory for these three checks, or
explain how Uy, Interco’s purchasing officer, came into
possession of these checks.
The records only disclose that Uy presented each
crossed check to Equitable on the day of its issuance
and claimed that he had good title thereto.13 He
demanded the deposit of the checks in his personal
15
accounts in Equitable, Account No. 18841-2 and Account
No. 03474-0.14
Equitable acceded to Uy’s demands on the assumption
that Uy, as the son-in-law of Interco’s majority
stockholder,15was acting pursuant to Interco’s orders.
The bank also relied on Uy’s status as a valued
client.16 Thus, Equitable accepted the checks for deposit
in Uy’s personal accounts17 and stamped "ALL PRIOR
ENDORSEMENT AND/OR LACK OF ENDORSEMENT
GUARANTEED" on their dorsal portion.18 Uy promptly
withdrew the proceeds of the checks.
In October 1991, SSPI reminded Interco of the unpaid
welding electrodes, amounting to ₱985,234.98.19 It
reiterated its demand on January 14, 1992.20 SSPI
explained its immediate need for payment as it was
experiencing some financial crisis of its own. Interco
replied that it had already issued three checks payable
to SSPI and drawn against Equitable. SSPI denied
receipt of these checks.
On August 6, 1992, SSPI requested information from
Equitable regarding the three checks. The bank refused
to give any information invoking the confidentiality of
deposits.21
The records do not disclose the circumstances
surrounding Interco’s and SSPI’s eventual discovery of
Uy’s scheme. Nevertheless, it was determined that Uy,
not SSPI, received the proceeds of the three checks that
were payable to SSPI. Thus, on June 30, 1993 (twenty-
three months after the issuance of the three checks),
Interco finally paid the value of the three checks to
SSPI, plus a portion of the accrued interests. Interco
refused to pay the entire accrued interest of
₱767,345.64 on the ground that it was not responsible
for the delay. Thus, SSPI was unable to collect
₱437,040.35 (at the contracted rate of 36% per annum)
in interest income.22
SSPI and its president, Pardo, filed a complaint for
damages with application for a writ of preliminary
attachment against Uy and Equitable Bank. The
complaint alleged that the three crossed checks, all
payable to the order of SSPI and with the notation
"account payee only," could be deposited and encashed
by SSPI only. However, due to Uy’s fraudulent
representations, and Equitable’s indispensable
connivance or gross negligence, the restrictive nature of
the checks was ignored and the checks were deposited
in Uy’s account. Had the defendants not diverted the
three checks in July 1991, the plaintiffs could have used
them in their business and earned money from them.
Thus, the plaintiffs prayed for an award of actual
damages consisting of the unrealized interest income
from the proceeds of the checks for the two-year period
that the defendants withheld the proceeds from them
(from July 1991 up to June 1993).23
In his personal capacity, Pardo claimed an award of ₱3
million as moral damages from the defendants. He
allegedly suffered hypertension, anxiety, and sleepless
nights for fear that the government would charge him
for tax evasion or money laundering. He maintained that
defendants’ actions amounted to money laundering and
that it unfairly implicated his company in the scheme. As
for his fear of tax evasion, Pardo explained that the
Bureau of Internal Revenue might notice a discrepancy
between the financial reports of Interco (which might
have reported the checks as SSPI’s income in 1991) and
those of SSPI (which reported the income only in 1993).
Since Uy and Equitable were responsible for Pardo’s
worries, they should compensate him jointly and
severally therefor.24
SSPI and Pardo also prayed for exemplary damages and
attorney’s fees.25
whom he obtained his title, and the value for which he
received them. During trial, Uy did not present any
evidence but adopted Equitable’s evidence as his own.
Ruling of the Regional Trial Court 38
The RTC clarified that SSPI’s cause of action against Uy
and Equitable is for quasi-delict. SSPI is not seeking to
enforce payment on the undelivered checks from the
defendants, but to recover the damage that it sustained
from the wrongful non-delivery of the checks.39

In support of their application for preliminary

attachment, the plaintiffs alleged that the defendants
are guilty of fraud in incurring the obligation upon which
the action was brought and that there is no sufficient
security for the claim sought to be enforced in this
action.26
The trial court granted plaintiffs’ application.27 It issued
the writ of preliminary attachment on September 20,
1993,28upon the filing of plaintiffs’ bond for
₱500,000.00. The sheriff served and implemented the
writ against the personal properties of both
defendants.29
Upon Equitable’s motion and filing of a counter-bond,
however, the trial court eventually discharged the
attachment30against it.31
Equitable then argued for the dismissal of the complaint
for lack of cause of action. It maintained that interest
income is due only when it is expressly stipulated in
writing. Since Equitable and SSPI did not enter into any
contract, Equitable is not liable for damages, in the form
of unobtained interest income, to SSPI.32 Moreover,
SSPI’s acceptance of Interco’s payment on the sales
invoices is a waiver or extinction of SSPI’s cause of
action based on the three checks.33
Equitable further argued that it is not liable to SSPI
because it accepted the three crossed checks in good
faith.34Equitable averred that, due to Uy’s close relations
with the drawer of the checks, the bank had basis to
assume that the drawer authorized Uy to countermand
the original order stated in the check (that it can only be
deposited in the named payee’s account). Since only Uy
is responsible for the fraudulent conversion of the
checks, he should reimburse Equitable for any amounts
that it may be made liable to plaintiffs.35
The crossed checks belonged solely to the payee named
therein, SSPI. Since SSPI did not authorize anyone to
receive payment in its behalf, Uy clearly had no title to
the checks and Equitable had no right to accept the said
checks from Uy. Equitable was negligent in permitting
Uy to deposit the checks in his account without verifying
Uy’s right to endorse the crossed checks. The court
reiterated that banks have the duty to scrutinize the
checks deposited with it, for a determination of their
genuineness and regularity. The law holds banks to a
high standard because banks hold themselves out to the
public as experts in the field. Thus, the trial court found
Equitable’s explanation regarding Uy’s close relations
with the drawer unacceptable.40
Uy’s conversion of the checks and Equitable’s negligence
make them liable to compensate SSPI for the actual
damage it sustained. This damage consists of the
income that SSPI failed to realize during the delay.41 The
trial court then equated this unrealized income with the
interest income that SSPI failed to collect from Interco.
Thus, it ordered Uy and Equitable to pay, jointly and
severally, the amount of ₱437,040.35 to SSPI as actual
damages.42
It also ordered the defendants to pay exemplary
damages of ₱500,000.00, attorney’s fees amounting to
₱200,000.00, as well as costs of suit.43
The trial court likewise found merit in Pardo’s claim for
moral damages. It found that Pardo suffered anxiety,
sleepless nights, and hypertension in fear that he would
face criminal prosecution. The trial court awarded Pardo
the amount of ₱3 million in moral damages.44
The dispositive portion of the trial court’s Decision
reads:

WHEREFORE, judgment is hereby rendered in favor of

The bank counter-claimed that SSPI is liable to it in
plaintiffs Special Steel Products, Inc., and Augusto L.
damages for the wrongful and malicious attachment of
Pardo and against defendants Equitable Banking
Equitable’s personal properties. The bank maintained
Corporation [and] Jose Isidoro Uy, alias "Jolly Uy,"
that SSPI knew that the allegation of fraud against the
ordering defendants to jointly and severally pay
bank is a falsehood. Further, the bank is financially
plaintiffs the following:
capable to meet the plaintiffs’ claim should the latter
receive a favorable judgment. SSPI was aware that the
preliminary attachment against the bank was 1. ₱437,040.35 as actual damages;
unnecessary, and intended only to humiliate or destroy
the bank’s reputation.36
2. ₱3,000,000.00 as moral damages to
Augusto L. Pardo;
Meanwhile, Uy answered that the checks were
negotiated to him; that he is a holder for value of the
checks and that he has a good title thereto.37 He did not, 3. ₱500,000.00 as exemplary damages;
however, explain how he obtained the checks, from

16
 4. ₱200,000.00 as attorney’s fees; and
5. Costs of suit.
Defendant EBC’s counterclaim is hereby DISMISSED for
lack of factual and legal basis.
Likewise, the crossclaim filed by defendant EBC against
defendant Jose Isidoro Uy and the crossclaim filed by
defendant Jose Isidoro Uy against defendant EBC are
hereby DISMISSED for lack of factual and legal basis.
SO ORDERED.
Pasig City, May 4, 1998.45
The trial court denied Equitable’s motion for
reconsideration in its Order dated November 19, 1998.46
Only Equitable appealed to the CA,47 reiterating its
defenses below.
Appealed Ruling of the Court of Appeals48
The appellate court found no merit in Equitable’s appeal.
It affirmed the trial court’s ruling that SSPI had a cause
of action for quasi-delict against Equitable.49 The CA
noted that the three checks presented by Uy to
Equitable were crossed checks, and strictly made
payable to SSPI only. This means that the checks could
only be deposited in the account of the named
payee.50 Thus, the CA found that Equitable had the
responsibility of ensuring that the crossed checks are
deposited in SSPI’s account only. Equitable violated this
duty when it allowed the deposit of the crossed checks
in Uy’s account.51
The CA found factual and legal basis to affirm the trial
court’s award of moral damages in favor of Pardo.52
It likewise affirmed the award of exemplary damages
and attorney’s fees in favor of SSPI.53
Issues
1. Whether SSPI has a cause of action against Equitable
for quasi-delict;
2. Whether SSPI can recover, as actual damages, the
stipulated 36% per annum interest from Equitable;
3. Whether speculative fears and imagined scenarios,
which cause sleepless nights, may be the basis for the
award of moral damages; and
4. Whether the attachment of Equitable’s personal
properties was wrongful.
Our Ruling
17
SSPI’s cause of action
This case involves a complaint for damages based on
quasi-delict. SSPI asserts that it did not receive prompt
payment from Interco in July 1991 because of Uy’s wilful
and illegal conversion of the checks payable to SSPI,
and of Equitable’s gross negligence, which facilitated
Uy’s actions. The combined actions of the defendants
deprived SSPI of interest income on the said moneys
from July 1991 until June 1993. Thus, SSPI claims
damages in the form of interest income for the said
period from the parties who wilfully or negligently
withheld its money from it.
Equitable argues that SSPI cannot assert a right against
the bank based on the undelivered checks.54 It cites
provisions from the Negotiable Instruments Law and the
case of Development Bank of Rizal v. Sima Wei55 to
argue that a payee, who did not receive the check,
cannot require the drawee bank to pay it the sum stated
on the checks.
Equitable’s argument is misplaced and beside the point.
SSPI’s cause of action is not based on the three checks.
SSPI does not ask Equitable or Uy to deliver to it the
proceeds of the checks as the rightful payee. SSPI does
not assert a right based on the undelivered checks or for
breach of contract. Instead, it asserts a cause of action
based on quasi-delict. A quasi-delict is an act or
omission, there being fault or negligence, which causes
damage to another. Quasi-delicts exist even without a
contractual relation between the parties. The courts
below correctly ruled that SSPI has a cause of action for
quasi-delict against Equitable.
The checks that Interco issued in favor of SSPI were all
crossed, made payable to SSPI’s order, and contained
the notation "account payee only." This creates a
reasonable expectation that the payee alone would
receive the proceeds of the checks and that diversion of
the checks would be averted. This expectation arises
from the accepted banking practice that crossed checks
are intended for deposit in the named payee’s account
only and no other.56 At the very least, the nature of
crossed checks should place a bank on notice that it
should exercise more caution or expend more than a
cursory inquiry, to ascertain whether the payee on the
check has authorized the holder to deposit the same in a
different account. It is well to remember that "[t]he
banking system has become an indispensable institution
in the modern world and plays a vital role in the
economic life of every civilized society. Whether as mere
passive entities for the safe-keeping and saving of
money or as active instruments of business and
commerce, banks have attained an [sic] ubiquitous
presence among the people, who have come to regard
them with respect and even gratitude and, above all,
trust and confidence. In this connection, it is important
that banks should guard against injury attributable to
negligence or bad faith on its part. As repeatedly
emphasized, since the banking business is impressed
with public interest, the trust and confidence of the
public in it is of paramount importance. Consequently,
the highest degree of diligence is expected, and high
standards of integrity and performance are required of
it."57
Equitable did not observe the required degree of
diligence expected of a banking institution under the
existing factual circumstances.
The fact that a person, other than the named payee of
the crossed check, was presenting it for deposit should
have put the bank on guard. It should have verified if
the payee (SSPI) authorized the holder (Uy) to present
the same in its behalf, or indorsed it to him. Considering
however, that the named payee does not have an
account with Equitable (hence, the latter has no
specimen signature of SSPI by which to judge the
genuineness of its indorsement to Uy), the bank
knowingly assumed the risk of relying solely on Uy’s
word that he had a good title to the three checks. Such
misplaced reliance on empty words is tantamount to
gross negligence, which is the "absence of or failure to
exercise even slight care or diligence, or the entire
absence of care, evincing a thoughtless disregard of
consequences without exerting any effort to avoid
them."58
Equitable contends that its knowledge that Uy is the
son-in-law of the majority stockholder of the drawer,
Interco, made it safe to assume that the drawer
authorized Uy to countermand the order appearing on
the check. In other words, Equitable theorizes that
Interco reconsidered its original order and decided to
give the proceeds of the checks to Uy.59 That the bank
arrived at this conclusion without anything on the face of
the checks to support it is demonstrative of its lack of
caution. It is troubling that Equitable proceeded with the
transaction based only on its knowledge that Uy had
close relations with Interco. The bank did not even make
inquiries with the drawer, Interco (whom the bank
considered a "valued client"), to verify Uy’s
representation. The banking system is placed in peril
when bankers act out of blind faith and empty promises,
without requiring proof of the assertions and without
making the appropriate inquiries. Had it only exercised
due diligence, Equitable could have saved both Interco
and the named payee, SSPI, from the trouble that the
bank’s mislaid trust wrought for them.
Equitable’s pretension that there is nothing under the
circumstances that rendered Uy’s title to the checks
questionable is outrageous. These are crossed checks,
whose manner of discharge, in banking practice, is
restrictive and specific. Uy’s name does not appear
anywhere on the crossed checks. Equitable, not knowing
the named payee on the check, had no way of verifying
for itself the alleged genuineness of the indorsement to
Uy. The checks bear nothing on their face that supports
the belief that the drawer gave the checks to Uy. Uy’s
relationship to Interco’s majority stockholder will not
justify disregarding what is clearly ordered on the
checks.
Actual damages
For its role in the conversion of the checks, which
deprived SSPI of the use thereof, Equitable is solidarily
liable with Uy to compensate SSPI for the damages it
suffered.
Among the compensable damages are actual damages,
which encompass the value of the loss sustained by the
18
plaintiff, and the profits that the plaintiff failed to
obtain.60 Interest payments, which SSPI claims, fall
under the second category of actual damages.
SSPI computed its claim for interest payments based on
the interest rate stipulated in its contract with Interco. It
explained that the stipulated interest rate is the actual
interest income it had failed to obtain from Interco due
to the defendants’ tortious conduct.
The Court finds the application of the stipulated interest
rate erroneous.
SSPI did not recover interest payments at the stipulated
rate from Interco because it agreed that the delay was
not Interco’s fault, but that of the defendants’. If that is
the case, then Interco is not in delay (at least not after
issuance of the checks) and the stipulated interest
payments in their contract did not become operational.
If Interco is not liable to pay for the 36% per annum
interest rate, then SSPI did not lose that income. SSPI
cannot lose something that it was not entitled to in the
first place. Thus, SSPI’s claim that it was entitled to
interest income at the rate stipulated in its contract with
Interco, as a measure of its actual damage, is fallacious.
More importantly, the provisions of a contract generally
take effect only among the parties, their assigns and
heirs.61SSPI cannot invoke the contractual stipulation on
interest payments against Equitable because it is neither
a party to the contract, nor an assignee or an heir to the
contracting parties.
Nevertheless, it is clear that defendants’ actions
deprived SSPI of the present use of its money for a
period of two years. SSPI is therefore entitled to obtain
from the tortfeasors the profits that it failed to obtain
from July 1991 to June 1993. SSPI should recover
interest at the legal rate of 6% per annum,62 this being
an award for damages based on quasi-delict and not for
a loan or forbearance of money.
Moral damages
Both the trial and appellate courts awarded Pardo ₱3
million in moral damages. Pardo claimed that he was
frightened, anguished, and seriously anxious that the
government would prosecute him for money laundering
and tax evasion because of defendants’ actions.63 In
other words, he was worried about the repercussions
that defendants’ actions would have on him.
Equitable argues that Pardo’s fears are all imagined and
should not be compensated. The bank points out that
none of Pardo’s fears panned out.64
Moral damages are recoverable only when they are the
proximate result of the defendant’s wrongful act or
omission.65 Both the trial and appellate courts found that
Pardo indeed suffered as a result of the diversion of the
three checks. It does not matter that the things he was
worried and anxious about did not eventually
materialize. It is rare for a person, who is beset with
mounting problems, to sift through his emotions and
distinguish which fears or anxieties he should or should
not bother with. So long as the injured party’s moral
sufferings are the result of the defendants’ actions, he true and correct out of my own personal
may recover moral damages. knowledge;

The Court, however, finds the award of ₱3 million 2. The corporation and I have a sufficient
excessive. Moral damages are given not to punish the cause of action against defendants Isidoro Uy
defendant but only to give the plaintiff the means to alias Jolly Uy and Equitable Banking
assuage his sufferings with diversions and Corporation, who are guilty of fraud in
recreation.66 We find that the award of ₱50,000.0067 as incurring the obligation upon which this action
moral damages is reasonable under the circumstances. is brought, as particularly alleged in the
Complaint, which allegations I hereby adopt
and reproduce herein;
Equitable to recover amounts from Uy

3. There is no sufficient security for our claim

Equitable then insists on the allowance of their cross-
in this action and that the amount due us is as
claim against Uy. The bank argues that it was Uy who
much as the sum for which the order is
was enriched by the entire scheme and should
granted above all legal counterclaims;
reimburse Equitable for whatever amounts the Court
might order it to pay in damages to SSPI.68
4. We are ready and able to put up a bond
executed to the defendants in an amount to be
Equitable is correct. There is unjust enrichment when
fixed by the Court[,] conditioned on the
(1) a person is unjustly benefited, and (2) such benefit
payment of all costs[,] which may be adjudged
is derived at the expense of or with damages to
to defendants[,] and all damages[,] which they
another.69 In the instant case, the fraudulent scheme
may sustain by reason of the attachment of
concocted by Uy allowed him to improperly receive the
the court, should [the court] finally adjudge
proceeds of the three crossed checks and enjoy the
that we are not entitled thereto.71
profits from these proceeds during the entire time that it
was withheld from SSPI. Equitable, through its gross
negligence and mislaid trust on Uy, became an unwitting The complaint (to which the supporting
instrument in Uy’s scheme. Equitable’s fault renders it affidavit refers) cites the following factual
solidarily liable with Uy, insofar as respondents are circumstances to justify SSPI’s application:
concerned. Nevertheless, as between Equitable and Uy,
Equitable should be allowed to recover from Uy
6. x x x Yet, notwithstanding the fact that
whatever amounts Equitable may be made to pay under
SPECIAL STEEL did not open an account with
the judgment. It is clear that Equitable did not profit in
EQUITABLE BANK as already alleged, thru its
Uy’s scheme. Disallowing Equitable’s cross-claim against
connivance with defendant UY in his fraudulent
Uy is tantamount to allowing Uy to unjustly enrich
scheme to defraud SPECIAL STEEL, or at least
himself at the expense of Equitable. For this reason, the
thru its gross negligence EQUITABLE BANK
Court allows Equitable’s cross-claim against Uy.
consented to or allowed the opening of Account
No. 18841-2 at its head office and Account No.
Preliminary attachment 03474-0 at its Ermita Branch in the name of
SPECIAL STEEL without the latter’s knowledge,
let alone authority or consent, but obviously on
Equitable next assails as error the trial court’s dismissal
the bases of spurious or falsified
of its counter-claim for wrongful preliminary attachment.
documents submitted by UY or under his
It maintains that, contrary to SSPI’s allegation in its
authority, which documents EQUITABLE
application for the writ, there is no showing whatsoever
BANK did not bother to verify or check their
that Equitable was guilty of fraud in allowing Uy to
authenticity with SPECIAL STEEL.72
deposit the checks. Thus, the trial court should not have
issued the writ of preliminary attachment in favor of
SSPI. The wrongful attachment compelled Equitable to xxxx
incur expenses for a counter-bond, amounting to
₱30,204.26, and caused it to sustain damage,
9. On August 6, 1992, plaintiffs, thru counsel,
amounting to ₱5 million, to its goodwill and business
wrote EQUITABLE BANK about the fraudulent
credit.70
transactions involving the aforesaid checks,
which could not have been perpetrated without
SSPI submitted the following affidavit in support of its its indispensable participation and cooperation,
application for a writ of preliminary attachment: or gross negligence, and therein solicited its
cooperation in securing information as to the
anomalous and irregular opening of the false
I, Augusto L. Pardo, of legal age, under oath
accounts maintained in SPECIAL STEEL’s
hereby depose and declare:
name, but EQUITABLE BANK malevolently
shirking from its responsibility to prevent the
1. I am one of the plaintiffs in the above- further perpetration of fraud, conveniently,
entitled case; the other plaintiff is our family albeit unjustifiably, invoked the confidentiality
corporation, Special Steel Products, Inc., of of the deposits and refused to give any
which I am the president and majority information, and accordingly denied SPECIAL
stockholder; I caused the preparation of the STEEL’s valid request, thereby knowingly
foregoing Complaint, the allegations of which I shielding the identity of the ma[le]factors
have read, and which I hereby affirm to be

19
 involved [in] the unlawful and fraudulent 2. REDUCING the award of moral damages in
transactions.73 favor of Augusto L. Pardo from ₱3,000,000.00
to ₱ 50,000.00; and
The above affidavit and the allegations of the complaint
are bereft of specific and definite allegations of fraud 3. REVERSING the dismissal of Equitable
against Equitable that would justify the attachment of its Banking Corporation’s cross-claim against Jose
properties. In fact, SSPI admits its uncertainty whether Isidoro Uy, alias Jolly Uy. Jolly Uy is hereby
Equitable’s participation in the transactions involved ORDERED to REIMBURSE Equitable Banking
fraud or was a result of its negligence. Despite such Corporation the amounts that the latter will
uncertainty with respect to Equitable’s participation, pay to respondents.
SSPI applied for and obtained a preliminary attachment
of Equitable’s properties on the ground of fraud. We
Additionally, the Court hereby REVERSES the dismissal
believe that such preliminary attachment was wrongful.
of Equitable Banking Corporation’s counterclaim for
"[A] writ of preliminary attachment is too harsh a
damages against Special Steel Products, Inc. This Court
provisional remedy to be issued based on mere
ORDERS Special Steel Products, Inc. to PAY Equitable
abstractions of fraud. Rather, the rules require that for
Banking Corporation actual damages in the total amount
the writ to issue, there must be a recitation of clear and
of ₱30,204.36, for the wrongful preliminary attachment
concrete factual circumstances manifesting that the
of its properties.
debtor practiced fraud upon the creditor at the time of
the execution of their agreement in that said debtor had
a preconceived plan or intention not to pay the The rest of the assailed Decision is AFFIRMED.
creditor."74 No proof was adduced tending to show that
Equitable had a preconceived plan not to pay SSPI or
had knowingly participated in Uy’s scheme. SO ORDERED.

That the plaintiffs eventually obtained a judgment in

their favor does not detract from the wrongfulness of the
preliminary attachment.1âwphi1 While "the evidence
warrants [a] judgment in favor of [the] applicant, the
proofs may nevertheless also establish that said
applicant’s proffered ground for attachment was
inexistent or specious, and hence, the writ should not
have issued at all x x x."75

For such wrongful preliminary attachment, plaintiffs may

be held liable for damages. However, Equitable is
entitled only to such damages as its evidence would
allow,76 for the wrongfulness of an attachment does not
automatically warrant the award of damages. The debtor
still has the burden of proving the nature and extent of
the injury that it suffered by reason of the wrongful
attachment.77

The Court has gone over the records and found that
Equitable has duly proved its claim for, and is entitled to
recover, actual damages. In order to lift the wrongful
attachment of Equitable’s properties, the bank was
compelled to pay the total amount of ₱30,204.26 in
premiums for a counter-bond.78 However, Equitable
failed to prove that it sustained damage to its "goodwill
and business credit" in consequence of the alleged
wrongful attachment. There was no proof of Equitable’s
contention that respondents’ actions caused it public
embarrassment and a bank run.

WHEREFORE, premises considered, the Petition is

PARTIALLY GRANTED. The assailed October 13, 2006
Decision of the Court of Appeals in CA-G.R. CV No.
62425 is MODIFIED by:

1. REDUCING the award of actual damages to

respondents to the rate of 6% per annum of
the value of the three checks from July 1991 to
June 1993 or a period of twenty-three months;

20
 Norma Rodriguez), and PNBig Demand Deposit
(Checking/Current Account No. 810480-4 under the
account name Erlando T. Rodriguez).

The spouses were engaged in the informal lending

business. In line with their business, they had a
discounting3 arrangement with the Philnabank
Employees Savings and Loan Association (PEMSLA), an
association of PNB employees. Naturally, PEMSLA was
likewise a client of PNB Amelia Avenue Branch. The
association maintained current and savings accounts
with petitioner bank.

PEMSLA regularly granted loans to its members.

Spouses Rodriguez would rediscount the postdated
checks issued to members whenever the association was
short of funds. As was customary, the spouses would
replace the postdated checks with their own checks
issued in the name of the members.

It was PEMSLA’s policy not to approve applications for

loans of members with outstanding debts. To subvert
this policy, some PEMSLA officers devised a scheme to
obtain additional loans despite their outstanding loan
accounts. They took out loans in the names of
unknowing members, without the knowledge or consent
of the latter. The PEMSLA checks issued for these loans
were then given to the spouses for rediscounting. The
officers carried this out by forging the indorsement of
the named payees in the checks.

In return, the spouses issued their personal checks

(Rodriguez checks) in the name of the members and
G.R. No. 170325 September 26, 2008 delivered the checks to an officer of PEMSLA. The
PEMSLA checks, on the other hand, were deposited by
the spouses to their account.
PHILIPPINE NATIONAL BANK, Petitioner,
vs.
ERLANDO T. RODRIGUEZ and NORMA Meanwhile, the Rodriguez checks were deposited directly
RODRIGUEZ, Respondents. by PEMSLA to its savings account without any
indorsement from the named payees. This was an
irregular procedure made possible through the
DECISION facilitation of Edmundo Palermo, Jr., treasurer of
PEMSLA and bank teller in the PNB Branch. It appears
that this became the usual practice for the parties.
REYES, R.T., J.:

For the period November 1998 to February 1999, the

WHEN the payee of the check is not intended to be the
spouses issued sixty nine (69) checks, in the total
true recipient of its proceeds, is it payable to order or
amount of P2,345,804.00. These were payable to forty
bearer? What is the fictitious-payee rule and who is
seven (47) individual payees who were all members of
liable under it? Is there any exception?
PEMSLA.4

These questions seek answers in this petition for review

Petitioner PNB eventually found out about these
on certiorari of the Amended Decision1 of the Court of
fraudulent acts. To put a stop to this scheme, PNB
Appeals (CA) which affirmed with modification that of
closed the current account of PEMSLA. As a result, the
the Regional Trial Court (RTC).2
PEMSLA checks deposited by the spouses were returned
or dishonored for the reason "Account Closed." The
The Facts corresponding Rodriguez checks, however, were
deposited as usual to the PEMSLA savings account. The
amounts were duly debited from the Rodriguez account.
The facts as borne by the records are as follows:
Thus, because the PEMSLA checks given as payment
were returned, spouses Rodriguez incurred losses from
Respondents-Spouses Erlando and Norma Rodriguez the rediscounting transactions.
were clients of petitioner Philippine National Bank (PNB),
Amelia Avenue Branch, Cebu City. They maintained
RTC Disposition
savings and demand/checking accounts, namely, PNBig
Demand Deposits (Checking/Current Account No.
810624-6 under the account name Erlando and/or

21
Alarmed over the unexpected turn of events, the
spouses Rodriguez filed a civil complaint for damages
against PEMSLA, the Multi-Purpose Cooperative of
Philnabankers (MCP), and petitioner PNB. They sought
to recover the value of their checks that were deposited
to the PEMSLA savings account amounting
to P2,345,804.00. The spouses contended that because
PNB credited the checks to the PEMSLA account even
without indorsements, PNB violated its contractual
obligation to them as depositors. PNB paid the wrong
payees, hence, it should bear the loss.
PNB moved to dismiss the complaint on the ground of
lack of cause of action. PNB argued that the claim for
damages should come from the payees of the checks,
and not from spouses Rodriguez. Since there was no
demand from the said payees, the obligation should be
considered as discharged.
In an Order dated January 12, 2000, the RTC denied
PNB’s motion to dismiss.
In its Answer,5 PNB claimed it is not liable for the checks
which it paid to the PEMSLA account without any
indorsement from the payees. The bank contended that
spouses Rodriguez, the makers, actually did not intend
for the named payees to receive the proceeds of the
checks. Consequently, the payees were considered as
"fictitious payees" as defined under the Negotiable
Instruments Law (NIL). Being checks made to fictitious
payees which are bearer instruments, the checks were
negotiable by mere delivery. PNB’s Answer included its
cross-claim against its co-defendants PEMSLA and the
MCP, praying that in the event that judgment is
rendered against the bank, the cross-defendants should
be ordered to reimburse PNB the amount it shall pay.
After trial, the RTC rendered judgment in favor of
spouses Rodriguez (plaintiffs). It ruled that PNB
(defendant) is liable to return the value of the checks.
All counterclaims and cross-claims were dismissed. The
dispositive portion of the RTC decision reads:
WHEREFORE, in view of the foregoing, the Court hereby
renders judgment, as follows:
1. Defendant is hereby ordered to pay the
plaintiffs the total amount of P2,345,804.00 or
reinstate or restore the amount of P775,337.00
in the PNBig Demand Deposit
Checking/Current Account No. 810480-4 of
Erlando T. Rodriguez, and the amount
of P1,570,467.00 in the PNBig Demand
Deposit, Checking/Current Account No.
810624-6 of Erlando T. Rodriguez and/or
Norma Rodriguez, plus legal rate of interest
thereon to be computed from the filing of this
complaint until fully paid;
2. The defendant PNB is hereby ordered to pay
the plaintiffs the following reasonable amount
of damages suffered by them taking into
consideration the standing of the plaintiffs
being sugarcane planters, realtors, residential
subdivision owners, and other businesses:
22
(a) Consequential damages,
unearned income in the amount
of P4,000,000.00, as a result of their
having incurred great dificulty (sic)
especially in the residential
subdivision business, which was not
pushed through and the contractor
even threatened to file a case against
the plaintiffs;
(b) Moral damages in the amount
of P1,000,000.00;
(c) Exemplary damages in the
amount of P500,000.00;
(d) Attorney’s fees in the amount
of P150,000.00 considering that this
case does not involve very
complicated issues; and for the
(e) Costs of suit.
3. Other claims and counterclaims are hereby
dismissed.6
CA Disposition
PNB appealed the decision of the trial court to the CA on
the principal ground that the disputed checks should be
considered as payable to bearer and not to order.
In a Decision7 dated July 22, 2004, the CA reversed and
set aside the RTC disposition. The CA concluded that the
checks were obviously meant by the spouses to be really
paid to PEMSLA. The court a quo declared:
We are not swayed by the contention of the plaintiffs-
appellees (Spouses Rodriguez) that their cause of action
arose from the alleged breach of contract by the
defendant-appellant (PNB) when it paid the value of the
checks to PEMSLA despite the checks being payable to
order. Rather, we are more convinced by the strong and
credible evidence for the defendant-appellant with
regard to the plaintiffs-appellees’ and PEMSLA’s business
arrangement – that the value of the rediscounted checks
of the plaintiffs-appellees would be deposited in
PEMSLA’s account for payment of the loans it has
approved in exchange for PEMSLA’s checks with the full
value of the said loans. This is the only obvious
explanation as to why all the disputed sixty-nine (69)
checks were in the possession of PEMSLA’s errand boy
for presentment to the defendant-appellant that led to
this present controversy. It also appears that the teller
who accepted the said checks was PEMSLA’s officer, and
that such was a regular practice by the parties until the
defendant-appellant discovered the scam. The logical
conclusion, therefore, is that the checks were never
meant to be paid to order, but instead, to PEMSLA. We
thus find no breach of contract on the part of the
defendant-appellant.
According to plaintiff-appellee Erlando Rodriguez’
testimony, PEMSLA allegedly issued post-dated checks
to its qualified members who had applied for loans.
However, because of PEMSLA’s insufficiency of funds,
PEMSLA approached the plaintiffs-appellees for the latter
to issue rediscounted checks in favor of said applicant
members. Based on the investigation of the defendant-
appellant, meanwhile, this arrangement allowed the
plaintiffs-appellees to make a profit by issuing
rediscounted checks, while the officers of PEMSLA and
other members would be able to claim their loans,
despite the fact that they were disqualified for one
reason or another. They were able to achieve this
conspiracy by using other members who had loaned
lesser amounts of money or had not applied at all. x x
x.8 (Emphasis added)
The CA found that the checks were bearer instruments,
thus they do not require indorsement for negotiation;
and that spouses Rodriguez and PEMSLA conspired with
each other to accomplish this money-making scheme.
The payees in the checks were "fictitious payees"
because they were not the intended payees at all.
The spouses Rodriguez moved for reconsideration. They
argued, inter alia, that the checks on their faces were
unquestionably payable to order; and that PNB
committed a breach of contract when it paid the value of
the checks to PEMSLA without indorsement from the
payees. They also argued that their cause of action is
not only against PEMSLA but also against PNB to recover
the value of the checks.
On October 11, 2005, the CA reversed itself via an
Amended Decision, the last paragraph and fallo of which
read:
In sum, we rule that the defendant-appellant PNB is
liable to the plaintiffs-appellees Sps. Rodriguez for the
following:
1. Actual damages in the amount
of P2,345,804 with interest at 6% per annum
from 14 May 1999 until fully paid;
2. Moral damages in the amount of P200,000;
3. Attorney’s fees in the amount of P100,000;
and
4. Costs of suit.
WHEREFORE, in view of the foregoing premises,
judgment is hereby rendered by Us AFFIRMING WITH
MODIFICATION the assailed decision rendered in Civil
Case No. 99-10892, as set forth in the immediately next
preceding paragraph hereof, and SETTING ASIDE Our
original decision promulgated in this case on 22 July
2004.
SO ORDERED.9
The CA ruled that the checks were payable to order.
According to the appellate court, PNB failed to present
sufficient proof to defeat the claim of the spouses
Rodriguez that they really intended the checks to be
received by the specified payees. Thus, PNB is liable for
the value of the checks which it paid to PEMSLA without
23
indorsements from the named payees. The award for
damages was deemed appropriate in view of the failure
of PNB to treat the Rodriguez account with the highest
degree of care considering the fiduciary nature of their
relationship, which constrained respondents to seek
legal action.
Hence, the present recourse under Rule 45.
Issues
The issues may be compressed to whether the subject
checks are payable to order or to bearer and who bears
the loss?
PNB argues anew that when the spouses Rodriguez
issued the disputed checks, they did not intend for the
named payees to receive the proceeds. Thus, they are
bearer instruments that could be validly negotiated by
mere delivery. Further, testimonial and documentary
evidence presented during trial amply proved that
spouses Rodriguez and the officers of PEMSLA conspired
with each other to defraud the bank.
Our Ruling
Prefatorily, amendment of decisions is more acceptable
than an erroneous judgment attaining finality to the
prejudice of innocent parties. A court discovering an
erroneous judgment before it becomes final may, motu
proprio or upon motion of the parties, correct its
judgment with the singular objective of achieving justice
for the litigants.10
However, a word of caution to lower courts, the CA in
Cebu in this particular case, is in order. The Court does
not sanction careless disposition of cases by courts of
justice. The highest degree of diligence must go into the
study of every controversy submitted for decision by
litigants. Every issue and factual detail must be closely
scrutinized and analyzed, and all the applicable laws
judiciously studied, before the promulgation of every
judgment by the court. Only in this manner will errors in
judgments be avoided.
Now to the core of the petition.
As a rule, when the payee is fictitious or not intended to
be the true recipient of the proceeds, the check is
considered as a bearer instrument. A check is "a bill of
exchange drawn on a bank payable on demand."11 It is
either an order or a bearer instrument. Sections 8 and 9
of the NIL states:
SEC. 8. When payable to order. – The instrument is
payable to order where it is drawn payable to the order
of a specified person or to him or his order. It may be
drawn payable to the order of –
(a) A payee who is not maker, drawer, or
drawee; or
(b) The drawer or maker; or
 (c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee
must be named or otherwise indicated therein with
reasonable certainty.
SEC. 9. When payable to bearer. – The instrument is
payable to bearer –
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named
therein or bearer; or
(c) When it is payable to the order of a
fictitious or non-existing person, and such fact
is known to the person making it so payable;
or
(d) When the name of the payee does not
purport to be the name of any person; or
(e) Where the only or last indorsement is an
indorsement in blank.12 (Underscoring
supplied)
The distinction between bearer and order instruments
lies in their manner of negotiation. Under Section 30 of
the NIL, an order instrument requires an indorsement
from the payee or holder before it may be validly
negotiated. A bearer instrument, on the other hand,
does not require an indorsement to be validly
negotiated. It is negotiable by mere delivery. The
provision reads:
SEC. 30. What constitutes negotiation. – An instrument
is negotiated when it is transferred from one person to
another in such manner as to constitute the transferee
the holder thereof. If payable to bearer, it is negotiated
by delivery; if payable to order, it is negotiated by the
indorsement of the holder completed by delivery.
A check that is payable to a specified payee is an order
instrument. However, under Section 9(c) of the NIL, a
check payable to a specified payee may nevertheless be
considered as a bearer instrument if it is payable to the
order of a fictitious or non-existing person, and such fact
is known to the person making it so payable. Thus,
checks issued to "Prinsipe Abante" or "Si Malakas at si
Maganda," who are well-known characters in Philippine
mythology, are bearer instruments because the named
payees are fictitious and non-existent.
We have yet to discuss a broader meaning of the term
"fictitious" as used in the NIL. It is for this reason that
We look elsewhere for guidance. Court rulings in the
United States are a logical starting point since our law
24
on negotiable instruments was directly lifted from the
Uniform Negotiable Instruments Law of the United
States.13
A review of US jurisprudence yields that an actual,
existing, and living payee may also be "fictitious" if the
maker of the check did not intend for the payee to in
fact receive the proceeds of the check. This usually
occurs when the maker places a name of an existing
payee on the check for convenience or to cover up an
illegal activity.14 Thus, a check made expressly payable
to a non-fictitious and existing person is not necessarily
an order instrument. If the payee is not the intended
recipient of the proceeds of the check, the payee is
considered a "fictitious" payee and the check is a bearer
instrument.
In a fictitious-payee situation, the drawee bank is
absolved from liability and the drawer bears the loss.
When faced with a check payable to a fictitious payee, it
is treated as a bearer instrument that can be negotiated
by delivery. The underlying theory is that one cannot
expect a fictitious payee to negotiate the check by
placing his indorsement thereon. And since the maker
knew this limitation, he must have intended for the
instrument to be negotiated by mere delivery. Thus, in
case of controversy, the drawer of the check will bear
the loss. This rule is justified for otherwise, it will be
most convenient for the maker who desires to escape
payment of the check to always deny the validity of the
indorsement. This despite the fact that the fictitious
payee was purposely named without any intention that
the payee should receive the proceeds of the check.15
The fictitious-payee rule is best illustrated in Mueller &
Martin v. Liberty Insurance Bank.16 In the said case, the
corporation Mueller & Martin was defrauded by George
L. Martin, one of its authorized signatories. Martin drew
seven checks payable to the German Savings Fund
Company Building Association (GSFCBA) amounting to
$2,972.50 against the account of the corporation
without authority from the latter. Martin was also an
officer of the GSFCBA but did not have signing authority.
At the back of the checks, Martin placed the rubber
stamp of the GSFCBA and signed his own name as
indorsement. He then successfully drew the funds from
Liberty Insurance Bank for his own personal profit.
When the corporation filed an action against the bank to
recover the amount of the checks, the claim was denied.
The US Supreme Court held in Mueller that when the
person making the check so payable did not intend for
the specified payee to have any part in the transactions,
the payee is considered as a fictitious payee. The check
is then considered as a bearer instrument to be validly
negotiated by mere delivery. Thus, the US Supreme
Court held that Liberty Insurance Bank, as drawee, was
authorized to make payment to the bearer of the check,
regardless of whether prior indorsements were genuine
or not.17
The more recent Getty Petroleum Corp. v. American
Express Travel Related Services Company, Inc.18 upheld
the fictitious-payee rule. The rule protects the
depositary bank and assigns the loss to the drawer of
the check who was in a better position to prevent the
loss in the first place. Due care is not even required
from the drawee or depositary bank in accepting and
paying the checks. The effect is that a showing of
negligence on the part of the depositary bank will not
defeat the protection that is derived from this rule.
However, there is a commercial bad faith exception to
the fictitious-payee rule. A showing of commercial bad
faith on the part of the drawee bank, or any transferee
of the check for that matter, will work to strip it of this
defense. The exception will cause it to bear the loss.
Commercial bad faith is present if the transferee of the
check acts dishonestly, and is a party to the fraudulent
scheme. Said the US Supreme Court in Getty:
Consequently, a transferee’s lapse of wary vigilance,
disregard of suspicious circumstances which might have
well induced a prudent banker to investigate and other
permutations of negligence are not relevant
considerations under Section 3-405 x x x. Rather, there
is a "commercial bad faith" exception to UCC 3-405,
applicable when the transferee "acts dishonestly – where
it has actual knowledge of facts and circumstances that
amount to bad faith, thus itself becoming a participant in
a fraudulent scheme. x x x Such a test finds support in
the text of the Code, which omits a standard of care
requirement from UCC 3-405 but imposes on all parties
an obligation to act with "honesty in fact." x x
x19 (Emphasis added)
Getty also laid the principle that the fictitious-payee rule
extends protection even to non-bank transferees of the
checks.
In the case under review, the Rodriguez checks were
payable to specified payees. It is unrefuted that the 69
checks were payable to specific persons. Likewise, it is
uncontroverted that the payees were actual, existing,
and living persons who were members of PEMSLA that
had a rediscounting arrangement with spouses
Rodriguez.
What remains to be determined is if the payees, though
existing persons, were "fictitious" in its broader context.
For the fictitious-payee rule to be available as a defense,
PNB must show that the makers did not intend for the
named payees to be part of the transaction involving the
checks. At most, the bank’s thesis shows that the
payees did not have knowledge of the existence of the
checks. This lack of knowledge on the part of the
payees, however, was not tantamount to a lack of
intention on the part of respondents-spouses that the
payees would not receive the checks’ proceeds.
Considering that respondents-spouses were transacting
with PEMSLA and not the individual payees, it is
understandable that they relied on the information given
by the officers of PEMSLA that the payees would be
receiving the checks.
Verily, the subject checks are presumed order
instruments. This is because, as found by both lower
courts, PNB failed to present sufficient evidence to
defeat the claim of respondents-spouses that the named
payees were the intended recipients of the checks’
proceeds. The bank failed to satisfy a requisite condition
of a fictitious-payee situation – that the maker of the
check intended for the payee to have no interest in the
transaction.
25
Because of a failure to show that the payees were
"fictitious" in its broader sense, the fictitious-payee rule
does not apply. Thus, the checks are to be deemed
payable to order. Consequently, the drawee bank bears
the loss.20
PNB was remiss in its duty as the drawee bank. It does
not dispute the fact that its teller or tellers accepted the
69 checks for deposit to the PEMSLA account even
without any indorsement from the named payees. It
bears stressing that order instruments can only be
negotiated with a valid indorsement.
A bank that regularly processes checks that are neither
payable to the customer nor duly indorsed by the payee
is apparently grossly negligent in its operations.21 This
Court has recognized the unique public interest
possessed by the banking industry and the need for the
people to have full trust and confidence in their
banks.22 For this reason, banks are minded to treat their
customer’s accounts with utmost care, confidence, and
honesty.23
In a checking transaction, the drawee bank has the duty
to verify the genuineness of the signature of the drawer
and to pay the check strictly in accordance with the
drawer’s instructions, i.e., to the named payee in the
check. It should charge to the drawer’s accounts only
the payables authorized by the latter. Otherwise, the
drawee will be violating the instructions of the drawer
and it shall be liable for the amount charged to the
drawer’s account.24
In the case at bar, respondents-spouses were the bank’s
depositors. The checks were drawn against respondents-
spouses’ accounts. PNB, as the drawee bank, had the
responsibility to ascertain the regularity of the
indorsements, and the genuineness of the signatures on
the checks before accepting them for deposit. Lastly,
PNB was obligated to pay the checks in strict accordance
with the instructions of the drawers. Petitioner miserably
failed to discharge this burden.
The checks were presented to PNB for deposit by a
representative of PEMSLA absent any type of
indorsement, forged or otherwise. The facts clearly show
that the bank did not pay the checks in strict accordance
with the instructions of the drawers, respondents-
spouses. Instead, it paid the values of the checks not to
the named payees or their order, but to PEMSLA, a third
party to the transaction between the drawers and the
payees.alf-ITC
Moreover, PNB was negligent in the selection and
supervision of its employees. The trustworthiness of
bank employees is indispensable to maintain the
stability of the banking industry. Thus, banks are
enjoined to be extra vigilant in the management and
supervision of their employees. In Bank of the Philippine
Islands v. Court of Appeals,25 this Court cautioned thus:
Banks handle daily transactions involving millions of
pesos. By the very nature of their work the degree of
responsibility, care and trustworthiness expected of their
employees and officials is far greater than those of
ordinary clerks and employees. For obvious reasons, the
banks are expected to exercise the highest degree of
diligence in the selection and supervision of their
employees.26

PNB’s tellers and officers, in violation of banking rules of

procedure, permitted the invalid deposits of checks to
the PEMSLA account. Indeed, when it is the gross
negligence of the bank employees that caused the loss,
the bank should be held liable.27

PNB’s argument that there is no loss to compensate

since no demand for payment has been made by the
payees must also fail. Damage was caused to
respondents-spouses when the PEMSLA checks they
deposited were returned for the reason "Account
Closed." These PEMSLA checks were the corresponding
payments to the Rodriguez checks. Since they could not
encash the PEMSLA checks, respondents-spouses were
unable to collect payments for the amounts they had
advanced.

A bank that has been remiss in its duty must suffer the
consequences of its negligence. Being issued to named
payees, PNB was duty-bound by law and by banking
rules and procedure to require that the checks be
properly indorsed before accepting them for deposit and
payment. In fine, PNB should be held liable for the
amounts of the checks.

One Last Note

We note that the RTC failed to thresh out the merits of

PNB’s cross-claim against its co-defendants PEMSLA and
MPC. The records are bereft of any pleading filed by
these two defendants in answer to the complaint of June 19, 2017
respondents-spouses and cross-claim of PNB. The Rules
expressly provide that failure to file an answer is a G.R. No. 227005
ground for a declaration that defendant is in
default.28 Yet, the RTC failed to sanction the failure of
both PEMSLA and MPC to file responsive pleadings. BDO UNIBANK, INC., Petitioner
Verily, the RTC dismissal of PNB’s cross-claim has no vs.
basis. Thus, this judgment shall be without prejudice to ENGR. SELWYN LAO, doing business under the
whatever action the bank might take against its co- name and style "SELWYN F. LAO CONSTRUCTION"
defendants in the trial court. AND "WING AN CONSTRUCTION AND
DEVELOPMENT CORPORATION" and
INTERNATIONAL EXCHANGE BANK (now UNION
To PNB’s credit, it became involved in the controversial BANK OF THE PHILIPPINES),, Respondents
transaction not of its own volition but due to the actions
of some of its employees. Considering that moral
damages must be understood to be in concept of grants, DECISION
not punitive or corrective in nature, We resolve to
reduce the award of moral damages to P50,000.00.29
MENDOZA, J.:

WHEREFORE, the appealed Amended Decision is

AFFIRMED with the MODIFICATION that the award for
moral damages is reduced to P50,000.00, and that this
is without prejudice to whatever civil, criminal, or
administrative action PNB might take against PEMSLA,
MPC, and the employees involved.
SO ORDERED.
This is a petition for review on certiorari seeking to
reverse and set aside the October 14, 2015
Decision1 and the September 5, 2016 Resolution2 of the
Court of Appeals (CA) in CA-G.R. CV No. 100351, which
affirmed, with modification, the July 9, 2012 Decision3 of
the Regional Trial Court, Branch 55, Manila (RTC) in Civil
Case No. 99-93068, a case for collection of sum of
money.

The Antecedents

On March 9, 1999, respondent Engineer Selwyn S.

Lao (Lao) filed before the RTC a complaint for collection
of sum of money against Equitable Banking Corporation,

26
now petitioner Banco de Oro Unibank (BDO), Everlink
Pacific Ventures, Inc. (Ever/ink), and Wu Hsieh
a.k.a.George Wu (Wu).
In his complaint, Lao alleged that he was doing business
under the name and style of "Selwyn Lao Construction";
that he was a majority stockholder of Wing An
Construction and Development
Corporation (WingAn); that he entered into a transaction
with Ever link, through its authorizedrepresentative Wu,
under which, Everlink would supply him with "HCG
sanitary wares"; and that for the down payment, he
issued two (2) Equitable crossed checks payable to
Everlink: Check No. 0127-2422494 and Check No. 0127-
242250,5 in the amounts of ₱273,300.00 and
₱336,500.00, respectively.
Lao further averred that when the checks were
encashed, he contacted Everlink for the immediate
delivery of the sanitary wares, but the latter failed to
perform its obligation. Later, Lao learned that the checks
were deposited in two different bank accounts at
respondent International Exchange Bank, now
respondent Union Bank of the
Philippines (UnionBank). He was later informed that the
two bank accounts belonged to Wuand a company
named New Wave Plastic (New Wave), represented by a
certain Willy Antiporda (Antiporda). Consequently, Lao
was prompted to file a complaint against Everlink and
Wu for their failure to comply with their obligation and
against BDO for allowing the encashment of the two (2)
checks. He later withdrew his complaint against Everlink
as the corporation had ceased existing.
In its answer, BDO asserted that it had no obligation to
ascertain the owner of the account/s to which the checks
were deposited because the instruction to deposit the
said checks to the payee's account only was directed to
the payee and the collecting bank, which in this case
was Union Bank; that as the drawee bank, its
obligations consist in examining the genuineness of the
signatures appearing on the checks, and paying the
same if there were sufficient funds in the account under
which the checks were drawn; and that the subject
checks were properly negotiated and paid in accordance
with the instruction of Lao in crossing them as they were
deposited to the account of the payee Ever link with
Union Bank, which then presented them for payment
with BDO.
On August 24, 2001, Lao filed an Amended Complaint,
wherein he impleaded Union Bank as additional
defendant for allowing the deposit of the crossed checks
in two bank accounts other than the payee's, in violation
of its obligation to deposit the same only to the payee's
account.
limitation being that it should be presented for payment
by a bank.
During trial, BDO presented as its witnesses Elizabeth P.
Tinimbang (Tinimbang) and Atty. Carlos
Buenaventura(Atty. Buenaventura).
Tinimbang testified that Everlink was the payee of the
two (2) crossed checks issued by their client, Wing An;
that the checks were deposited with Union Bank, which
presented them to BDO for payment. She further
narrated that after the checks were cleared and that the
drawer's signatures on the checks were determined to
be genuine, that there was sufficient fund to cover the
amounts of the checks, and that there was no order to
stop payment, the checks were paid by BDO. Tinimbang
continued that sometime in July 1998, BDO received a
letter from Wing An stating that the amounts of the
checks were not credited to Everlink's account. This
prompted BDO to write a letter to Union Bank
demanding the latter to refund the amounts of the
checks. In a letter-reply, Union Bank claimed that the
checks were deposited in the account of Everlink.
Atty. Buenaventura claimed that BDO gave credence to
Union Bank's representation that the checks were indeed
credited to the account of Everlink. He stated that BDO's
only obligations under the circumstances were to
ascertain the genuineness of the checks, to determine if
the account was sufficiently funded and to credit the
proceeds to the collecting bank. On cross-examination,
Atty. Buenaventura clarified that Union Bank endorsed
the crossed checks as could be seen on the dorsal
portion of the subject checks. According to him, such
endorsement meant that the lack of prior endorsement
was guaranteed by Union Bank.
For its part, Union Bank presented as its witness Jojina
Lourdes C. Vega (Vega), its Branch Business Manager.
Vega testified that the transaction history of Everlink's
account with Union Bank and the notation at the back of
the check indicating Everlink's Account No.
(005030000925) revealed that the proceeds of Check
No. 0127-242249 were duly credited to Everlink's
account on September 22, 1997. As regards Check No.
0127-242250, Vega clarified that the proceeds of the
same were credited to New Wave's account. She
explained that New Wave was a valued client of Union
Bank. As a form of accommodation extended to valued
clients, Union Bank would request the signing of a
second endorsement agreement because the payee was
not the same as the account holder. In this case,
Antiporda executed a Deed of Undertaking (Second
Endorsed Checks) wherein he assumed the
responsibilities for the correctness, genuineness, and
validity of the subject checks.

In its answer, Union Bank argued that Check No. 0127- The RTC Ruling
242249 was deposited in the account of Everlink; that
Check No. 0127-242250 was validly negotiated by
In its Decision, dated July 9, 2012, the RTC absolved
Everlink to New Wave; that Check No. 0127-242250 was
BDO from any liability, but ordered Union Bank to pay
presented for payment to BDO, and the proceeds
Lao the amount of ₱336,500.00, representing the value
thereof were credited to New Wave's account; that it
of Check No. 0127-242250; ₱50,000.00 as moral
was under no obligation to deposit the checks only in the
damages; ₱l00,000.00 as exemplary damages; and
account of Everlink because there was nothing on the
₱50,000.00 as attorney's fees.
checks which would indicate such restriction; and that a
crossed check continues to be negotiable, the only

27
The RTC observed that there was nothing irregular with With regard to BDO's liability, the CA explained that it
the transaction of Check No. 0127-242249 because the violated its duty to charge to the drawer's account only
same was deposited in Everlink's account with Union those authorized by the latter when it paid the value of
Bank. It, however, found that Check No. 0127-242250 Check No. 0127-242250. Thus, it held that BDO was
was irregularly deposited and encashed because it was liable for the amount charged to the drawer's
not issued for the account of Everlink, the payee, but for account. The fallo reads:
the account of New Wave. The trial court noted further
that Check No. 0127-242250 was not even endorsed by
FOR THESE REASONS, the appeal is PARTLY GRANTED.
Everlink to New Wave. Thus, it opined that Union Bank
The July 9, 2012 Decision of the Regional Trial Court of
was negligent in allowing the deposit and encashment of
Manila, Branch 55 is AFFIRMED with MODIFICATIONS
the said check without proper endorsement. The R TC
that Equitable Bank is ordered to pay Selwyn Lao the
wrote that considering that the subject check was a
amount corresponding to Check No. 0127-242250, i.e.,
crossed check, Union Bank failed to take reasonable
₱336,500.oo, with legal interest from the time of filing of
steps in order to determine the validity of the
the complaint until the amount is fully paid.
representations made by Antiporda. In the end, it
International Exchange Bank (now Union Bank of the
adjudged that BDO could not be held liable because of
Philippines) is ordered to reimburse Equitable Bank the
Union Bank's warranty when it stamped on the check
abovementioned amount. The award of damages and
that "all prior endorsement and/or lack of endorsement
attorney's fees is DELETED. The rest of the Decision
guaranteed." The dispositive portion of the decision
stands.
reads:

WHEREFORE, premises considered, judgment
herebyrendered in FAVOR of the plaintiff Engr. Selwyn
F. Lao and AGAINST the defendant International
Exchange Bank (now Union Bank) ordering the latter to
pay the former the following:
1. The amount of Three Hundred Thirty Six
Thousand Five Hundred Pesos (₱336,500.oo)
representing the Equitable Bank Check No.
0127-242250;
2. The amount of Fifty Thousand Pesos
(₱50,ooo.oo) representing moral damages;
3. The amount of One Hundred Thousand
Pesos (₱100,ooo.oo) representing exemplary
damages; and,
4. The amount of Fifty Thousand
(₱50,ooo.oo) as attorney's fees.
SO ORDERED.8
is
On November 5, 2012, BDO filed its Motion for Partial
Reconsideration. It argued that neither Lao nor Union
Bank appealed the dismissal of the complaint against it,
thus, the RTC decision had already attained finality as
far as it was concerned. It also prayed that Lao should
be allowed to recover directly from Union Bank.
In its assailed Resolution, dated September 6, 2016, the
CA denied BDO's Motion for Partial Reconsideration. It
ratiocinated that in Bank ofAmerica, NT & SA v.
Associated Citizens Bank, 9 (Bank of America) thedrawee
bank was adjudged liable for the amount charged to the
drawer's account, while the collecting bank was ordered
to reimburse the drawee bank whatever amount the
latter was made to pay.
Hence, this petition anchored on the following:
Pesos
GROUNDS

The Complaints against defendants Equitable Banking

I.
Corporation (now Banco de Oro) and Wu Shu Chien
a.k.a. George Wu are hereby ordered DISMISSED.
ISSUES NOT RAISED BY THE PARTIES ON APPEAL
CANNOT BE REVIEWED NOR RULED UPON BY THE
Costs against the defendant International and Exchange
APPELLATE COURT.
Bank (now Union Bank).

II.
SO ORDERED. 6

A COLLECTING BANK ASSUMES RESPONSIBILITY FOR A

Aggrieved, Union Bank elevated an appeal to the CA. 7
CROSSED CHECK AS A GENERAL ENDORSER IN
ACCORDANCE WITH SECTION 66 OF THE NEGOTIABLE
The CA Ruling INSTRUMENTS LAW.

In its assailed Decision, dated October 14, 2015, the CA III.

affirmed, with modification, the ruling of the R TC. It
ordered BDO to pay Lao the amount of ₱336,500.00,
THE PARTY WHICH DID NOT EXERCISE THE REQUIRED
with legal interest from the time of filing of the
DILIGENCE IS THE CAUSE OF THE LOSS AND BEARS
complaint until its full satisfaction. The appellate court
THE DAMAGES. 10
further directed Union Bank to reimburse BDO the
aforementioned amount. It concurred with the RTC that
Union Bank was liable because of its negligence and its BDO argued that the CA's order for it to pay Lao was
guarantee on the validity of all prior endorsements or erroneous as the RTC had already adjudged with finality
lack of it. that it was not liable. It posited that the appellate court

28
could not resolve issues not raised on appeal by both
parties thereto. BDO pointed out that it was not a party
in the appeal before the CA. It further stressed that
neither Lao nor Union Bank assailed the R TC decision
with respect to the dismissal of the complaint against it
during the appeal before the CA, and even on motion for
reconsideration before the R TC. Thus, for failure to
appeal therefrom, the R TC decision had already
attained finality as to BDO.
BDO further averred that Union Bank, as the collecting
bank and last endorser, must suffer the loss because it
had the duty to ascertain the genuineness of all prior
endorsement. It asserted that as the drawee bank, it
could not be held liable because it merely relied on
Union Bank's express guarantee. It added that the
proximate cause of the loss suffered by Lao was the
negligence of Union Bank when it allowed the deposit of
the crossed check intended for Everlink to New Wave's
account.
In his Comment, 11 dated January 26,2017, Lao asserted
that the CA did not commit any error when it resolved
the issue on the liability of BDO even if it was not raised
on appeal. He was of the view that the said issue was
inextricably intertwined with the principal issue. Lao
stated that the CA correctly adjudged BDO liable,
without prejudice to its right to seek reimbursement
from Union Bank, as it was the correct sequence in the
enforcement of payment in cases where the collecting
bank allowed a crossed check to be deposited in the
account of a person other than the payee.
Union Bank did not file any comment on BDO's petition.
The Court's Ruling
The petition is meritorious.
Ordinarily, this Court would have concurred with the CA
as regards the applicability of Bank of America. There is,
however, a peculiar circumstance which would prevent
the application of Bank of America in the present case.
Sequence of Recovery in cases of unauthorized payment
of checks
The Court agrees with the appellate court that in cases
of unauthorized payment of checks to a person other
than the payee named therein, the drawee bank may be
held liable to the drawer. The drawee bank, in turn, may
seek reimbursement from the collecting bank for the
amount of the check. This rule on the sequence of
recovery in case of unauthorized check transactions had
already been deeply embedded in jurisprudence. 12
The liability of the drawee bank is based on its contract
with the drawer and its duty to charge to the latter's
accounts only those payables authorized by him. A
drawee bank is under strict liability to pay the check
only to the payee or to the payee's order. When the
drawee bank pays a person other than the payee named
in the check, it does not comply with the terms of the
check and violates its duty to charge the drawer's
account only for properly payable items. 13
29
On the other hand, the liability of the collecting bank is
anchored on its guarantees as the last endorser of the
check. Under Section 66 of the Negotiable Instruments
Law, an endorser warrants "that the instrument is
genuine and in all respects what it purports to be; that
he has good title to it; that all prior parties had capacity
to contract; and that the instrument is at the time of his
endorsement valid and subsisting."
It has been repeatedly held that in check transactions,
the collecting bank generally suffers the loss because it
has the duty to ascertain the genuineness of all prior
endorsements considering that the act of presenting the
check for payment to the drawee is an assertion that the
party making the presentment has done its duty to
ascertain the genuineness of the endorsements. If any
of the warranties made by the collecting bank turns out
to be false, then the drawee bank may recover from it
up to the amount of the check. 14
In the present case, BDO paid the value of Check No.
0127-242250 to Union Bank, which, in turn, credited the
amount to New Wave's account. The payment by BDO
was in violation of Lao's instruction because the same
was not issued in favor of Everlink, the payee named in
the check. It must be pointed out that the subject check
was not even endorsed by Everlink to New Wave.
Clearly, BDO violated its duty to charge to Lao's account
only those payables authorized by him.
Nevertheless, even with such clear violation by BDO of
its duty, the loss would have ultimately pertained to
Union Bank. By stamping at the back of the subject
check the phrase "all prior endorsements and/or lack of
it guaranteed," Union Bank had, for all intents and
purposes treated the check as a negotiable instrument
and, accordingly, assumed the warranty of an endorser.
Without such warranty, BDO would not have paid the
proceeds of the check. Thus, Union Bank cannot now
deny liability after the aforesaid warranty turned out to
be false. 15
Union Bank was clearly negligent when it allowed the
check to be presented by, and deposited in the account
of New Wave, despite knowledge that it was not the
payee named therein. Further, it could not have escaped
its attention that the subject checks were crossed
checks.
A crossed check is one where two parallel lines are
drawn across its face or across the comer thereof. A
check may be crossed generally or specially. A check is
crossed especially when the name of a particular banker
or company is written between the parallel lines drawn.
It is crossed generally when only the words "and
company" are written at all between the parallel lines. 16
Jurisprudence dictates that the effects of crossing a
check are: (1) that the check may not be encashed but
only deposited in the bank; (2) that the check may be
negotiated only once - to one who has an account with a
bank; and (3) that the act of crossing the check serves
as a warning to the holder that the check has been
issued for a definite purpose so that he must inquire if
he has received the check pursuant to that
purpose. 17 The effects of crossing a check, thus, relate
to the mode of payment, meaning that the drawer had
intended the check for deposit only by the rightful was no longer a party in the case, not being impleaded
person, i.e., the payee named therein. 18 in the appeal, and that the issue as regards its had
liability already been settled with finality by the R TC.
It is undisputed that Check No. 0127-242250 had been
crossed generally as nothing was written between the The Court agrees.
parallel lines appearing on the face of the instrument.
This indicated that Lao, the drawer, had intended the
It has been held that it is not the caption of the
same for deposit only to the account of Everlink, the
pleading, but the allegations therein that are controlling.
payee named therein. Despite this clear intention,
The non-inclusion of a party in the title of the pleading is
however, Union Bank negligently allowed the deposit of
not fatal to the case, provided there is a statement in
the proceeds of the said check in the account of New
the body indicating that such non-included person is a
Wave.
party to the case.22

Generally, BDO must be ordered to pay Lao the value of

the subject check; whereas, Union Bank would be
ordered to reimburse BDO the amount of the check. The
aforesaid sequence of recovery, however, is not
applicable in the present case due to the presence of
certain factual peculiarities.
Simplification of the proceedings for Recovery
BDO was not impleaded as a party in Union Bank's
appeal before the CA. This is evident from the title of the
case before the CA, and the respective briefs of Union
Bank and Lao, which mentioned only Lao and Union
Bank as parties thereto. Moreover, in their respective
briefs before the appellate court, neither Lao23 nor Union
Bank24 made any statement or raised any issue on
BDO's liability and its inclusion as a party in the appeal.

Although the rule on the sequence of recovery has been
deeply engrained in jurisprudence, there may be
exceptional circumstances which would justify its
simplification.1âwphi1 Stated differently, the aggrieved
party may be allowed to recover directly from the
person which caused the loss when circumstances
warrant. In Associated Bank v. Court of Appeals
(AssociatedBank), 19 the person who suffered the loss as
a result of the unauthorizedencashment of crossed
checks was allowed to recover the loss directly from the
negligent bank despite the latter's contention of lack of
privity of contract. The Court said:
There being no evidence that the crossed checks were
actually received by the private respondent, she would
have a right of action against the drawer companies,
which in turn could go against their respective drawee
banks, which in turn could sue the herein petitioner as
collecting bank. In a similar situation, it was held that,
to simplify proceedings, the payee of the illegally
encashed checks should be allowed to recover directly
from the bank responsible for such encashment
regardless of whether or not the checks were actually
delivered to the payee. We approve such direct action in
the case at bar.20
A peculiar circumstance in Associated Bank is the fact
that the drawer companies, which should have been
directly liable to the aggrieved payee, were not
impleaded as parties in the suit. In this regard, it is a
fundamental principle in this jurisdiction that a person
cannot be prejudiced by a ruling rendered in an action or
proceeding in which he has not been made a party. This
principle conforms to the constitutional guarantee of due
process of law.21 To the mind of the Court, this principle
was a foremost underlying consideration for allowing the
direct recovery by the payee from the negligent
collecting bank.
Finality of the RTC decisionwith respecttoBDOjustifiesthe
simplification of the proceedings for recovery.
BDO argues that the appellate court erred in ordering it
to pay the amount of the subject check to Lao because it
Consequently, because of Lao and Union Bank's failure
to appeal the July 9, 2012 Decision of the RTC with
respect to BDO's lack of liability, said decision became
final as to the latter.
The finality of the July 9, 2012 RTC Decision as to BDO,
which absolved it from any liability, necessarily means
that it could not be prejudiced or adversely affected by
the decision rendered in the appeal. It is elementary in
this jurisdiction that a person cannot be bound by a
decision wherein it was not a party.25 A contrary finding
would violate BDO's constitutional right to due· process.
Needless to state, the appellate court erred in ordering
BDO to pay the amount of the subject check because
the latter was not made a party in the appeal, and the
issue as to its liability or lack thereof, was not raised on
appeal.
From the foregoing, the Court is of the considered view
that the pronouncements made in Associated Bank as
regards the simplification of the recovery proceedings
are applicable in the present case. The factual milieu of
this case are substantially similar with that of Associated
Bank, i.e., a crossed check was presented and
deposited, without authority, in the account of a person
other than the payee named therein; the collecting bank
endorsed the crossed check and warrant the validity of
all prior endorsements and/or lack of it; the warranty
turned out to be false; and, a party to the check
transaction, which would otherwise be held liable to the
party aggrieved, was not made a party in the
proceedings in court.
To summarize, Lao, the drawer of the subject check, has
a right of action against BDO for its failure to comply
with its duty as the drawee bank. BDO, in turn, would
have a right of action against Union Bank because of the
falsity of its warranties as the collecting bank.
Considering, however, that BDO was not made a party
in the appeal, it could no longer be held liable to Lao.
Thus, following Associated Bank, the proceedings for
recovery must be simplified and Lao should be allowed
to recover directly from Union Bank.

30
WHEREFORE, the petition is GRANTED. The October 14,
2015 Decision and the September 5, 2016 Resolution of
the Court of Appeals in CA-G.R. CV No. 100351 are
hereby REVERSED and SET ASIDE insofar as it ordered
petitioner BDO Unibank, Inc. to pay Selwyn Lao the
amount of Check No. 0127-242250. The rest of the
decision is AFFIRMED.
From the adverse decision * of the Court of Appeals
(CA-G.R. CV No. 16447), petitioner, Natividad
Gempesaw, appealed to this Court in a Petition for
Review, on the issue of the right of the drawer to
recover from the drawee bank who pays a check with a
forged indorsement of the payee, debiting the same
against the drawer's account.

The amount shall earn interest at the rate of twelve
percent (12%) perannum from August 24, 2001, the
date of judicial demand, to June 30, 2013.From July 1,
2013, the rate shall be six percent (6%) per annum until
full satisfaction.
SO ORDERED.
The records show that on January 23, 1985, petitioner
filed a Complaint against the private respondent
Philippine Bank of Communications (respondent drawee
Bank) for recovery of the money value of eighty-two
(82) checks charged against the petitioner's account
with the respondent drawee Bank on the ground that the
payees' indorsements were forgeries. The Regional Trial
Court, Branch CXXVIII of Caloocan City, which tried the
case, rendered a decision on November 17, 1987
dismissing the complaint as well as the respondent
drawee Bank's counterclaim. On appeal, the Court of
Appeals in a decision rendered on February 22, 1990,
affirmed the decision of the RTC on two grounds, namely
(1) that the plaintiff's (petitioner herein) gross
negligence in issuing the checks was the proximate
cause of the loss and (2) assuming that the bank was
also negligent, the loss must nevertheless be borne by
the party whose negligence was the proximate cause of
the loss. On March 5, 1990, the petitioner filed this
petition under Rule 45 of the Rules of Court setting forth
the following as the alleged errors of the respondent
Court:1

THE RESPONDENT COURT OF

APPEALS ERRED IN RULING THAT
THE NEGLIGENCE OF THE DRAWER
IS THE PROXIMATE CAUSE OF THE
RESULTING INJURY TO THE DRAWEE
BANK, AND THE DRAWER IS
PRECLUDED FROM SETTING UP THE
FORGERY OR WANT OF AUTHORITY.

II

THE RESPONDENT COURT OF

APPEALS ALSO ERRED IN NOT
FINDING AND RULING THAT IT IS
THE GROSS AND INEXCUSABLE
G.R. No. 92244 February 9, 1993 NEGLIGENCE AND FRAUDULENT
ACTS OF THE OFFICIALS AND
EMPLOYEES OF THE RESPONDENT
NATIVIDAD GEMPESAW, petitioner,
BANK IN FORGING THE SIGNATURE
vs.
OF THE PAYEES AND THE WRONG
THE HONORABLE COURT OF APPEALS and
AND/OR ILLEGAL PAYMENTS MADE
PHILIPPINE BANK OF
TO PERSONS, OTHER THAN TO THE
COMMUNICATIONS, respondents.
INTENDED PAYEES SPECIFIED IN
THE CHECKS, IS THE DIRECT AND
L.B. Camins for petitioner. PROXIMATE CAUSE OF THE DAMAGE
TO PETITIONER WHOSE SAVING
(SIC) ACCOUNT WAS DEBITED.
Angara, Abello, Concepcion, Regals & Cruz for private
respondent
III

THE RESPONDENT COURT OF

APPEALS ALSO ERRED IN NOT
CAMPOS, JR., J.:
ORDERING THE RESPONDENT BANK
TO RESTORE OR RE-CREDIT THE

31
 CHECKING ACCOUNT OF THE
PETITIONER IN THE CALOOCAN CITY
BRANCH BY THE VALUE OF THE
EIGHTY-TWO (82) CHECKS WHICH IS
IN THE AMOUNT OF P1,208,606.89
WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and
operates four grocery stores located at Rizal Avenue
Extension and at Second Avenue, Caloocan City. Among
these groceries are D.G. Shopper's Mart and D.G. Whole
Sale Mart. Petitioner maintains a checking account
numbered 13-00038-1 with the Caloocan City Branch of
the respondent drawee Bank. To facilitate payment of
debts to her suppliers, petitioner draws checks against
her checking account with the respondent bank as
drawee. Her customary practice of issuing checks in
payment of her suppliers was as follows: the checks
were prepared and filled up as to all material particulars
by her trusted bookkeeper, Alicia Galang, an employee
for more than eight (8) years. After the bookkeeper
prepared the checks, the completed checks were
submitted to the petitioner for her signature, together
with the corresponding invoice receipts which indicate
the correct obligations due and payable to her suppliers.
Petitioner signed each and every check without
bothering to verify the accuracy of the checks against
the corresponding invoices because she reposed full and
implicit trust and confidence on her bookkeeper. The
issuance and delivery of the checks to the payees
named therein were left to the bookkeeper. Petitioner
admitted that she did not make any verification as to
whether or not the checks were delivered to their
respective payees. Although the respondent drawee
Bank notified her of all checks presented to and paid by
the bank, petitioner did not verify he correctness of the
returned checks, much less check if the payees actually
received the checks in payment for the supplies she
received. In the course of her business operations
covering a period of two years, petitioner issued,
following her usual practice stated above, a total of
eighty-two (82) checks in favor of several suppliers.
These checks were all presented by the indorsees as
holders thereof to, and honored by, the respondent
drawee Bank. Respondent drawee Bank correspondingly
debited the amounts thereof against petitioner's
checking account numbered 30-00038-1. Most of the
aforementioned checks were for amounts in excess of
her actual obligations to the various payees as shown in
their corresponding invoices. To mention a few:
. . . 1) in Check No. 621127, dated
June 27, 1984 in the amount of
P11,895.23 in favor of Kawsek Inc.
(Exh. A-60), appellant's actual
obligation to said payee was only
P895.33 (Exh. A-83); (2) in Check
No. 652282 issued on September 18,
1984 in favor of Senson Enterprises
in the amount of P11,041.20 (Exh. A-
67) appellant's actual obligation to
said payee was only P1,041.20 (Exh.
7); (3) in Check No. 589092 dated
April 7, 1984 for the amount of
P11,672.47 in favor of Marchem
(Exh. A-61) appellant's obligation
was only P1,672.47 (Exh. B); (4) in
32
Check No. 620450 dated May 10,
1984 in favor of Knotberry for
P11,677.10 (Exh. A-31) her actual
obligation was only P677.10 (Exhs. C
and C-1); (5) in Check No. 651862
dated August 9, 1984 in favor of
Malinta Exchange Mart for
P11,107.16 (Exh. A-62), her
obligation was only P1,107.16 (Exh.
D-2); (6) in Check No. 651863 dated
August 11, 1984 in favor of Grocer's
International Food Corp. in the
amount of P11,335.60 (Exh. A-66),
her obligation was only P1,335.60
(Exh. E and E-1); (7) in Check No.
589019 dated March 17, 1984 in
favor of Sophy Products in the
amount of P11,648.00 (Exh. A-78),
her obligation was only P648.00 (Exh.
G); (8) in Check No. 589028 dated
March 10, 1984 for the amount of
P11,520.00 in favor of the Yakult
Philippines (Exh. A-73), the latter's
invoice was only P520.00 (Exh. H-2);
(9) in Check No. 62033 dated May
23, 1984 in the amount of
P11,504.00 in favor of Monde
Denmark Biscuit (Exh. A-34), her
obligation was only P504.00 (Exhs. I-
1 and I-2).2
Practically, all the checks issued and honored by the
respondent drawee bank were crossed checks.3 Aside
from the daily notice given to the petitioner by the
respondent drawee Bank, the latter also furnished her
with a monthly statement of her transactions, attaching
thereto all the cancelled checks she had issued and
which were debited against her current account. It was
only after the lapse of more two (2) years that petitioner
found out about the fraudulent manipulations of her
bookkeeper.
All the eighty-two (82) checks with forged signatures of
the payees were brought to Ernest L. Boon, Chief
Accountant of respondent drawee Bank at the Buendia
branch, who, without authority therefor, accepted them
all for deposit at the Buendia branch to the credit and/or
in the accounts of Alfredo Y. Romero and Benito Lam.
Ernest L. Boon was a very close friend of Alfredo Y.
Romero. Sixty-three (63) out of the eighty-two (82)
checks were deposited in Savings Account No. 00844-5
of Alfredo Y. Romero at the respondent drawee Bank's
Buendia branch, and four (4) checks in his Savings
Account No. 32-81-9 at its Ongpin branch. The rest of
the checks were deposited in Account No. 0443-4, under
the name of Benito Lam at the Elcaño branch of the
respondent drawee Bank.
About thirty (30) of the payees whose names were
specifically written on the checks testified that they did
not receive nor even see the subject checks and that the
indorsements appearing at the back of the checks were
not theirs.
The team of auditors from the main office of the
respondent drawee Bank which conducted periodic
inspection of the branches' operations failed to discover,
check or stop the unauthorized acts of Ernest L. Boon.
Under the rules of the respondent drawee Bank, only a
Branch Manager and no other official of the respondent
drawee bank, may accept a second indorsement on a
check for deposit. In the case at bar, all the deposit slips
of the eighty-two (82) checks in question were initialed
and/or approved for deposit by Ernest L. Boon. The
Branch Managers of the Ongpin and Elcaño branches
accepted the deposits made in the Buendia branch and
credited the accounts of Alfredo Y. Romero and Benito
Lam in their respective branches.
On November 7, 1984, petitioner made a written
demand on respondent drawee Bank to credit her
account with the money value of the eighty-two (82)
checks totalling P1,208.606.89 for having been
wrongfully charged against her account. Respondent
drawee Bank refused to grant petitioner's demand. On
January 23, 1985, petitioner filed the complaint with the
Regional Trial Court.
This is not a suit by the party whose signature was
forged on a check drawn against the drawee bank. The
payees are not parties to the case. Rather, it is the
drawer, whose signature is genuine, who instituted this
action to recover from the drawee bank the money value
of eighty-two (82) checks paid out by the drawee bank
to holders of those checks where the indorsements of
the payees were forged. How and by whom the forgeries
were committed are not established on the record, but
the respective payees admitted that they did not receive
those checks and therefore never indorsed the same.
The applicable law is the Negotiable Instruments
Law4 (heretofore referred to as the NIL). Section 23 of
the NIL provides:
When a signature is forged or made
without the authority of the person
whose signature it purports to be, it
is wholly inoperative, and no right to
retain the instrument, or to give a
discharge therefor, or to enforce
payment thereof against any party
thereto, can be acquired through or
under such signature, unless the
party against whom it is sought to
enforce such right is precluded from
setting up the forgery or want of
authority.
Under the aforecited provision, forgery is a real
or absolute defense by the party whose
signature is forged. A party whose signature to
an instrument was forged was never a party
and never gave his consent to the contract
which gave rise to the instrument. Since his
signature does not appear in the instrument,
he cannot be held liable thereon by anyone,
not even by a holder in due course. Thus, if a
person's signature is forged as a maker of a
promissory note, he cannot be made to pay
because he never made the promise to pay. Or
where a person's signature as a drawer of a
check is forged, the drawee bank cannot
charge the amount thereof against the
drawer's account because he never gave the
bank the order to pay. And said section does
not refer only to the forged signature of the
maker of a promissory note and of the drawer
33
of a check. It covers also a forged
indorsement, i.e., the forged signature of the
payee or indorsee of a note or check. Since
under said provision a forged signature is
"wholly inoperative", no one can gain title to
the instrument through such forged
indorsement. Such an indorsement prevents
any subsequent party from acquiring any right
as against any party whose name appears
prior to the forgery. Although rights may exist
between and among parties subsequent to the
forged indorsement, not one of them can
acquire rights against parties prior to the
forgery. Such forged indorsement cuts off the
rights of all subsequent parties as against
parties prior to the forgery. However, the law
makes an exception to these rules where a
party is precluded from setting up forgery as a
defense.
As a matter of practical significance, problems arising
from forged indorsements of checks may generally be
broken into two types of cases: (1) where forgery was
accomplished by a person not associated with the
drawer — for example a mail robbery; and (2) where
the indorsement was forged by an agent of the drawer.
This difference in situations would determine the effect
of the drawer's negligence with respect to forged
indorsements. While there is no duty resting on the
depositor to look for forged indorsements on his
cancelled checks in contrast to a duty imposed upon him
to look for forgeries of his own name, a depositor is
under a duty to set up an accounting system and a
business procedure as are reasonably calculated to
prevent or render difficult the forgery of indorsements,
particularly by the depositor's own employees. And if the
drawer (depositor) learns that a check drawn by him has
been paid under a forged indorsement, the drawer is
under duty promptly to report such fact to the drawee
bank.5For his negligence or failure either to discover or
to report promptly the fact of such forgery to the
drawee, the drawer loses his right against the drawee
who has debited his account under a forged
indorsement.6 In other words, he is precluded from
using forgery as a basis for his claim for re-crediting of
his account.
In the case at bar, petitioner admitted that the checks
were filled up and completed by her trusted employee,
Alicia Galang, and were given to her for her signature.
Her signing the checks made the negotiable instrument
complete. Prior to signing the checks, there was no valid
contract yet.
Every contract on a negotiable instrument is incomplete
and revocable until delivery of the instrument to the
payee for the purpose of giving effect thereto.7 The first
delivery of the instrument, complete in form, to the
payee who takes it as a holder, is called issuance of the
instrument.8 Without the initial delivery of the
instrument from the drawer of the check to the payee,
there can be no valid and binding contract and no
liability on the instrument.
Petitioner completed the checks by signing them as
drawer and thereafter authorized her employee Alicia
Galang to deliver the eighty-two (82) checks to their
respective payees. Instead of issuing the checks to the
payees as named in the checks, Alicia Galang delivered wrongfully charged to her account, at which she notified
them to the Chief Accountant of the Buendia branch of the respondent drawee bank.
the respondent drawee Bank, a certain Ernest L. Boon.
It was established that the signatures of the payees as
It is highly improbable that in a period of two years, not
first indorsers were forged. The record fails to show the
one of Petitioner's suppliers complained of non-payment.
identity of the party who made the forged signatures.
Assuming that even one single complaint had been
The checks were then indorsed for the second time with
made, petitioner would have been duty-bound, as far as
the names of Alfredo Y. Romero and Benito Lam, and
the respondent drawee Bank was concerned, to make an
were deposited in the latter's accounts as earlier noted.
adequate investigation on the matter. Had this been
The second indorsements were all genuine signatures of
done, the discrepancies would have been discovered,
the alleged holders. All the eighty-two (82) checks
sooner or later. Petitioner's failure to make such
bearing the forged indorsements of the payees and the
adequate inquiry constituted negligence which resulted
genuine second indorsements of Alfredo Y. Romero and
in the bank's honoring of the subsequent checks with
Benito Lam were accepted for deposit at the Buendia
forged indorsements. On the other hand, since the
branch of respondent drawee Bank to the credit of their
record mentions nothing about such a complaint, the
respective savings accounts in the Buendia, Ongpin and
possibility exists that the checks in question covered
Elcaño branches of the same bank. The total amount of
inexistent sales. But even in such a case, considering
P1,208,606.89, represented by eighty-two (82) checks,
the length of a period of two (2) years, it is hard to
were credited and paid out by respondent drawee Bank
believe that petitioner did not know or realize that she
to Alfredo Y. Romero and Benito Lam, and debited
was paying more than she should for the supplies she
against petitioner's checking account No. 13-00038-1,
was actually getting. A depositor may not sit idly by,
Caloocan branch.
after knowledge has come to her that her funds seem to
be disappearing or that there may be a leak in her
As a rule, a drawee bank who has paid a check on which business, and refrain from taking the steps that a careful
an indorsement has been forged cannot charge the and prudent businessman would take in such
drawer's account for the amount of said check. An circumstances and if taken, would result in stopping the
exception to this rule is where the drawer is guilty of continuance of the fraudulent scheme. If she fails to
such negligence which causes the bank to honor such a take steps, the facts may establish her negligence, and
check or checks. If a check is stolen from the payee, it is in that event, she would be estopped from recovering
quite obvious that the drawer cannot possibly discover from the bank.9
the forged indorsement by mere examination of his
cancelled check. This accounts for the rule that although
One thing is clear from the records — that the petitioner
a depositor owes a duty to his drawee bank to examine
failed to examine her records with reasonable diligence
his cancelled checks for forgery of his own signature, he
whether before she signed the checks or after receiving
has no similar duty as to forged indorsements. A
her bank statements. Had the petitioner examined her
different situation arises where the indorsement was
records more carefully, particularly the invoice receipts,
forged by an employee or agent of the drawer, or done
cancelled checks, check book stubs, and had she
with the active participation of the latter. Most of the
compared the sums written as amounts payable in the
cases involving forgery by an agent or employee deal
eighty-two (82) checks with the pertinent sales invoices,
with the payee's indorsement. The drawer and the
she would have easily discovered that in some checks,
payee often time shave business relations of long
the amounts did not tally with those appearing in the
standing. The continued occurrence of business
sales invoices. Had she noticed these discrepancies, she
transactions of the same nature provides the
should not have signed those checks, and should have
opportunity for the agent/employee to commit the fraud
conducted an inquiry as to the reason for the irregular
after having developed familiarity with the signatures of
entries. Likewise had petitioner been more vigilant in
the parties. However, sooner or later, some leak will
going over her current account by taking careful note of
show on the drawer's books. It will then be just a
the daily reports made by respondent drawee Bank in
question of time until the fraud is discovered. This is
her issued checks, or at least made random scrutiny of
specially true when the agent perpetrates a series of
cancelled checks returned by respondent drawee Bank
forgeries as in the case at bar.
at the close of each month, she could have easily
discovered the fraud being perpetrated by Alicia Galang,
The negligence of a depositor which will prevent and could have reported the matter to the respondent
recovery of an unauthorized payment is based on failure drawee Bank. The respondent drawee Bank then could
of the depositor to act as a prudent businessman would have taken immediate steps to prevent further
under the circumstances. In the case at bar, the commission of such fraud. Thus, petitioner's negligence
petitioner relied implicitly upon the honesty and loyalty was the proximate cause of her loss. And since it was
of her bookkeeper, and did not even verify the accuracy her negligence which caused the respondent drawee
of amounts of the checks she signed against the invoices Bank to honor the forged checks or prevented it from
attached thereto. Furthermore, although she regularly recovering the amount it had already paid on the
received her bank statements, she apparently did not checks, petitioner cannot now complain should the bank
carefully examine the same nor the check stubs and the refuse to recredit her account with the amount of such
returned checks, and did not compare them with the checks. 10 Under Section 23 of the NIL, she is now
same invoices. Otherwise, she could have easily precluded from using the forgery to prevent the bank's
discovered the discrepancies between the checks and debiting of her account.
the documents serving as bases for the checks. With
such discovery, the subsequent forgeries would not have
The doctrine in the case of Great Eastern Life Insurance
been accomplished. It was not until two years after the
Co. vs. Hongkong & Shanghai Bank 11 is not applicable
bookkeeper commenced her fraudulent scheme that
to the case at bar because in said case, the check was
petitioner discovered that eighty-two (82) checks were
fraudulently taken and the signature of the payee was

34
forged not by an agent or employee of the drawer. The
drawer was not found to be negligent in the handling of
its business affairs and the theft of the check by a total
stranger was not attributable to negligence of the
drawer; neither was the forging of the payee's
indorsement due to the drawer's negligence. Since the
drawer was not negligent, the drawee was duty-bound
to restore to the drawer's account the amount
theretofore paid under the check with a forged payee's
indorsement because the drawee did not pay as ordered
by the drawer.
Petitioner argues that respondent drawee Bank should
not have honored the checks because they were crossed
checks. Issuing a crossed check imposes no legal
obligation on the drawee not to honor such a check. It is
more of a warning to the holder that the check cannot
be presented to the drawee bank for payment in cash.
Instead, the check can only be deposited with the
payee's bank which in turn must present it for payment
against the drawee bank in the course of normal
banking transactions between banks. The crossed check
cannot be presented for payment but it can only be
deposited and the drawee bank may only pay to another
bank in the payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit
the drawee bank from having checks with more than
one indorsement. The banking rule banning acceptance
of checks for deposit or cash payment with more than
one indorsement unless cleared by some bank officials
does not invalidate the instrument; neither does it
invalidate the negotiation or transfer of the said check.
In effect, this rule destroys the negotiability of
bills/checks by limiting their negotiation by indorsement
of only the payee. Under the NIL, the only kind of
indorsement which stops the further negotiation of an
instrument is a restrictive indorsement which prohibits
the further negotiation thereof.
Sec. 36. When indorsement
restrictive. — An indorsement is
restrictive which either
(a) Prohibits further negotiation of
the instrument; or
xxx xxx xxx
by the drawer or any holder because as a drawee, he
incurs no liability on the check unless he accepts it. But
the drawee will make itself liable to a suit for damages
at the instance of the drawer for wrongful dishonor of
the bill or check.
Thus, it is clear that under the NIL, petitioner is
precluded from raising the defense of forgery by reason
of her gross negligence. But under Section 196 of the
NIL, any case not provided for in the Act shall be
governed by the provisions of existing legislation. Under
the laws of quasi-delict, she cannot point to the
negligence of the respondent drawee Bank in the
selection and supervision of its employees as being the
cause of the loss because negligence is the proximate
cause thereof and under Article 2179 of the Civil Code,
she may not be awarded damages. However, under
Article 1170 of the same Code the respondent drawee
Bank may be held liable for damages. The article
provides —
Those who in the performance of
their obligations are guilty of fraud,
negligence or delay, and those who in
any manner contravene the tenor
thereof, are liable for damages.
There is no question that there is a contractual relation
between petitioner as depositor (obligee) and the
respondent drawee bank as the obligor. In the
performance of its obligation, the drawee bank is bound
by its internal banking rules and regulations which form
part of any contract it enters into with any of its
depositors. When it violated its internal rules that
second endorsements are not to be accepted without the
approval of its branch managers and it did accept the
same upon the mere approval of Boon, a chief
accountant, it contravened the tenor of its obligation at
the very least, if it were not actually guilty of fraud or
negligence.
Furthermore, the fact that the respondent drawee Bank
did not discover the irregularity with respect to the
acceptance of checks with second indorsement for
deposit even without the approval of the branch
manager despite periodic inspection conducted by a
team of auditors from the main office constitutes
negligence on the part of the bank in carrying out its
obligations to its depositors. Article 1173 provides —

In this kind of restrictive indorsement, the prohibition to

The fault or negligence of the obligor
transfer or negotiate must be written in express words
consists in the omission of that
at the back of the instrument, so that any subsequent
diligence which is required by the
party may be forewarned that ceases to be negotiable.
nature of the obligation and
However, the restrictive indorsee acquires the right to
corresponds with the circumstance of
receive payment and bring any action thereon as any
the persons, of the time and of the
indorser, but he can no longer transfer his rights as such
place. . . .
indorsee where the form of the indorsement does not
authorize him to do so. 12
We hold that banking business is so impressed with
public interest where the trust and confidence of the
Although the holder of a check cannot compel a drawee
public in general is of paramount importance such that
bank to honor it because there is no privity between
the appropriate standard of diligence must be a high
them, as far as the drawer-depositor is concerned, such
degree of diligence, if not the utmost diligence. Surely,
bank may not legally refuse to honor a negotiable bill of
respondent drawee Bank cannot claim it exercised such
exchange or a check drawn against it with more than
a degree of diligence that is required of it. There is no
one indorsement if there is nothing irregular with the bill
way We can allow it now to escape liability for such
or check and the drawer has sufficient funds. The
negligence. Its liability as obligor is not merely vicarious
drawee cannot be compelled to accept or pay the check

35
but primary wherein the defense of exercise of due
diligence in the selection and supervision of its
employees is of no moment.
Premises considered, respondent drawee Bank is
adjudged liable to share the loss with the petitioner on a
fifty-fifty ratio in accordance with Article 172 which
provides:
Responsibility arising from negligence
in the performance of every kind of
obligation is also demandable, but
such liability may be regulated by the
courts according to the
circumstances.
With the foregoing provisions of the Civil Code being
relied upon, it is being made clear that the decision to
hold the drawee bank liable is based on law and
substantial justice and not on mere equity. And although
the case was brought before the court not on breach of
contractual obligations, the courts are not precluded
from applying to the circumstances of the case the laws
pertinent thereto. Thus, the fact that petitioner's
negligence was found to be the proximate cause of her
loss does not preclude her from recovering damages.
The reason why the decision dealt on a discussion on
proximate cause is due to the error pointed out by
petitioner as allegedly committed by the respondent
court. And in breaches of contract under Article 1173,
due diligence on the part of the defendant is not a
defense.
PREMISES CONSIDERED, the case is hereby ordered
REMANDED to the trial court for the reception of
evidence to determine the exact amount of loss suffered
by the petitioner, considering that she partly benefited
from the issuance of the questioned checks since the
obligation for which she issued them were apparently
extinguished, such that only the excess amount over
and above the total of these actual obligations must be
considered as loss of which one half must be paid by
respondent drawee bank to herein petitioner.
SO ORDERED.
G.R. No. 107382/G.R. No. 107612 January
31, 1996
ASSOCIATED BANK, petitioner,
vs.
HON. COURT OF APPEALS, PROVINCE OF TARLAC
and PHILIPPINE NATIONAL BANK, respondents.
xxxxxxxxxxxxxxxxxxxxx
G.R. No. 107612 January 31, 1996
PHILIPPINE NATIONAL BANK, petitioner,
vs.
36
HONORABLE COURT OF APPEALS, PROVINCE OF
TARLAC, and ASSOCIATED BANK, respondents.
DECISION
ROMERO, J.:
Where thirty checks bearing forged endorsements are
paid, who bears the loss, the drawer, the drawee bank
or the collecting bank?
This is the main issue in these consolidated petitions for
review assailing the decision of the Court of Appeals in
"Province of Tarlac v. Philippine National Bank v.
Associated Bank v. Fausto Pangilinan, et. al." (CA-G.R.
No. CV No. 17962). 1
The facts of the case are as follows:
The Province of Tarlac maintains a current account with
the Philippine National Bank (PNB) Tarlac Branch where
the provincial funds are deposited. Checks issued by the
Province are signed by the Provincial Treasurer and
countersigned by the Provincial Auditor or the Secretary
of the Sangguniang Bayan.
A portion of the funds of the province is allocated to the
Concepcion Emergency Hospital. 2 The allotment checks
for said government hospital are drawn to the order of
"Concepcion Emergency Hospital, Concepcion, Tarlac" or
"The Chief, Concepcion Emergency Hospital, Concepcion,
Tarlac." The checks are released by the Office of the
Provincial Treasurer and received for the hospital by its
administrative officer and cashier.
In January 1981, the books of account of the Provincial
Treasurer were post-audited by the Provincial Auditor. It
was then discovered that the hospital did not receive
several allotment checks drawn by the Province.
On February 19, 1981, the Provincial Treasurer
requested the manager of the PNB to return all of its
cleared checks which were issued from 1977 to 1980 in
order to verify the regularity of their encashment. After
the checks were examined, the Provincial Treasurer
learned that 30 checks amounting to P203,300.00 were
encashed by one Fausto Pangilinan, with the Associated
Bank acting as collecting bank.
It turned out that Fausto Pangilinan, who was the
administrative officer and cashier of payee hospital until
his retirement on February 28, 1978, collected the
questioned checks from the office of the Provincial
Treasurer. He claimed to be assisting or helping the
hospital follow up the release of the checks and had
official receipts. 3Pangilinan sought to encash the first
check 4 with Associated Bank. However, the manager of
Associated Bank refused and suggested that Pangilinan
deposit the check in his personal savings account with
the same bank. Pangilinan was able to withdraw the
money when the check was cleared and paid by the
drawee bank, PNB.
After forging the signature of Dr. Adena Canlas who was
chief of the payee hospital, Pangilinan followed the same
procedure for the second check, in the amount of
P5,000.00 and dated April 20, 1978, 5 as well as for
twenty-eight other checks of various amounts and on
various dates. The last check negotiated by Pangilinan
was for f8,000.00 and dated February 10, 1981. 6 All the
checks bore the stamp of Associated Bank which reads
"All prior endorsements guaranteed ASSOCIATED
BANK."
Jesus David, the manager of Associated Bank testified
that Pangilinan made it appear that the checks were
paid to him for certain projects with the hospital. 7 He
did not find as irregular the fact that the checks were
not payable to Pangilinan but to the Concepcion
Emergency Hospital. While he admitted that his wife and
Pangilinan's wife are first cousins, the manager denied
having given Pangilinan preferential treatment on this
account. 8
On February 26, 1981, the Provincial Treasurer wrote
the manager of the PNB seeking the restoration of the
various amounts debited from the current account of the
Province. 9
In turn, the PNB manager demanded reimbursement
from the Associated Bank on May 15, 1981. 10
As both banks resisted payment, the Province of Tarlac
brought suit against PNB which, in turn, impleaded
Associated Bank as third-party defendant. The latter
then filed a fourth-party complaint against Adena Canlas
and Fausto Pangilinan. 11
After trial on the merits, the lower court rendered its
decision on March 21, 1988, disposing as follows:
WHEREFORE, in view of the foregoing,
judgment is hereby rendered:
1. On the basic complaint, in favor of plaintiff
Province of Tarlac and against defendant
Philippine National Bank (PNB), ordering the
latter to pay to the former, the sum of Two
Hundred Three Thousand Three Hundred
(P203,300.00) Pesos with legal interest
thereon from March 20, 1981 until fully paid;
2. On the third-party complaint, in favor of
defendant/third-party plaintiff Philippine
National Bank (PNB) and against third-party
defendant/fourth-party plaintiff Associated
Bank ordering the latter to reimburse to the
former the amount of Two Hundred Three
Thousand Three Hundred (P203,300.00) Pesos
with legal interests thereon from March 20,
1981 until fully paid;.
3. On the fourth-party complaint, the same is
hereby ordered dismissed for lack of cause of
action as against fourth-party defendant Adena
Canlas and lack of jurisdiction over the person
of fourth-party defendant Fausto Pangilinan as
against the latter.
37
4. On the counterclaims on the complaint,
third-party complaint and fourth-party
complaint, the same are hereby ordered
dismissed for lack of merit.
SO ORDERED. 12
PNB and Associated Bank appealed to the Court of
Appeals. 13 Respondent court affirmed the trial court's
decision in toto on September 30, 1992.
Hence these consolidated petitions which seek a reversal
of respondent appellate court's decision.
PNB assigned two errors. First, the bank contends that
respondent court erred in exempting the Province of
Tarlac from liability when, in fact, the latter was
negligent because it delivered and released the
questioned checks to Fausto Pangilinan who was then
already retired as the hospital's cashier and
administrative officer. PNB also maintains its innocence
and alleges that as between two innocent persons, the
one whose act was the cause of the loss, in this case the
Province of Tarlac, bears the loss.
Next, PNB asserts that it was error for the court to order
it to pay the province and then seek reimbursement
from Associated Bank. According to petitioner bank,
respondent appellate Court should have directed
Associated Bank to pay the adjudged liability directly to
the Province of Tarlac to avoid circuity. 14
Associated Bank, on the other hand, argues that the
order of liability should be totally reversed, with the
drawee bank (PNB) solely and ultimately bearing the
loss.
Respondent court allegedly erred in applying Section 23
of the Philippine Clearing House Rules instead of Central
Bank Circular No. 580, which, being an administrative
regulation issued pursuant to law, has the force and
effect of law. 15 The PCHC Rules are merely contractual
stipulations among and between member-banks. As
such, they cannot prevail over the aforesaid CB Circular.
It likewise contends that PNB, the drawee bank, is
estopped from asserting the defense of guarantee of
prior indorsements against Associated Bank, the
collecting bank. In stamping the guarantee (for all prior
indorsements), it merely followed a mandatory
requirement for clearing and had no choice but to place
the stamp of guarantee; otherwise, there would be no
clearing. The bank will be in a "no-win" situation and will
always bear the loss as against the drawee bank. 16
Associated Bank also claims that since PNB already
cleared and paid the value of the forged checks in
question, it is now estopped from asserting the defense
that Associated Bank guaranteed prior indorsements.
The drawee bank allegedly has the primary duty to
verify the genuineness of payee's indorsement before
paying the check. 17
While both banks are innocent of the forgery, Associated
Bank claims that PNB was at fault and should solely bear
the loss because it cleared and paid the forged checks.
xxx xxx xxx
The case at bench concerns checks payable to the order
of Concepcion Emergency Hospital or its Chief. They
were properly issued and bear the genuine signatures of
the drawer, the Province of Tarlac. The infirmity in the
questioned checks lies in the payee's (Concepcion
Emergency Hospital) indorsements which are forgeries.
At the time of their indorsement, the checks were order
instruments.
Checks having forged indorsements should be
differentiated from forged checks or checks bearing the
forged signature of the drawer.
Section 23 of the Negotiable Instruments Law (NIL)
provides:
Sec. 23. FORGED SIGNATURE, EFFECT OF. —
When a signature is forged or made without
authority of the person whose signature it
purports to be, it is wholly inoperative, and no
right to retain the instrument, or to give a
discharge therefor, or to enforce payment
thereof against any party thereto, can be
acquired through or under such signature
unless the party against whom it is sought to
enforce such right is precluded from setting up
the forgery or want of authority.
A forged signature, whether it be that of the drawer or
the payee, is wholly inoperative and no one can gain
title to the instrument through it. A person whose
signature to an instrument was forged was never a party
and never consented to the contract which allegedly
gave rise to such instrument. 18 Section 23 does not
avoid the instrument but only the forged
signature. 19 Thus, a forged indorsement does not
operate as the payee's indorsement.
The exception to the general rule in Section 23 is where
"a party against whom it is sought to enforce a right is
precluded from setting up the forgery or want of
authority." Parties who warrant or admit the
genuineness of the signature in question and those who,
by their acts, silence or negligence are estopped from
setting up the defense of forgery, are precluded from
using this defense. Indorsers, persons negotiating by
delivery and acceptors are warrantors of the
genuineness of the signatures on the instrument. 20
In bearer instruments, the signature of the payee or
holder is unnecessary to pass title to the instrument.
Hence, when the indorsement is a forgery, only the
person whose signature is forged can raise the defense
of forgery against a holder in due course. 21
The checks involved in this case are order instruments,
hence, the following discussion is made with reference
to the effects of a forged indorsement on an instrument
payable to order.
38
Where the instrument is payable to order at the time of
the forgery, such as the checks in this case, the
signature of its rightful holder (here, the payee hospital)
is essential to transfer title to the same instrument.
When the holder's indorsement is forged, all parties
prior to the forgery may raise the real defense of forgery
against all parties subsequent thereto. 22
An indorser of an order instrument warrants "that the
instrument is genuine and in all respects what it
purports to be; that he has a good title to it; that all
prior parties had capacity to contract; and that the
instrument is at the time of his indorsement valid and
subsisting." 23 He cannot interpose the defense that
signatures prior to him are forged.
A collecting bank where a check is deposited and which
indorses the check upon presentment with the drawee
bank, is such an indorser. So even if the indorsement on
the check deposited by the banks's client is forged, the
collecting bank is bound by his warranties as an indorser
and cannot set up the defense of forgery as against the
drawee bank.
The bank on which a check is drawn, known as the
drawee bank, is under strict liability to pay the check to
the order of the payee. The drawer's instructions are
reflected on the face and by the terms of the check.
Payment under a forged indorsement is not to the
drawer's order. When the drawee bank pays a person
other than the payee, it does not comply with the terms
of the check and violates its duty to charge its
customer's (the drawer) account only for properly
payable items. Since the drawee bank did not pay a
holder or other person entitled to receive payment, it
has no right to reimbursement from the drawer. 24 The
general rule then is that the drawee bank may not debit
the drawer's account and is not entitled to
indemnification from the drawer. 25 The risk of loss must
perforce fall on the drawee bank.
However, if the drawee bank can prove a failure by the
customer/drawer to exercise ordinary care that
substantially contributed to the making of the forged
signature, the drawer is precluded from asserting the
forgery.
If at the same time the drawee bank was also negligent
to the point of substantially contributing to the loss,
then such loss from the forgery can be apportioned
between the negligent drawer and the negligent bank. 26
In cases involving a forged check, where the drawer's
signature is forged, the drawer can recover from the
drawee bank. No drawee bank has a right to pay a
forged check. If it does, it shall have to recredit the
amount of the check to the account of the drawer. The
liability chain ends with the drawee bank whose
responsibility it is to know the drawer's signature since
the latter is its customer. 27
In cases involving checks with forged indorsements,
such as the present petition, the chain of liability does
not end with the drawee bank. The drawee bank may
not debit the account of the drawer but may generally
pass liability back through the collection chain to the
party who took from the forger and, of course, to the
forger himself, if available. 28 In other words, the drawee
bank canseek reimbursement or a return of the amount
it paid from the presentor bank or
person. 29 Theoretically, the latter can demand
reimbursement from the person who indorsed the check
to it and so on. The loss falls on the party who took the
check from the forger, or on the forger himself.
In this case, the checks were indorsed by the collecting
bank (Associated Bank) to the drawee bank (PNB). The
former will necessarily be liable to the latter for the
checks bearing forged indorsements. If the forgery is
that of the payee's or holder's indorsement, the
collecting bank is held liable, without prejudice to the
latter proceeding against the forger.
Since a forged indorsement is inoperative, the collecting
bank had no right to be paid by the drawee bank. The
former must necessarily return the money paid by the
latter because it was paid wrongfully. 30
More importantly, by reason of the statutory warranty of
a general indorser in section 66 of the Negotiable
Instruments Law, a collecting bank which indorses a
check bearing a forged indorsement and presents it to
the drawee bank guarantees all prior indorsements,
including the forged indorsement. It warrants that the
instrument is genuine, and that it is valid and subsisting
at the time of his indorsement. Because the indorsement
is a forgery, the collecting bank commits a breach of this
warranty and will be accountable to the drawee bank.
This liability scheme operates without regard to fault on
the part of the collecting/presenting bank. Even if the
latter bank was not negligent, it would still be liable to
the drawee bank because of its indorsement.
The Court has consistently ruled that "the collecting
bank or last endorser generally suffers the loss because
it has the duty to ascertain the genuineness of all prior
endorsements considering that the act of presenting the
check for payment to the drawee is an assertion that the
party making the presentment has done its duty to
ascertain the genuineness of the endorsements." 31
The drawee bank is not similarly situated as the
collecting bank because the former makes no warranty
as to the genuineness. of any indorsement. 32 The
drawee bank's duty is but to verify the genuineness of
the drawer's signature and not of the indorsement
because the drawer is its client.
Moreover, the collecting bank is made liable because it is
privy to the depositor who negotiated the check. The
bank knows him, his address and history because he is a
client. It has taken a risk on his deposit. The bank is
also in a better position to detect forgery, fraud or
irregularity in the indorsement.
Hence, the drawee bank can recover the amount paid on
the check bearing a forged indorsement from the
collecting bank. However, a drawee bank has the duty to
promptly inform the presentor of the forgery upon
discovery. If the drawee bank delays in informing the
presentor of the forgery, thereby depriving said
presentor of the right to recover from the forger, the
former is deemed negligent and can no longer recover
from the presentor. 33
39
Applying these rules to the case at bench, PNB, the
drawee bank, cannot debit the current account of the
Province of Tarlac because it paid checks which bore
forged indorsements. However, if the Province of Tarlac
as drawer was negligent to the point of substantially
contributing to the loss, then the drawee bank PNB can
charge its account. If both drawee bank-PNB and
drawer-Province of Tarlac were negligent, the loss
should be properly apportioned between them.
The loss incurred by drawee bank-PNB can be passed on
to the collecting bank-Associated Bank which presented
and indorsed the checks to it. Associated Bank can, in
turn, hold the forger, Fausto Pangilinan, liable.
If PNB negligently delayed in informing Associated Bank
of the forgery, thus depriving the latter of the
opportunity to recover from the forger, it forfeits its
right to reimbursement and will be made to bear the
loss.
After careful examination of the records, the Court finds
that the Province of Tarlac was equally negligent and
should, therefore, share the burden of loss from the
checks bearing a forged indorsement.
The Province of Tarlac permitted Fausto Pangilinan to
collect the checks when the latter, having already retired
from government service, was no longer connected with
the hospital. With the exception of the first check (dated
January 17, 1978), all the checks were issued and
released after Pangilinan's retirement on February 28,
1978. After nearly three years, the Treasurer's office
was still releasing the checks to the retired cashier. In
addition, some of the aid allotment checks were released
to Pangilinan and the others to Elizabeth Juco, the new
cashier. The fact that there were now two persons
collecting the checks for the hospital is an unmistakable
sign of an irregularity which should have alerted
employees in the Treasurer's office of the fraud being
committed. There is also evidence indicating that the
provincial employees were aware of Pangilinan's
retirement and consequent dissociation from the
hospital. Jose Meru, the Provincial Treasurer, testified:.
ATTY. MORGA:
Q Now, is it true that for a given month there
were two releases of checks, one went to Mr.
Pangilinan and one went to Miss Juco?
JOSE MERU:
A Yes, sir.
Q Will you please tell us how at the time (sic)
when the authorized representative of
Concepcion Emergency Hospital is and was
supposed to be Miss Juco?
A Well, as far as my investigation show (sic)
the assistant cashier told me that Pangilinan
represented himself as also authorized to help
in the release of these checks and we were
apparently misled because they accepted the
 representation of Pangilinan that he was
helping them in the release of the checks and
besides according to them they were,
Pangilinan, like the rest, was able to present
an official receipt to acknowledge these
receipts and according to them since this is a
government check and believed that it will
eventually go to the hospital following the
standard procedure of negotiating government
checks, they released the checks to Pangilinan
aside from Miss Juco.34
The failure of the Province of Tarlac to exercise due care
contributed to a significant degree to the loss
tantamount to negligence. Hence, the Province of Tarlac
should be liable for part of the total amount paid on the
questioned checks.
The drawee bank PNB also breached its duty to pay only
according to the terms of the check. Hence, it cannot
escape liability and should also bear part of the loss.
As earlier stated, PNB can recover from the collecting
bank.
In the case of Associated Bank v. CA, 35 six crossed
checks with forged indorsements were deposited in the
forger's account with the collecting bank and were later
paid by four different drawee banks. The Court found
the collecting bank (Associated) to be negligent and
held:
The Bank should have first verified his right to
endorse the crossed checks, of which he was
not the payee, and to deposit the proceeds of
the checks to his own account. The Bank was
by reason of the nature of the checks put upon
notice that they were issued for deposit only to
the private respondent's account. . . .
The situation in the case at bench is analogous to the
above case, for it was not the payee who deposited the
checks with the collecting bank. Here, the checks were
all payable to Concepcion Emergency Hospital but it was
Fausto Pangilinan who deposited the checks in his
personal savings account.
Although Associated Bank claims that the guarantee
stamped on the checks (All prior and/or lack of
endorsements guaranteed) is merely a requirement
forced upon it by clearing house rules, it cannot but
remain liable. The stamp guaranteeing prior
indorsements is not an empty rubric which a bank must
fulfill for the sake of convenience. A bank is not required
to accept all the checks negotiated to it. It is within the
bank's discretion to receive a check for no banking
institution would consciously or deliberately accept a
check bearing a forged indorsement. When a check is
deposited with the collecting bank, it takes a risk on its
depositor. It is only logical that this bank be held
accountable for checks deposited by its customers.
A delay in informing the collecting bank (Associated
Bank) of the forgery, which deprives it of the
opportunity to go after the forger, signifies negligence
40
on the part of the drawee bank (PNB) and will preclude
it from claiming reimbursement.
It is here that Associated Bank's assignment of error
concerning C.B. Circular No. 580 and Section 23 of the
Philippine Clearing House Corporation Rules comes to
fore. Under Section 4(c) of CB Circular No. 580, items
bearing a forged endorsement shall be returned within
twenty-Sour (24) hours after discovery of the forgery
but in no event beyond the period fixed or provided by
law for filing of a legal action by the returning bank.
Section 23 of the PCHC Rules deleted the requirement
that items bearing a forged endorsement should be
returned within twenty-four hours. Associated Bank now
argues that the aforementioned Central Bank Circular is
applicable. Since PNB did not return the questioned
checks within twenty-four hours, but several days later,
Associated Bank alleges that PNB should be considered
negligent and not entitled to reimbursement of the
amount it paid on the checks.
The Court deems it unnecessary to discuss Associated
Bank's assertions that CB Circular No. 580 is an
administrative regulation issued pursuant to law and as
such, must prevail over the PCHC rule. The Central Bank
circular was in force for all banks until June 1980 when
the Philippine Clearing House Corporation (PCHC) was
set up and commenced operations. Banks in Metro
Manila were covered by the PCHC while banks located
elsewhere still had to go through Central Bank Clearing.
In any event, the twenty-four-hour return rule was
adopted by the PCHC until it was changed in 1982. The
contending banks herein, which are both branches in
Tarlac province, are therefore not covered by PCHC
Rules but by CB Circular No. 580. Clearly then, the CB
circular was applicable when the forgery of the checks
was discovered in 1981.
The rule mandates that the checks be returned within
twenty-four hours after discovery of the forgery but in
no event beyond the period fixed by law for filing a legal
action. The rationale of the rule is to give the collecting
bank (which indorsed the check) adequate opportunity
to proceed against the forger. If prompt notice is not
given, the collecting bank maybe prejudiced and lose
the opportunity to go after its depositor.
The Court finds that even if PNB did not return the
questioned checks to Associated Bank within twenty-four
hours, as mandated by the rule, PNB did not commit
negligent delay. Under the circumstances, PNB gave
prompt notice to Associated Bank and the latter bank
was not prejudiced in going after Fausto Pangilinan.
After the Province of Tarlac informed PNB of the
forgeries, PNB necessarily had to inspect the checks and
conduct its own investigation. Thereafter, it requested
the Provincial Treasurer's office on March 31, 1981 to
return the checks for verification. The Province of Tarlac
returned the checks only on April 22, 1981. Two days
later, Associated Bank received the checks from PNB. 36
Associated Bank was also furnished a copy of the
Province's letter of demand to PNB dated March 20,
1981, thus giving it notice of the forgeries. At this time,
however, Pangilinan's account with Associated had only
P24.63 in it. 37Had Associated Bank decided to debit
Pangilinan's account, it could not have recovered the
amounts paid on the questioned checks. In addition,
while Associated Bank filed a fourth-party complaint
against Fausto Pangilinan, it did not present evidence
against Pangilinan and even presented him as its
rebuttal witness. 38 Hence, Associated Bank was not
prejudiced by PNB's failure to comply with the twenty-
four-hour return rule.
Next, Associated Bank contends that PNB is estopped
from requiring reimbursement because the latter paid
and cleared the checks. The Court finds this contention
unmeritorious. Even if PNB cleared and paid the checks,
it can still recover from Associated Bank. This is true
even if the payee's Chief Officer who was supposed to
have indorsed the checks is also a customer of the
drawee bank. 39 PNB's duty was to verify the
genuineness of the drawer's signature and not the
genuineness of payee's indorsement. Associated Bank,
as the collecting bank, is the entity with the duty to
verify the genuineness of the payee's indorsement.
PNB also avers that respondent court erred in adjudging
circuitous liability by directing PNB to return to the
Province of Tarlac the amount of the checks and then
directing Associated Bank to reimburse PNB. The Court
finds nothing wrong with the mode of the award. The
drawer, Province of Tarlac, is a clientor customer of the
PNB, not of Associated Bank. There is no privity of
contract between the drawer and the collecting bank.
The collecting bank, Associated Bank, shall be liable to
PNB for fifty (50%) percent of P203,300.00. It is liable
on its warranties as indorser of the checks which were
deposited by Fausto Pangilinan, having guaranteed the
genuineness of all prior indorsements, including that of
the chief of the payee hospital, Dr. Adena Canlas.
Associated Bank was also remiss in its duty to ascertain
the genuineness of the payee's indorsement.
IN VIEW OF THE FOREGOING, the petition for review
filed by the Philippine National Bank (G.R. No. 107612)
is hereby PARTIALLY GRANTED. The petition for review
filed by the Associated Bank (G.R. No. 107382) is
hereby DENIED. The decision of the trial court is
MODIFIED. The Philippine National Bank shall pay fifty
percent (50%) of P203,300.00 to the Province of Tarlac,
with legal interest from March 20, 1981 until the
payment thereof. Associated Bank shall pay fifty percent
(50%) of P203,300.00 to the Philippine National Bank,
likewise, with legal interest from March 20, 1981 until
payment is made.
SO ORDERED.

The trial court made PNB and Associated Bank liable

with legal interest from March 20, 1981, the date of
extrajudicial demand made by the Province of Tarlac on
PNB. The payments to be made in this case stem from
the deposits of the Province of Tarlac in its current
account with the PNB. Bank deposits are considered
under the law as loans. 40 Central Bank Circular No. 416
prescribes a twelve percent (12%) interest per annum
for loans, forebearance of money, goods or credits in the
absence of express stipulation. Normally, current
accounts are likewise interest-bearing, by express
contract, thus excluding them from the coverage of CB
Circular No. 416. In this case, however, the actual
interest rate, if any, for the current account opened by
the Province of Tarlac with PNB was not given in
evidence. Hence, the Court deems it wise to affirm the
trial court's use of the legal interest rate, or six percent
(6%) per annum. The interest rate shall be computed
from the date of default, or the date of judicial or
extrajudicial demand. 41 The trial court did not err in
granting legal interest from March 20, 1981, the date of
extrajudicial demand.

The Court finds as reasonable, the proportionate sharing

of fifty percent - fifty percent (50%-50%). Due to the
negligence of the Province of Tarlac in releasing the
checks to an unauthorized person (Fausto Pangilinan), in
allowing the retired hospital cashier to receive the
G.R. No. 139130 November 27, 2002
checks for the payee hospital for a period close to three
years and in not properly ascertaining why the retired
hospital cashier was collecting checks for the payee RAMON K. ILUSORIO, petitioner,
hospital in addition to the hospital's real cashier, vs.
respondent Province contributed to the loss amounting HON. COURT OF APPEALS, and THE MANILA
to P203,300.00 and shall be liable to the PNB for fifty BANKING CORPORATION, respondents.
(50%) percent thereof. In effect, the Province of Tarlac
can only recover fifty percent (50%) of P203,300.00
DECISION
from PNB.

QUISUMBING, J.:

41
This petition for review seeks to reverse the
decision1 promulgated on January 28, 1999 by the Court
of Appeals in CA-G.R. CV No. 47942, affirming the
decision of the then Court of First Instance of Rizal,
Branch XV (now the Regional Trial Court of Makati,
Branch 138) dismissing Civil Case No. 43907, for
damages.
The facts as summarized by the Court of Appeals are as
follows:
Petitioner is a prominent businessman who, at the time
material to this case, was the Managing Director of
Multinational Investment Bancorporation and the
Chairman and/or President of several other corporations.
He was a depositor in good standing of respondent
bank, the Manila Banking Corporation, under current
Checking Account No. 06-09037-0. As he was then
running about 20 corporations, and was going out of the
country a number of times, petitioner entrusted to his
secretary, Katherine2 E. Eugenio, his credit cards and his
checkbook with blank checks. It was also Eugenio who
verified and reconciled the statements of said checking
account.3
Between the dates September 5, 1980 and January 23,
1981, Eugenio was able to encash and deposit to her
personal account about seventeen (17) checks drawn
against the account of the petitioner at the respondent
bank, with an aggregate amount of P119,634.34.
Petitioner did not bother to check his statement of
account until a business partner apprised him that he
saw Eugenio use his credit cards. Petitioner fired
Eugenio immediately, and instituted a criminal action
against her for estafa thru falsification before the Office
of the Provincial Fiscal of Rizal. Private respondent,
through an affidavit executed by its employee, Mr.
Dante Razon, also lodged a complaint for estafa thru
falsification of commercial documents against Eugenio
on the basis of petitioner’s statement that his signatures
in the checks were forged.4 Mr. Razon’s affidavit states:
That I have examined and scrutinized the following
checks in accordance with prescribed verification
procedures with utmost care and diligence by comparing
the signatures affixed thereat against the specimen
signatures of Mr. Ramon K. Ilusorio which we have on
file at our said office on such dates,
xxx
That the aforementioned checks were among those
issued by Manilabank in favor of its client MR. RAMON K.
ILUSORIO,…
That the same were personally encashed by KATHERINE
E. ESTEBAN, an executive secretary of MR. RAMON K.
ILUSORIO in said Investment Corporation;
That I have met and known her as KATHERINE E.
ESTEBAN the attending verifier when she personally
encashed the above-mentioned checks at our said
office;
That MR. RAMON K. ILUSORIO executed an affidavit
expressly disowning his signature appearing on the
42
checks further alleged to have not authorized the
issuance and encashment of the same.…5
Petitioner then requested the respondent bank to credit
back and restore to its account the value of the checks
which were wrongfully encashed but respondent bank
refused. Hence, petitioner filed the instant case.6
At the trial, petitioner testified on his own behalf,
attesting to the truth of the circumstances as narrated
above, and how he discovered the alleged forgeries.
Several employees of Manila Bank were also called to
the witness stand as hostile witnesses. They testified
that it is the bank’s standard operating procedure that
whenever a check is presented for encashment or
clearing, the signature on the check is first verified
against the specimen signature cards on file with the
bank.
Manila Bank also sought the expertise of the National
Bureau of Investigation (NBI) in determining the
genuineness of the signatures appearing on the checks.
However, in a letter dated March 25, 1987, the NBI
informed the trial court that they could not conduct the
desired examination for the reason that the standard
specimens submitted were not sufficient for purposes of
rendering a definitive opinion. The NBI then suggested
that petitioner be asked to submit seven (7) or more
additional standard signatures executed before or about,
and immediately after the dates of the questioned
checks. Petitioner, however, failed to comply with this
request.
After evaluating the evidence on both sides, the court a
quo rendered judgment on May 12, 1994 with the
following dispositive portion:
WHEREFORE, finding no sufficient basis for plaintiff's
cause herein against defendant bank, in the light of the
foregoing considerations and established facts, this case
would have to be, as it is hereby DISMISSED.
Defendant’s counterclaim is likewise DISMISSED for lack
of sufficient basis.
SO ORDERED.7
Aggrieved, petitioner elevated the case to the Court of
Appeals by way of a petition for review but without
success. The appellate court held that petitioner’s own
negligence was the proximate cause of his loss. The
appellate court disposed as follows:
WHEREFORE, the judgment appealed from is AFFIRMED.
Costs against the appellant.
SO ORDERED.8
Before us, petitioner ascribes the following errors to the
Court of Appeals:
A. THE COURT OF APPEALS ERRED IN NOT HOLDING
THAT THE RESPONDENT BANK IS ESTOPPED FROM
RAISING THE DEFENSE THAT THERE WAS NO FORGERY
OF THE SIGNATURES OF THE PETITIONER IN THE
CHECK BECAUSE THE RESPONDENT FILED A CRIMINAL
COMPLAINT FOR ESTAFA THRU FALSIFICATION OF
COMMERCIAL DOCUMENTS AGAINST KATHERINE
EUGENIO USING THE AFFIDAVIT OF PETITIONER
STATING THAT HIS SIGNATURES WERE FORGED AS
PART OF THE AFFIDAVIT-COMPLAINT.9
B. THE COURT OF APPEALS ERRED IN NOT APPLYING
SEC. 23, NEGOTIABLE INSTRUMENTS LAW.10
C. THE COURT OF APPEALS ERRED IN NOT HOLDING
THE BURDEN OF PROOF IS WITH THE RESPONDENT
BANK TO PROVE THE DUE DILIGENCE TO PREVENT
DAMAGE, TO THE PETITIONER, AND THAT IT WAS NOT
NEGLIGENT IN THE SELECTION AND SUPERVISION OF
ITS EMPLOYEES.11
D. THE COURT OF APPEALS ERRED IN NOT HOLDING
THAT RESPONDENT BANK SHOULD BEAR THE LOSS,
AND SHOULD BE MADE TO PAY PETITIONER, WITH
RECOURSE AGAINST KATHERINE EUGENIO ESTEBAN.12
Essentially the issues in this case are: (1) whether or
not petitioner has a cause of action against private
respondent; and (2) whether or not private respondent,
in filing an estafa case against petitioner’s secretary, is
barred from raising the defense that the fact of forgery
was not established.
Petitioner contends that Manila Bank is liable for
damages for its negligence in failing to detect the
discrepant checks. He adds that as a general rule a bank
which has obtained possession of a check upon an
unauthorized or forged endorsement of the payee’s
signature and which collects the amount of the check
from the drawee is liable for the proceeds thereof to the
payee. Petitioner invokes the doctrine of estoppel,
saying that having itself instituted a forgery case against
Eugenio, Manila Bank is now estopped from asserting
that the fact of forgery was never proven.
For its part, Manila Bank contends that respondent
appellate court did not depart from the accepted and
usual course of judicial proceedings, hence there is no
reason for the reversal of its ruling. Manila Bank
additionally points out that Section 2313 of the
Negotiable Instruments Law is inapplicable, considering
that the fact of forgery was never proven. Lastly, the
bank negates petitioner’s claim of estoppel.14
On the first issue, we find that petitioner has no cause of
action against Manila Bank. To be entitled to damages,
petitioner has the burden of proving negligence on the
part of the bank for failure to detect the discrepancy in
the signatures on the checks. It is incumbent upon
petitioner to establish the fact of forgery, i.e., by
submitting his specimen signatures and comparing them
with those on the questioned checks. Curiously though,
petitioner failed to submit additional specimen
signatures as requested by the National Bureau of
Investigation from which to draw a conclusive finding
regarding forgery. The Court of Appeals found that
petitioner, by his own inaction, was precluded from
setting up forgery. Said the appellate court:
43
We cannot fault the court a quo for such declaration,
considering that the plaintiff’s evidence on the alleged
forgery is not convincing enough. The burden to prove
forgery was upon the plaintiff, which burden he failed to
discharge. Aside from his own testimony, the appellant
presented no other evidence to prove the fact of forgery.
He did not even submit his own specimen signatures,
taken on or about the date of the questioned checks, for
examination and comparison with those of the subject
checks. On the other hand, the appellee presented
specimen signature cards of the appellant, taken at
various years, namely, in 1976, 1979 and 1981 (Exhibits
"1", "2", "3" and "7"), showing variances in the
appellant’s unquestioned signatures. The evidence
further shows that the appellee, as soon as it was
informed by the appellant about his questioned
signatures, sought to borrow the questioned checks
from the appellant for purposes of analysis and
examination (Exhibit "9"), but the same was denied by
the appellant. It was also the former which sought the
assistance of the NBI for an expert analysis of the
signatures on the questioned checks, but the same was
unsuccessful for lack of sufficient specimen signatures.15
Moreover, petitioner’s contention that Manila Bank was
remiss in the exercise of its duty as drawee lacks factual
basis. Consistently, the CA and the RTC found that
Manila Bank employees exercised due diligence in
cashing the checks. The bank’s employees in the present
case did not have a hint as to Eugenio’s modus operandi
because she was a regular customer of the bank, having
been designated by petitioner himself to transact in his
behalf. According to the appellate court, the employees
of the bank exercised due diligence in the performance
of their duties. Thus, it found that:
The evidence on both sides indicates that TMBC’s
employees exercised due diligence before encashing the
checks. Its verifiers first verified the drawer’s signatures
thereon as against his specimen signature cards, and
when in doubt, the verifier went further, such as by
referring to a more experienced verifier for further
verification. In some instances the verifier made a
confirmation by calling the depositor by phone. It is only
after taking such precautionary measures that the
subject checks were given to the teller for payment.
Of course it is possible that the verifiers of TMBC might
have made a mistake in failing to detect any forgery -- if
indeed there was. However, a mistake is not equivalent
to negligence if they were honest mistakes. In the
instant case, we believe and so hold that if there were
mistakes, the same were not deliberate, since the bank
took all the precautions.16
As borne by the records, it was petitioner, not the bank,
who was negligent. Negligence is the omission to do
something which a reasonable man, guided by those
considerations which ordinarily regulate the conduct of
human affairs, would do, or the doing of something
which a prudent and reasonable man would do.17 In the
present case, it appears that petitioner accorded his
secretary unusual degree of trust and unrestricted
access to his credit cards, passbooks, check books, bank
statements, including custody and possession of
cancelled checks and reconciliation of accounts. Said the
Court of Appeals on this matter:
Moreover, the appellant had introduced his secretary to
the bank for purposes of reconciliation of his account,
through a letter dated July 14, 1980 (Exhibit "8"). Thus,
the said secretary became a familiar figure in the bank.
What is worse, whenever the bank verifiers call the
office of the appellant, it is the same secretary who
answers and confirms the checks.
The trouble is, the appellant had put so much trust and
confidence in the said secretary, by entrusting not only
his credit cards with her but also his checkbook with
blank checks. He also entrusted to her the verification
and reconciliation of his account. Further adding to his
injury was the fact that while the bank was sending him
the monthly Statements of Accounts, he was not
personally checking the same. His testimony did not
indicate that he was out of the country during the period
covered by the checks. Thus, he had all the
opportunities to verify his account as well as the
cancelled checks issued thereunder -- month after
month. But he did not, until his partner asked him
whether he had entrusted his credit card to his secretary
because the said partner had seen her use the same. It
was only then that he was minded to verify the records
of his account. 18
The abovecited findings are binding upon the reviewing
court. We stress the rule that the factual findings of a
trial court, especially when affirmed by the appellate
court, are binding upon us19 and entitled to utmost
respect20 and even finality. We find no palpable error
that would warrant a reversal of the appellate court’s
assessment of facts anchored upon the evidence on
record.
Petitioner’s failure to examine his bank statements
appears as the proximate cause of his own damage.
Proximate cause is that cause, which, in natural and
continuous sequence, unbroken by any efficient
intervening cause, produces the injury, and without
which the result would not have occurred.21 In the
instant case, the bank was not shown to be remiss in its
duty of sending monthly bank statements to petitioner
so that any error or discrepancy in the entries therein
could be brought to the bank’s attention at the earliest
opportunity. But, petitioner failed to examine these bank
statements not because he was prevented by some
cause in not doing so, but because he did not pay
sufficient attention to the matter. Had he done so, he
could have been alerted to any anomaly committed
against him. In other words, petitioner had sufficient
opportunity to prevent or detect any misappropriation
by his secretary had he only reviewed the status of his
accounts based on the bank statements sent to him
regularly. In view of Article 2179 of the New Civil
Code,22 when the plaintiff’s own negligence was the
immediate and proximate cause of his injury, no
recovery could be had for damages.
Petitioner further contends that under Section 23 of the
Negotiable Instruments Law a forged check is
inoperative, and that Manila Bank had no authority to
pay the forged checks. True, it is a rule that when a
signature is forged or made without the authority of the
person whose signature it purports to be, the check is
wholly inoperative. No right to retain the instrument, or
to give a discharge therefor, or to enforce payment
thereof against any party, can be acquired through or
44
under such signature. However, the rule does provide
for an exception, namely: "unless the party against
whom it is sought to enforce such right is precluded
from setting up the forgery or want of authority." In the
instant case, it is the exception that applies. In our view,
petitioner is precluded from setting up the forgery,
assuming there is forgery, due to his own negligence in
entrusting to his secretary his credit cards and
checkbook including the verification of his statements of
account.
Petitioner’s reliance on Associated Bank vs. Court of
Appeals23 and Philippine Bank of Commerce vs. CA24 to
buttress his contention that respondent Manila Bank as
the collecting or last endorser generally suffers the loss
because it has the duty to ascertain the genuineness of
all prior endorsements is misplaced. In the cited cases,
the fact of forgery was not in issue. In the present case,
the fact of forgery was not established with certainty. In
those cited cases, the collecting banks were held to be
negligent for failing to observe precautionary measures
to detect the forgery. In the case before us, both courts
below uniformly found that Manila Bank’s personnel
diligently performed their duties, having compared the
signature in the checks from the specimen signatures on
record and satisfied themselves that it was petitioner’s.
On the second issue, the fact that Manila Bank had filed
a case for estafa against Eugenio would not estop it
from asserting the fact that forgery has not been clearly
established. Petitioner cannot hold private respondent in
estoppel for the latter is not the actual party to the
criminal action. In a criminal action, the State is the
plaintiff, for the commission of a felony is an offense
against the State.25 Thus, under Section 2, Rule 110 of
the Rules of Court the complaint or information filed in
court is required to be brought in the name of the
"People of the Philippines." 26
Further, as petitioner himself stated in his petition,
respondent bank filed the estafa case against Eugenio
on the basis of petitioner’s own affidavit,27 but without
admitting that he had any personal knowledge of the
alleged forgery. It is, therefore, easy to understand that
the filing of the estafa case by respondent bank was a
last ditch effort to salvage its ties with the petitioner as
a valuable client, by bolstering the estafa case which he
filed against his secretary.
All told, we find no reversible error that can be ascribed
to the Court of Appeals.
WHEREFORE, the instant petition is DENIED for lack of
merit. The assailed decision of the Court of Appeals
dated January 28, 1999 in CA-G.R. CV No. 47942, is
AFFIRMED.
Costs against petitioner.
SO ORDERED.
45
G.R. No. 97753 August 10, 1992 deposited with herein defendant the aggregate amount of
P1,120,000.00, as follows: (Joint Partial Stipulation of Facts
and Statement of Issues, Original Records, p. 207;
CALTEX (PHILIPPINES), INC., petitioner,
Defendant's Exhibits 1 to 280);
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents. CTD CTD
Dates Serial Nos. Quantity Amount
Bito, Lozada, Ortega & Castillo for petitioners.
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
Nepomuceno, Hofileña & Guingona for private.
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
REGALADO, J.: 8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
This petition for review on certiorari impugns and seeks the reversal of the 9 Mar. 82 89991 to 90000 10 40,000
decision promulgated by respondent court on March 8, 1991 in CA-G.R. CV No. 9 Mar. 82 90251 to 90272 22 88,000
23615 1 affirming with modifications, the earlier decision of the Regional Trial ——— ————
Court of Manila, Branch XLII, 2 which dismissed the complaint filed therein by Total 280 P1,120,000
herein petitioner against respondent bank. ===== ========

The undisputed background of this case, as found by the court a quo and 2. Angel dela Cruz delivered the said certificates of time
adopted by respondent court, appears of record: (CTDs) to herein plaintiff in connection with his purchased of
fuel products from the latter (Original Record, p. 208).

1. On various dates, defendant, a commercial banking

institution, through its Sucat Branch issued 280 certificates of
time deposit (CTDs) in favor of one Angel dela Cruz who
3. Sometime in March 1982, Angel dela Cruz informed Mr.
Timoteo Tiangco, the Sucat Branch Manger, that he lost all
the certificates of time deposit in dispute. Mr. Tiangco
advised said depositor to execute and submit a notarized
Affidavit of Loss, as required by defendant bank's procedure,
if he desired replacement of said lost CTDs (TSN, February 9,
1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed and
delivered to defendant bank the required Affidavit of Loss
(Defendant's Exhibit 281). On the basis of said affidavit of
loss, 280 replacement CTDs were issued in favor of said
depositor (Defendant's Exhibits 282-561).
5. On March 25, 1982, Angel dela Cruz negotiated and
obtained a loan from defendant bank in the amount of Eight
Hundred Seventy Five Thousand Pesos (P875,000.00). On
the same date, said depositor executed a notarized Deed of
Assignment of Time Deposit (Exhibit 562) which stated,
among others, that he (de la Cruz) surrenders to defendant
bank "full control of the indicated time deposits from and
after date" of the assignment and further authorizes said
bank to pre-terminate, set-off and "apply the said time
deposits to the payment of whatever amount or amounts
may be due" on the loan upon its maturity (TSN, February 9,
1987, pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas, Credit Manager
of plaintiff Caltex (Phils.) Inc., went to the defendant bank's
Sucat branch and presented for verification the CTDs
declared lost by Angel dela Cruz alleging that the same were
delivered to herein plaintiff "as security for purchases made
with Caltex Philippines, Inc." by said depositor (TSN,
February 9, 1987, pp. 54-68).

46
7. On November 26, 1982, defendant received a letter informing it of its possession of the CTDs in question and of
(Defendant's Exhibit 563) from herein plaintiff formally its decision to pre-terminate the same.

8. On December 8, 1982, plaintiff was requested by herein
defendant to furnish the former "a copy of the document
evidencing the guarantee agreement with Mr. Angel dela
Cruz" as well as "the details of Mr. Angel dela Cruz"
obligation against which plaintiff proposed to apply the time
deposits (Defendant's Exhibit 564).
P1,120,000.00 plus accrued interest and compounded
interest therein at 16% per annum, moral and exemplary
damages as well as attorney's fees.
After trial, the court a quo rendered its decision dismissing
the instant complaint. 3

9. No copy of the requested documents was furnished herein

defendant.
10. Accordingly, defendant bank rejected the plaintiff's
demand and claim for payment of the value of the CTDs in a
letter dated February 7, 1983 (Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the
defendant bank matured and fell due and on August 5, 1983,
the latter set-off and applied the time deposits in question to
the payment of the matured loan (TSN, February 9, 1987,
pp. 130-131).
On appeal, as earlier stated, respondent court affirmed the lower court's
dismissal of the complaint, hence this petition wherein petitioner faults
respondent court in ruling (1) that the subject certificates of deposit are non-
negotiable despite being clearly negotiable instruments; (2) that petitioner did
not become a holder in due course of the said certificates of deposit; and (3) in
disregarding the pertinent provisions of the Code of Commerce relating to lost
instruments payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to provide a
better understanding of the issues involved in this recourse.

12. In view of the foregoing, plaintiff filed the instant

complaint, praying that defendant bank be ordered to pay it
the aggregate value of the certificates of time deposit of

SECURITY BANK presentation and surrender of this

AND TRUST COMPANY certificate, with interest at the rate
6778 Ayala Ave., Makati No. 90101 of 16% per cent per annum.
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
(Sgd. Illegible) (Sgd. Illegible)
CERTIFICATE OF DEPOSIT
Rate 16%
—————————— ———————————
Date of Maturity FEB. 23, 1984 FEB 22, 1982,
19____ AUTHORIZED SIGNATURES 5

This is to Certify that B E A R E R has
deposited in this Bank the sum of PESOS:
FOUR THOUSAND ONLY, SECURITY BANK
SUCAT OFFICE P4,000 & 00 CTS Pesos,
Philippine Currency, repayable to said
depositor 731 days. after date, upon
Respondent court ruled that the CTDs in question are non-negotiable
instruments, nationalizing as follows:
. . . While it may be true that the word "bearer" appears
rather boldly in the CTDs issued, it is important to note that

47
 after the word "BEARER" stamped on the space provided Atty. Calida:
supposedly for the name of the depositor, the words "has
deposited" a certain amount follows. The document further
q In other words Mr. Witness, you are
provides that the amount deposited shall be "repayable to
saying that per books of the bank, the
said depositor" on the period indicated. Therefore, the text of
depositor referred (sic) in these
the instrument(s) themselves manifest with clarity that they
certificates states that it was Angel dela
are payable, not to whoever purports to be the "bearer" but
Cruz?
only to the specified person indicated therein, the depositor.
In effect, the appellee bank acknowledges its depositor Angel
dela Cruz as the person who made the deposit and further witness:
engages itself to pay said depositor the amount indicated
thereon at the stipulated date. 6
a Yes, your Honor, and we have the
record to show that Angel dela Cruz was
We disagree with these findings and conclusions, and hereby hold that the CTDs the one who cause (sic) the amount.
in question are negotiable instruments. Section 1 Act No. 2031, otherwise
known as the Negotiable Instruments Law, enumerates the requisites for an
instrument to become negotiable, viz: Atty. Calida:

(a) It must be in writing and signed by the maker or drawer; q And no other person or entity or
company, Mr. Witness?

(b) Must contain an unconditional promise or order to pay a

sum certain in money; witness:

(c) Must be payable on demand, or at a fixed or determinable a None, your Honor. 7

future time;
xxx xxx xxx
(d) Must be payable to order or to bearer; and
Atty. Calida:
(e) Where the instrument is addressed to a drawee, he must
be named or otherwise indicated therein with reasonable q Mr. Witness, who is the depositor
certainty. identified in all of these certificates of time
deposit insofar as the bank is concerned?
The CTDs in question undoubtedly meet the requirements of the law for
negotiability. The parties' bone of contention is with regard to requisite (d) set witness:
forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's Branch
Manager way back in 1982, testified in open court that the depositor reffered to
in the CTDs is no other than Mr. Angel de la Cruz. a Angel dela Cruz is the depositor. 8

xxx xxx xxx

48

xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability of
an instrument is determined from the writing, that is, from the face of the
instrument itself.9 In the construction of a bill or note, the intention of the
parties is to control, if it can be legally ascertained. 10 While the writing may be
read in the light of surrounding circumstances in order to more perfectly
understand the intent and meaning of the parties, yet as they have constituted
the writing to be the only outward and visible expression of their meaning, no
other words are to be added to it or substituted in its stead. The duty of the
court in such case is to ascertain, not what the parties may have secretly
intended as contradistinguished from what their words express, but what is the
meaning of the words they have used. What the parties meant must be
determined by what they said. 11
Contrary to what respondent court held, the CTDs are negotiable instruments.
The documents provide that the amounts deposited shall be repayable to the
depositor. And who, according to the document, is the depositor? It is the
"bearer." The documents do not say that the depositor is Angel de la Cruz and
that the amounts deposited are repayable specifically to him. Rather, the
amounts are to be repayable to the bearer of the documents or, for that matter,
whosoever may be the bearer at the time of presentment.
If it was really the intention of respondent bank to pay the amount to Angel de
la Cruz only, it could have with facility so expressed that fact in clear and
categorical terms in the documents, instead of having the word "BEARER"
stamped on the space provided for the name of the depositor in each CTD. On
the wordings of the documents, therefore, the amounts deposited are repayable
to whoever may be the bearer thereof. Thus, petitioner's aforesaid witness
merely declared that Angel de la Cruz is the depositor "insofar as the bank is
concerned," but obviously other parties not privy to the transaction between
them would not be in a position to know that the depositor is not the bearer
stated in the CTDs. Hence, the situation would require any party dealing with
the CTDs to go behind the plain import of what is written thereon to unravel the
agreement of the parties thereto through facts aliunde. This need for resort to
extrinsic evidence is what is sought to be avoided by the Negotiable Instruments
Law and calls for the application of the elementary rule that the interpretation of
obscure words or stipulations in a contract shall not favor the party who caused
the obscurity. 12
The next query is whether petitioner can rightfully recover on the CTDs. This
time, the answer is in the negative. The records reveal that Angel de la Cruz,
whom petitioner chose not to implead in this suit for reasons of its own,
delivered the CTDs amounting to P1,120,000.00 to petitioner without informing
49
respondent bank thereof at any time. Unfortunately for petitioner, although the
CTDs are bearer instruments, a valid negotiation thereof for the true purpose
and agreement between it and De la Cruz, as ultimately ascertained, requires
both delivery and indorsement. For, although petitioner seeks to deflect this
fact, the CTDs were in reality delivered to it as a security for De la Cruz'
purchases of its fuel products. Any doubt as to whether the CTDs were delivered
as payment for the fuel products or as a security has been dissipated and
resolved in favor of the latter by petitioner's own authorized and responsible
representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank,
J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These certificates of deposit
were negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel
products" (Emphasis ours.) 13 This admission is conclusive upon petitioner, its
protestations notwithstanding. Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it, and cannot be
denied or disproved as against the person relying thereon. 14 A party may not
go back on his own acts and representations to the prejudice of the other party
who relied upon them. 15 In the law of evidence, whenever a party has, by his
own declaration, act, or omission, intentionally and deliberately led another to
believe a particular thing true, and to act upon such belief, he cannot, in any
litigation arising out of such declaration, act, or omission, be permitted to falsify
it. 16
If it were true that the CTDs were delivered as payment and not as security,
petitioner's credit manager could have easily said so, instead of using the words
"to guarantee" in the letter aforequoted. Besides, when respondent bank, as
defendant in the court below, moved for a bill of particularity therein 17 praying,
among others, that petitioner, as plaintiff, be required to aver with sufficient
definiteness or particularity (a) the due date or dates of payment of the alleged
indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a
receipt showing that the CTDs were delivered to it by De la Cruz as payment of
the latter's alleged indebtedness to it, plaintiff corporation opposed the
motion. 18 Had it produced the receipt prayed for, it could have proved, if such
truly was the fact, that the CTDs were delivered as payment and not as security.
Having opposed the motion, petitioner now labors under the presumption that
evidence willfully suppressed would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated Realty
Corporation, et al. vs. Philippine National Bank, et al. 20 is apropos:
. . . Adverting again to the Court's pronouncements in Lopez,
supra, we quote therefrom:
The character of the transaction between
the parties is to be determined by their
intention, regardless of what language
was used or what the form of the transfer
 was. If it was intended to secure the
payment of money, it must be construed
as a pledge; but if there was some other
intention, it is not a pledge. However,
even though a transfer, if regarded by
itself, appears to have been absolute, its
object and character might still be
qualified and explained by
contemporaneous writing declaring it to
have been a deposit of the property as
collateral security. It has been said that a
transfer of property by the debtor to a
creditor, even if sufficient on its face to
make an absolute conveyance, should be
treated as a pledge if the debt continues
in inexistence and is not discharged by the
transfer, and that accordingly the use of
the terms ordinarily importing conveyance
of absolute ownership will not be given
that effect in such a transaction if they are
also commonly used in pledges and
mortgages and therefore do not
unqualifiedly indicate a transfer of
absolute ownership, in the absence of
clear and unambiguous language or other
circumstances excluding an intent to
pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question.
Under the Negotiable Instruments Law, an instrument is negotiated when it is
transferred from one person to another in such a manner as to constitute the
transferee the holder thereof, 21 and a holder may be the payee or indorsee of a
bill or note, who is in possession of it, or the bearer thereof. 22 In the present
case, however, there was no negotiation in the sense of a transfer of the legal
title to the CTDs in favor of petitioner in which situation, for obvious reasons,
mere delivery of the bearer CTDs would have sufficed. Here, the delivery thereof
only as security for the purchases of Angel de la Cruz (and we even disregard
the fact that the amount involved was not disclosed) could at the most
constitute petitioner only as a holder for value by reason of his lien. Accordingly,
a negotiation for such purpose cannot be effected by mere delivery of the
instrument since, necessarily, the terms thereof and the subsequent disposition
of such security, in the event of non-payment of the principal obligation, must
be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the
instrument arising from contract, he is deemed a holder for value to the extent
of his lien. 23 As such holder of collateral security, he would be a pledgee but the
requirements therefor and the effects thereof, not being provided for by the
Negotiable Instruments Law, shall be governed by the Civil Code provisions on
pledge of incorporeal rights, 24 which inceptively provide:
50
Art. 2095. Incorporeal rights, evidenced by negotiable
instruments, . . . may also be pledged. The instrument
proving the right pledged shall be delivered to the creditor,
and if negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect against third persons
if a description of the thing pledged and the date of the
pledge do not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the
factual findings of respondent court quoted at the start of this opinion show that
petitioner failed to produce any document evidencing any contract of pledge or
guarantee agreement between it and Angel de la Cruz. 25 Consequently, the
mere delivery of the CTDs did not legally vest in petitioner any right effective
against and binding upon respondent bank. The requirement under Article 2096
aforementioned is not a mere rule of adjective law prescribing the mode
whereby proof may be made of the date of a pledge contract, but a rule of
substantive law prescribing a condition without which the execution of a pledge
contract cannot affect third persons adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la Cruz in
favor of respondent bank was embodied in a public instrument. 27 With regard to
this other mode of transfer, the Civil Code specifically declares:
Art. 1625. An assignment of credit, right or action shall
produce no effect as against third persons, unless it appears
in a public instrument, or the instrument is recorded in the
Registry of Property in case the assignment involves real
property.
Respondent bank duly complied with this statutory requirement. Contrarily,
petitioner, whether as purchaser, assignee or lien holder of the CTDs, neither
proved the amount of its credit or the extent of its lien nor the execution of any
public instrument which could affect or bind private respondent. Necessarily,
therefore, as between petitioner and respondent bank, the latter has definitely
the better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question
of whether or not private respondent observed the requirements of the law in
the case of lost negotiable instruments and the issuance of replacement
certificates therefor, on the ground that petitioner failed to raised that issue in
the lower court. 28
On this matter, we uphold respondent court's finding that the aspect of alleged
negligence of private respondent was not included in the stipulation of the
parties and in the statement of issues submitted by them to the trial
court. 29 The issues agreed upon by them for resolution in this case are:
 1. Whether or not the CTDs as worded are negotiable
instruments.
2. Whether or not defendant could legally apply the amount
covered by the CTDs against the depositor's loan by virtue of
the assignment (Annex "C").
3. Whether or not there was legal compensation or set off
involving the amount covered by the CTDs and the
depositor's outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to
preterminate the CTDs before the maturity date provided
therein.
5. Whether or not plaintiff is entitled to the proceeds of the
CTDs.
6. Whether or not the parties can recover damages,
attorney's fees and litigation expenses from each other.
As respondent court correctly observed, with appropriate citation of some
doctrinal authorities, the foregoing enumeration does not include the issue of
negligence on the part of respondent bank. An issue raised for the first time on
appeal and not raised timely in the proceedings in the lower court is barred by
estoppel. 30 Questions raised on appeal must be within the issues framed by the
parties and, consequently, issues not raised in the trial court cannot be raised
for the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to the
disposition of a case are properly raised. Thus, to obviate the element of
surprise, parties are expected to disclose at a pre-trial conference all issues of
law and fact which they intend to raise at the trial, except such as may involve
privileged or impeaching matters. The determination of issues at a pre-trial
conference bars the consideration of other questions on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed negligence
may be considered encompassed by the issues on its right to preterminate and
receive the proceeds of the CTDs would be tantamount to saying that petitioner
could raise on appeal any issue. We agree with private respondent that the
broad ultimate issue of petitioner's entitlement to the proceeds of the
questioned certificates can be premised on a multitude of other legal reasons
and causes of action, of which respondent bank's supposed negligence is only
one. Hence, petitioner's submission, if accepted, would render a pre-trial
delimitation of issues a useless exercise. 33
51
Still, even assuming arguendo that said issue of negligence was raised in the
court below, petitioner still cannot have the odds in its favor. A close scrutiny of
the provisions of the Code of Commerce laying down the rules to be followed in
case of lost instruments payable to bearer, which it invokes, will reveal that said
provisions, even assuming their applicability to the CTDs in the case at bar, are
merely permissive and not mandatory. The very first article cited by petitioner
speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it
may be, may apply to the judge or court of competent
jurisdiction, asking that the principal, interest or dividends
due or about to become due, be not paid a third person, as
well as in order to prevent the ownership of the instrument
that a duplicate be issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory but
discretionary on the part of the "dispossessed owner" to apply to the judge or
court of competent jurisdiction for the issuance of a duplicate of the lost
instrument. Where the provision reads "may," this word shows that it is not
mandatory but discretional. 34 The word "may" is usually permissive, not
mandatory. 35 It is an auxiliary verb indicating liberty, opportunity, permission
and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of
the Code of Commerce, on which petitioner seeks to anchor respondent bank's
supposed negligence, merely established, on the one hand, a right of recourse
in favor of a dispossessed owner or holder of a bearer instrument so that he
may obtain a duplicate of the same, and, on the other, an option in favor of the
party liable thereon who, for some valid ground, may elect to refuse to issue a
replacement of the instrument. Significantly, none of the provisions cited by
petitioner categorically restricts or prohibits the issuance a duplicate or
replacement instrument sans compliance with the procedure outlined therein,
and none establishes a mandatory precedent requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is
DENIED and the appealed decision is hereby AFFIRMED.
SO ORDERED.