NEW SAMPAGUITA BUILDERS CONSTRUCTION, INC. (NSBCI) AND SPOUSES EDUARDO R. 5) Dupels, Inc.

5) Dupels, Inc., Extensive prawn farm development project;

DEE AND ARCELITA M. DEE, PETITIONERS, VS. PHILIPPINE NATIONAL BANK, RESPONDENT.
6) Banawe Hotel Phase II;
DECISION
PANGANIBAN, J.: 7) Clark Air Base -- Barracks and Buildings; and
Courts have the authority to strike down or to modify provisions in promissory notes that grant the
lenders unrestrained power to increase interest rates, penalties and other charges at the latter’s sole
8) Others: EDSA Lighting, Roxas Blvd. Painting NEA Sapang Palay and
discretion and without giving prior notice to and securing the consent of the borrowers. This unilateral
Angeles City.’
authority is anathema to the mutuality of contracts and enable lenders to take undue advantage of
borrowers. Although the Usury Law has been effectively repealed, courts may still reduce iniquitous or “The loan of [Petitioner] NSBCI was secured by a first mortgage on the following: a) three (3) parcels of
unconscionable rates charged for the use of money. Furthermore, excessive interests, penalties and residential land located at Mangaldan, Pangasinan with total land area of 1,214 square meters[,]
other charges not revealed in disclosure statements issued by banks, even if stipulated in the including improvements thereon and registered under TCT Nos. 128449, 126071, and 126072 of the
promissory notes, cannot be given effect under the Truth in Lending Act. Registry of Deeds of Pangasinan; b) six (6) parcels of residential land situated at San Fabian,
Pangasinan with total area of 1,767 square meters[,] including improvements thereon and covered by
TCT Nos. 144006, 144005, 120458, 120890, 144161[,] and 121127 of the Registry of Deeds of
The Case
Pangasinan; and c) a residential lot and improvements thereon located at Mangaldan, Pangasinan with
an area of 4,437 square meters and covered by TCT No. 140378 of the Registry of Deeds of
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to nullify the June 20,
Pangasinan.
2001 Decision[2] of the Court of Appeals[3] (CA) in CA-GR CV No. 55231. The decretal portion of the
assailed Decision reads as follows:
“The loan was further secured by the joint and several signatures of [Petitioners] Eduardo Dee and
“WHEREFORE, the decision of the Regional Trial Court of Dagupan City, Branch 40 dated December
Arcelita Marquez Dee, who signed as accommodation-mortgagors since all the collaterals were owned
28, 1995 is REVERSED and SET ASIDE. The foreclosure proceedings of the mortgaged properties of
by them and registered in their names.
defendants-appellees[4]and the February 26, 1992 auction sale are declared legal and valid and said
defendants-appellees are ordered to pay plaintiff-appellant PNB,[5] jointly and severally[,] the amount of
“Moreover [Petitioner] NSBCI executed the following documents, viz: a) promissory note dated June 29,
deficiency that will be computed by the trial court based on the original penalty of 6% per annum as
1989 in the amount of P5,000,000.00 with due date on October 27, 1989; [b)] promissory note dated
explicitly stated in the loan documents and to pay attorney’s fees in an amount equivalent to x x x 1% of
September 1, 1989 in the amount of P2,700,000.00 with due date on December 30, 1989; and c)
the total amount due and the costs of suit and expenses of litigation.” [6]
promissory note dated September 6, 1989 in the amount of P300,000.00 with maturity date on January
The Facts
4, 1990.
The facts are narrated by the CA as follows:
“In addition, [petitioner] corporation also signed the Credit Agreement dated August 31, 1989 relating to
“On February 11, 1989, Board Resolution No. 05, Series of 1989 was approved by [Petitioner] NSBCI
the ‘revolving credit line’ of P7.7 Million x x x and the Credit Agreement dated September 5, 1989 to
[1)] authorizing the company to x x x apply for or secure a commercial loan with the PNB in an
support the ‘unadvised line’ of P300,000.00.
aggregate amount of P8.0M, under such terms agreed by the Bank and the NSBCI, using or mortgaging
the real estate properties registered in the name of its President and Chairman of the Board [Petitioner]
“On August 31, 1989, [petitioner-spouses] executed a ‘Joint and Solidary Agreement’ (JSA) in favor of
Eduardo R. Dee as collateral; [and] 2) authorizing [petitioner-spouses] to secure the loan and to sign
[Respondent] PNB ‘unconditionally and irrevocably binding themselves to be jointly and severally liable
any [and all] documents which may be required by [Respondent] PNB[,] and that [petitioner-spouses]
with the borrower for the payment of all sums due and payable to the Bank under the Credit Document.’
shall act as sureties or co-obligors who shall be jointly and severally liable with [Petitioner] NSBCI for
the payment of any [and all] obligations.
“Later on, [Petitioner] NSBCI failed to comply with its obligations under the promissory notes.
“On August 15, 1989, Resolution No. 77 was approved by granting the request of [Respondent] PNB
“On June 18, 1991, [Petitioner] Eduardo R. Dee on behalf of [Petitioner] NSBCI sent a letter to the
thru its Board NSBCI for an P8 Million loan broken down into a revolving credit line of P7.7M and an
Branch Manager of the PNB Dagupan Branch requesting for a 90-day extension for the payment of
unadvised line of P0.3M for additional operating and working capital [7] to mobilize its various
interests and restructuring of its loan for another term.
construction projects, namely:
“Subsequently, NSBCI tendered payment to [Respondent] PNB [of] three (3) checks
‘1) MWSS Watermain; aggregating P1,000,000.00, namely 1) check no. 316004 dated August 8, 1991 in the amount
of P200,000.00; 2) check no. 03499997 dated August 8, 1991 in the amount of P650,000.00; and 3)
2) NEA-Liberty farm; check no. 03499998 dated August 15, 1991 in the amount of P150,000.00.[8]

3) Olongapo City Pag-Asa Public Market; “In a meeting held on August 12, 1991, [Respondent] PNB’s representative[,] Mr. Rolly Cruzabra, was
informed by [Petitioner] Eduardo Dee of his intention to remit to [Respondent] PNB post-dated checks
4) Renovation of COA-NCR Buildings 1, 2 and 9; covering interests, penalties and part of the loan principals of his due account.
“On August 22, 1991, [Respondent] bank’s Crispin Carcamo wrote [Petitioner] Eduardo Dee[,] informing
him that [Petitioner] NSBCI’s proposal [was] acceptable[,] provided the total payment should
be P4,128,968.29 that [would] cover the amount of P1,019,231.33 as principal, P3,056,058.03 as
interests and penalties[,] and P53,678.93 for insurance[,] with the issuance of post-dated checks to be
dated not later than November 29, 1991.
“On September 6, 1991, [Petitioner] Eduardo Dee wrote the PNB Branch Manager reiterating his
proposals for the settlement of [Petitioner] NSBCI’s past due loan account amounting to P7,019,231.33.
“[Petitioner] Eduardo Dee later tendered four (4) post-dated Interbank checks
aggregating P1,111,306.67 in favor of [Respondent] PNB, viz:
‘Check No. Date Amount
03500087 Sept. 29, 1991 P277,826.70
03500088 Oct. 29, 1991 P277,826.70
03500089 Nov. 29, 1991 P277,826.70
03500090 Dec. 20, 1991 P277,826.57’
“Upon presentment[,] however, x x x check nos. 03500087 and 03500088 dated September 29 and
October 29, 1991 were dishonored by the drawee bank and returned due [to] a ‘stop payment’ order
from [petitioners].
“On November 12, 1991, PNB’s Mr. Carcamo wrote [Petitioner] Eduardo Dee informing him that unless
the dishonored checks [were] made good, said PNB branch ‘shall recall its recommendation to the Head
Office for the restructuring of the loan account and refer the matter to its legal counsel for legal action.[’]
[Petitioners] did not heed [respondent’s] warning and as a result[,] the PNB Dagupan Branch sent
demand letters to [Petitioner] NSBCI at its office address at 1611 ERDC Building, E. Rodriguez Sr.
Avenue, Quezon City[,] asking it to settle its past due loan account.
“[Petitioners] nevertheless failed to pay their loan obligations within the [timeframe] given them and as a
result, [Respondent] PNB filed with the Provincial Sheriff of Pangasinan at Lingayen a Petition for Sale
under Act 3135, as amended[,] and Presidential Decree No. 385 dated January 30, 1992.
“The notice of extra-judicial sale of the mortgaged properties relating to said PNB’s [P]etition for [S]ale
was published in the February 8, 15 and 22, 1992 issues of the Weekly Guardian, allegedly a
newspaper of general circulation in the Province of Pangasinan, including the cities of Dagupan and
San Carlos. In addition[,] copies of the notice were posted in three (3) public places[,] and copies
thereof furnished [Petitioner] NSBCI at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City,
[and at] 555 Shaw Blvd., Mandaluyong[, Metro Manila;] and [Petitioner] Sps. Eduardo and Arcelita Dee
at 213 Wilson St., San Juan, Metro Manila.
“On February 26, 1992, the Provincial Deputy Sheriff Cresencio F. Ferrer of Lingayen, Pangasinan
foreclosed the real estate mortgage and sold at public auction the mortgaged properties of [petitioner-
spouses,] with [Respondent] PNB being declared the highest bidder for the amount of P10,334,000.00.
“On March 2, 1992, copies of the Sheriff’s Certificate of Sale were sent by registered mail to [petitioner]
corporation’s address at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City and [petitioner-
spouses’] address at 213 Wilson St., San Juan, Metro Manila.
“On April 6, 1992, the PNB Dagupan Branch Manager sent a letter to [petitioners] at their address at
1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City[,] informing them that the properties
securing their loan account [had] been sold at public auction, that the Sheriff’s Certificate of Sale had
been registered with the Registry of Deeds of Pangasinan on March 13, 1992[,] and that a period of one
(1) year therefrom [was] granted to them within which to redeem their properties.
“[Petitioners] failed to redeem their properties within the one-year redemption period[,] and so
[Respondent] PNB executed a [D]eed of [A]bsolute [S]ale consolidating title to the properties in its
name. TCT Nos. 189935 to 189944 were later issued to [Petitioner] PNB by the Registry of Deeds of
Pangasinan.
“On August 4, 1992, [Respondent] PNB informed [Petitioner] NSBCI that the proceeds of the sale
conducted on February 26, 1992 were not sufficient to cover its total claim amounting
to P12,506,476.43[,] and thus demanded from the latter the deficiency of P2,172,476.43 plus interest
and other charges[,] until the amount [was] fully paid.
“[Petitioners] refused to pay the above deficiency claim which compelled [Respondent] PNB to institute
the instant [C]omplaint for the collection of its deficiency claim.
“Finding that the PNB debt relief package automatically [granted] to [Petitioner] NSBCI the benefits
under the program, the court a quo ruled in favor of [petitioners] in its Decision dated December 28,
1995, the fallo of which reads:
‘In view of the foregoing, the Court believes and so holds that the [respondent] has no cause of action
against the [petitioners].
‘WHEREFORE, the case is hereby DISMISSED, without costs.’”[9]
On appeal, respondent assailed the trial court’s Decision dismissing its deficiency claim on the
mortgage debt. It also challenged the ruling of the lower court that Petitioner NSBCI’s loan account was
bloated, and that the inadequacy of the bid price was sufficient to set aside the auction sale.
Ruling of the Court of Appeals
Reversing the trial court, the CA held that Petitioner NSBCI did not avail itself of respondent’s debt relief
package (DRP) or take steps to comply with the conditions for qualifying under the program. The
appellate court also ruled that entitlement to the program was not a matter of right, because such
entitlement was still subject to the approval of higher bank authorities, based on their assessment of the
borrower’s repayment capability and satisfaction of other requirements.
As to the misapplication of loan payments, the CA held that the subsidiary ledgers of NSBCI’s loan
accounts with respondent reflected all the loan proceeds as well as the partial payments that had been
applied either to the principal or to the interests, penalties and other charges. Having been made in the
ordinary and usual course of the banking business of respondent, its entries were presumed accurate,
regular and fair under Section 5(q) of Rule 131 of the Rules of Court. Petitioners failed to rebut this
presumption.
The increases in the interest rates on NSBCI’s loan were also held to be authorized by law and the
Monetary Board and -- like the increases in penalty rates -- voluntarily and freely agreed upon by the
parties in the Credit Agreements they executed. Thus, these increases were binding upon petitioners.
However, after considering that two to three of Petitioner NSBCI’s projects covered by the loan were
affected by the economic slowdown in the areas near the military bases in the cities of Angeles and
Olongapo, the appellate court annulled and deleted the adjustment in penalty from 6 percent to 36
percent per annum. Not only did respondent fail to demonstrate the existence of market forces and
economic conditions that would justify such increases; it could also have treated petitioners’ request for
restructuring as a request for availment of the DRP. Consequently, the original penalty rate of 6 percent
per annum was used to compute the deficiency claim.
The auction sale could not be set aside on the basis of the inadequacy of the auction price, because in
sales made at public auction, the owner is given the right to redeem the mortgaged properties; the lower
the bid price, the easier it is to effect redemption or to sell such right. The bid price of P10,334,000.00
vis-à-vis respondent’s claim of P12,506,476.43 was found to be neither shocking nor unconscionable.
The attorney’s fees were also reduced by the appellate court from 10 percent to 1 percent of the total
indebtedness.First, there was no extreme difficulty in an extrajudicial foreclosure of a real estate
mortgage, as this proceeding was merely administrative in nature and did not involve a court litigation
contesting the proceedings prior to the auction sale. Second, the attorney’s fees were exclusive of all
stipulated costs and fees. Third, such fees were in the nature of liquidated damages that did not inure to
respondent’s salaried counsel.
Respondent was also declared to have the unquestioned right to foreclose the Real Estate Mortgage. It
was allowed to recover any deficiency in the mortgage account not realized in the foreclosure sale,
since petitioner-spouses had agreed to be solidarily liable for all sums due and payable to respondent.
Finally, the appellate court concluded that the extrajudicial foreclosure proceedings and auction sale
were valid for the following reasons: (1) personal notice to the mortgagors, although unnecessary, was
actually made; (2) the notice of extrajudicial sale was duly published and posted; (3) the extrajudicial
sale was conducted through the deputy sheriff, under the direction of the clerk of court who was
concurrently the ex-oficio provincial sheriff and acting as agent of respondent; (4) the sale was
conducted within the province where the mortgaged properties were located; and (5) such sale was not
shown to have been attended by fraud.
Hence this Petition.[10]
Issues
Petitioners submit the following issues for our consideration:
“I
Whether or not the Honorable Court of Appeals correctly ruled that petitioners did not avail of PNB’s
debt relief package and were not entitled thereto as a matter of right.
“II
Whether or not petitioners have adduced sufficient and convincing evidence to overthrow the
presumption of regularity and correctness of the PNB entries in the subsidiary ledgers of the loan
accounts of petitioners.
“III
Whether or not the Honorable Court of Appeals seriously erred in not holding that the Respondent PNB
bloated the loan account of petitioner corporation by imposing interests, penalties and attorney’s fees
without legal, valid and equitable justification.
“IV
Whether or not the auction price at which the mortgaged properties was sold was disproportionate to
their actual fair mortgage value.
“V
Whether or not Respondent PNB is not entitled to recover the deficiency in the mortgage account not
realized in the foreclosure sale, considering that:
A. Petitioners are merely guarantors of the mortgage debt of petitioner corporation which has a
separate personality from the [petitioner-spouses].
B. The joint and solidary agreement executed by [petitioner- spouses] are contracts of adhesion not
binding on them;
C. The NSBCI Board Resolution is not valid and binding on [petitioner-spouses] because they were
compelled to execute the said Resolution[;] otherwise[,] Respondent PNB would not grant petitioner
corporation the loan;
D. The Respondent PNB had already in its possession the properties of the [petitioner-spouses] which
served as a collateral to the loan obligation of petitioner corporation[,] and to still allow Respondent
PNB to recover the deficiency claim amounting to a very substantial amount of P2.1 million would
constitute unjust enrichment on the part of Respondent PNB.
“VI
Whether or not the extrajudicial foreclosure proceedings and auction sale, including all subsequent
proceedings[,] are null and void for non-compliance with jurisdictional and other mandatory
requirements; whether or not the petition for extrajudicial foreclosure of mortgage was filed prematurely;
and whether or not the finding of fraud by the trial court is amply supported by the evidence on
record.”[11]
The foregoing may be summed up into two main issues: first, whether the loan accounts are bloated;
and second, whether the extrajudicial foreclosure and subsequent claim for deficiency are valid and
proper.
The Court’s Ruling
The Petition is partly meritorious.
First Main Issue:
Bloated Loan Accounts
At the outset, it must be stressed that only questions of law[12] may be raised in a petition for review on
certiorari under Rule 45 of the Rules of Court. As a rule, questions of fact cannot be the subject of this
mode of appeal,[13] for “[t]he Supreme Court is not a trier of facts.”[14] As exceptions to this rule,
however, factual findings of the CA may be reviewed on appeal [15] when, inter alia, the factual
inferences are manifestly mistaken;[16] the judgment is based on a misapprehension of facts;[17] or the
CA manifestly overlooked certain relevant and undisputed facts that, if properly considered, would justify
a different legal conclusion.[18] In the present case, these exceptions exist in various instances, thus
prompting us to take cognizance of factual issues and to decide upon them in the interest of justice and
in the exercise of our sound discretion.[19]
Indeed, Petitioner NSBCI’s loan accounts with respondent appear to be bloated with some iniquitous
imposition of interests, penalties, other charges and attorney’s fees. To demonstrate this point, the
Court shall take up one by one the promissory notes, the credit agreements and the disclosure
statements.
Increases in Interest Baseless
Promissory Notes. In each drawdown, the Promissory Notes specified the interest rate to be charged:
19.5 percent in the first, and 21.5 percent in the second and again in the third. However, a uniform
clause therein permitted respondent to increase the rate “within the limits allowed by law at any time
depending on whatever policy it may adopt in the future x x x,” [20] without even giving prior notice to
petitioners. The Court holds that petitioners’ accessory duty to pay interest [21] did not give respondent
unrestrained freedom to charge any rate other than that which was agreed upon. No interest shall be
due, unless expressly stipulated in writing.[22] It would be the zenith of farcicality to specify and agree
upon rates that could be subsequently upgraded at whim by only one party to the agreement.
The “unilateral determination and imposition”[23] of increased rates is “violative of the principle of
mutuality of contracts ordained in Article 1308[24] of the Civil Code.”[25] One-sided impositions do not
have the force of law between the parties, because such impositions are not based on the parties’
essential equality.
Although escalation clauses[26] are valid in maintaining fiscal stability and retaining the value of money
on long-term contracts,[27] giving respondent an unbridled right to adjust the interest independently and
upwardly would completely take away from petitioners the “right to assent to an important modification
in their agreement”[28] and would also negate the element of mutuality in their contracts. The clause
cited earlier made the fulfillment of the contracts “dependent exclusively upon the uncontrolled will” [29] of
respondent and was therefore void. Besides, the pro forma promissory notes have the character of
a contract d’adhésion,[30] “where the parties do not bargain on equal footing, the weaker party’s [the
debtor’s] participation being reduced to the alternative ‘to take it or leave it.’” [31]
“While the Usury Law[32] ceiling on interest rates was lifted by [Central Bank] Circular No. 905, [33] nothing
in the said Circular grants lenders carte blanche authority to raise interest rates to levels which will
either enslave their borrowers or lead to a hemorrhaging of their assets.” [34] In fact, we have declared
nearly ten years ago that neither this Circular nor PD 1684, which further amended the Usury Law,
“authorized either party to unilaterally raise the interest rate without the other’s consent.” [35]
Moreover, a similar case eight years ago pointed out to the same respondent (PNB) that borrowing
signified a capital transfusion from lending institutions to businesses and industries and was done for
the purpose of stimulating their growth; yet respondent’s continued “unilateral and lopsided policy” [36] of
increasing interest rates “without the prior assent”[37] of the borrower not only defeats this purpose, but
also deviates from this pronouncement. Although such increases are not usurious, since the “Usury Law
is now legally inexistent”[38] -- the interest ranging from 26 percent to 35 percent in the statements of
account[39] -- “must be equitably reduced for being iniquitous, unconscionable and exorbitant.” [40] Rates
found to be iniquitous or unconscionable are void, as if it there were no express contract
thereon.[41] Above all, it is undoubtedly against public policy to charge excessively for the use of
money.[42]
It cannot be argued that assent to the increases can be implied either from the June 18, 1991 request of
petitioners for loan restructuring or from their lack of response to the statements of account sent by
respondent. Such request does not indicate any agreement to an interest increase; there can be no
implied waiver of a right when there is no clear, unequivocal and decisive act showing such
purpose.[43] Besides, the statements were not letters of information sent to secure their conformity; and
even if we were to presume these as an offer, there was no acceptance. No one receiving a proposal to
modify a loan contract, especially interest -- a vital component -- is “obliged to answer the proposal.”[44]
Furthermore, respondent did not follow the stipulation in the Promissory Notes providing for the
automatic conversion of the portion that remained unpaid after 730 days -- or two years from date of
original release --into a medium-term loan, subject to the applicable interest rate to be applied from the
dates of original release.[45]
In the first,[46] second[47] and third[48] Promissory Notes, the amount that remained unpaid as of October
27, 1989, December 1989 and January 4, 1990 -- their respective due dates -- should have been
automatically converted by respondent into medium-term loans on June 30, 1991, September 2, 1991,
and September 7, 1991, respectively. And on this unpaid amount should have been imposed the same
interest rate charged by respondent on other medium-term loans; and the rate applied from June 29,
1989, September 1, 1989 and September 6, 1989 -- their respective original release --until paid. But
these steps were not taken. Aside from sending demand letters, respondent did not at all exercise its
option to enforce collection as of these Notes’ due dates. Neither did it renew or extend the account.
In these three Promissory Notes, evidently, no complaint for collection was filed with the courts. It was
not until January 30, 1992 that a Petition for Sale of the mortgaged properties was filed -- with the
provincial sheriff, instead.[49] Moreover, respondent did not supply the interest rate to be charged on
medium-term loans granted by automatic conversion. Because of this deficiency, we shall use the legal
rate of 12 percent per annum on loans and forbearance of money, as provided for by CB Circular
416.[50]
Credit Agreements. Aside from the promissory notes, another main document involved in the principal
obligation is the set of credit agreements executed and their annexes.
The first Credit Agreement[51] dated June 19, 1989 -- although offered and admitted in evidence, and
even referred to in the first Promissory Note -- cannot be given weight.
First, it was not signed by respondent through its branch manager.[52] Apparently it was surreptitiously
acknowledged before respondent’s counsel, who unflinchingly declared that it had been signed by the
parties on every page, although respondent’s signature does not appear thereon.[53]
Second, it was objected to by petitioners,[54] contrary to the trial court’s findings.[55] However, it was not
the Agreement, but the revolving credit line[56] of P5,000,000, that expired one year from the
Agreement’s date of implementation.[57]
Third, there was no attached annex that contained the General Conditions. [58] Even the
Acknowledgment did not allude to its existence.[59] Thus, no terms or conditions could be added to the
Agreement other than those already stated therein.
Since the first Credit Agreement cannot be given weight, the interest rate on the first availment pegged
at 3 percent over and above respondent’s prime rate [60] on the date of such availment[61] has no bearing
at all on the loan. After the first Note’s due date, the rate of 19 percent agreed upon should continue to
be applied on the availment, until its automatic conversion to a medium-term loan.
The second Credit Agreement[62] dated August 31, 1989, provided for interest -- respondent’s prime
rate, plus the applicable spread[63] in effect as of the date of each availment,[64] on a revolving credit line
of P7,700,000[65] -- but did not state any provision on its increase or decrease.[66] Consequently,
petitioners could not be made to bear interest more than such prime rate plus spread. The Court gives
weight to this second Credit Agreement for the following reasons.
First, this document submitted by respondent was admitted by petitioners. [67] Again, contrary to their
assertion, it was not the Agreement -- but the credit line -- that expired one year from the Agreement’s
date of implementation.[68]Thus, the terms and conditions continued to apply, even if drawdowns could
no longer be made.
Second, there was no 7-page annex[69] offered in evidence that contained the General
Conditions,[70]notwithstanding the Acknowledgment of its existence by respondent’s counsel. Thus, no
terms or conditions could be appended to the Agreement other than those specified therein.
Third, the 12-page General Conditions[71] offered and admitted in evidence had no probative value.
There was no reference to it in the Acknowledgment of the Agreement; neither was respondent’s
signature on any of the pages thereof. Thus, the General Conditions’ stipulations on interest
adjustment,[72] whether on a fixed or a floating scheme, had no effect whatsoever on the Agreement.
Contrary to the trial court’s findings,[73] the General Condition were correctly objected to by
petitioners.[74] The rate of 21.5 percent agreed upon in the second Note thus continued to apply to the
second availment, until its automatic conversion into a medium-term loan.
The third Credit Agreement[75] dated September 5, 1989, provided for the same rate of interest as that in
the second Agreement. This rate was to be applied to availments of an unadvised line of P300,000.
Since there was no mention in the third Agreement, either, of any stipulation on increases or
decreases[76] in interest, there would be no basis for imposing amounts higher than the prime rate plus
spread. Again, the 21.5 percent rate agreed upon would continue to apply to the third availment
indicated in the third Note, until such amount was automatically converted into a medium-term loan.
The Court also finds that, first, although this document was admitted by petitioners,[77] it was the credit
line that expired one year from the implementation of the Agreement. [78] The terms and conditions
therein continued to apply, even if availments could no longer be drawn after expiry.
Second, there was again no 7-page annex[79] offered that contained the General
Conditions,[80] regardless of the Acknowledgment by the same respondent’s counsel affirming its
existence. Thus, the terms and conditions in this Agreement relating to interest cannot be expanded
beyond that which was already laid down by the parties.
Disclosure Statements. In the present case, the Disclosure Statements[81] furnished by respondent set
forth the same interest rates as those respectively indicated in the Promissory Notes. Although no
method of computation was provided showing how such rates were arrived at, we will nevertheless take
up the Statements seriatim in order to determine the applicable rates clearly.
As to the first Disclosure Statement on Loan/Credit Transaction [82] dated June 13, 1989, we hold that
the 19.5 percent effective interest rate per annum[83] would indeed apply to the first availment or
drawdown evidenced by the first Promissory Note. Not only was this Statement issued prior to the
consummation of such availment or drawdown, but the rate shown therein can also be considered
equivalent to 3 percent over and above respondent’s prime rate in effect. Besides, respondent
mentioned no other rate that it considered to be the prime rate chargeable to petitioners. Even if we
disregarded the related Credit Agreement, we assume that this private transaction between the parties
was fair and regular,[84] and that the ordinary course of business was followed.[85]
As to the second Disclosure Statement on Loan/Credit Transaction [86] dated September 2, 1989, we
hold that the 21.5 percent effective interest rate per annum[87] would definitely apply to the second
availment or drawdown evidenced by the second Promissory Note. Incidentally, this Statement was
issued only after the consummation of its related availment or drawdown, yet such rate can be deemed
equivalent to the prime rate plus spread, as stipulated in the corresponding Credit Agreement. Again,
we presume that this private transaction was fair and regular, and that the ordinary course of business
was followed. That the related Promissory Note was pre-signed would also bolster petitioners’ claim
although, under cross-examination Efren Pozon -- Assistant Department Manager I[88] of PNB, Dagupan
Branch -- testified that the Disclosure Statements were the basis for preparing the Notes. [89]
As to the third Disclosure Statement on Loan/Credit Transaction [90] dated September 6, 1989, we hold
that the same 21.5 percent effective interest rate per annum [91] would apply to the third availment or
drawdown evidenced by the third Promissory Note. This Statement was made available to petitioner-
spouses, only after the related Credit Agreement had been executed, but simultaneously with the
consummation of the Statement’s related availment or drawdown. Nonetheless, the rate herein should
still be regarded as equivalent to the prime rate plus spread, under the similar presumption that this
private transaction was fair and regular and that the ordinary course of business was followed.
In sum, the three disclosure statements, as well as the two credit agreements considered by this Court,
did not provide for any increase in the specified interest rates. Thus, none would now be permitted.
When cross-examined, Julia Ang-Lopez, Finance Account Analyst II of PNB, Dagupan Branch, even
testified that the bases for computing such rates were those sent by the head office from time to time,
and not those indicated in the notes or disclosure statements.[92]
In addition to the preceding discussion, it is then useless to belabor the point that the increase in rates
violates the impairment[93] clause of the Constitution,[94] because the sole purpose of this provision is to
safeguard the integrity of valid contractual agreements against unwarranted interference by the
State[95] in the form of laws. Private individuals’ intrusions on interest rates is governed by statutory
enactments like the Civil Code.
Penalty, or Increases
Thereof, Unjustified
No penalty charges or increases thereof appear either in the Disclosure Statements [96] or in any of the
clauses in the second and the third Credit Agreements [97] earlier discussed. While a standard penalty
charge of 6 percent per annum has been imposed on the amounts stated in all three Promissory Notes
still remaining unpaid or unrenewed when they fell due, [98] there is no stipulation therein that would
justify any increase in that charges. The effect, therefore, when the borrower is not clearly informed of
the Disclosure Statements -- prior to the consummation of the availment or drawdown -- is that the
lender will have no right to collect upon such charge [99] or increases thereof, even if stipulated in the
Notes. The time is now ripe to give teeth to the often ignored forty-one-year old “Truth in Lending
Act”[100] and thus transform it from a snivelling paper tiger to a growling financial watchdog of hapless
borrowers.
Besides, we have earlier said that the Notes are contracts of adhesion; although not invalid per se, any
apparent ambiguity in the loan contracts -- taken as a whole -- shall be strictly construed against
respondent who caused it.[101] Worse, in the statements of account, the penalty rate has again been
unilaterally increased by respondent to 36 percent without petitioners’ consent. As a result of its move,
such liquidated damages intended as a penalty shall be equitably reduced by the Court to zilch [102] for
being iniquitous or unconscionable.[103]
Although the first Disclosure Statement was furnished Petitioner NSBCI prior to the execution of the
transaction, it is not a contract that can be modified by the related Promissory Note, but a mere
statement in writing that reflects the true and effective cost of loans from respondent. Novation can
never be presumed,[104] and the animus novandi“must appear by express agreement of the parties, or
by their acts that are too clear and unequivocal to be mistaken.” [105] To allow novation will surely flout
the “policy of the State to protect its citizens from a lack of awareness of the true cost of credit.” [106]
With greater reason should such penalty charges be indicated in the second and third Disclosure
Statements, yet none can be found therein. While the charges are issued after the respective availment
or drawdown, the disclosure statements are given simultaneously therewith. Obviously, novation still
does not apply.
Other Charges Unwarranted
In like manner, the other charges imposed by respondent are not warranted. No particular values or
rates of service charge are indicated in the Promissory Notes or Credit Agreements, and no total value
or even the breakdown figures of such non-finance charge are specified in the Disclosure Statements.
Moreover, the provision in the Mortgage that requires the payment of insurance and other charges is
neither made part of nor reflected in such Notes, Agreements, or Statements. [107]
Attorney’s Fees Equitably Reduced
We affirm the equitable reduction in attorney’s fees.[108] These are not an integral part of the cost of
borrowing, but arise only when collecting upon the Notes becomes necessary. The purpose of these
fees is not to give respondent a larger compensation for the loan than the law already allows, but to
protect it against any future loss or damage by being compelled to retain counsel – in-house or not -- to
institute judicial proceedings for the collection of its credit. [109] Courts have has the power[110] to
determine their reasonableness[111] based on quantum meruit[112] and to reduce[113] the amount thereof if
excessive.[114]
In addition, the disqualification argument in the Affidavit of Publication raised by petitioners no longer
holds water, inasmuch as Act 496[115] has repealed the Spanish Notarial Law.[116] In the same vein, their
engagement of their counsel in another capacity concurrent with the practice of law is not prohibited, so
long as the roles being assumed by such counsel is made clear to the client. [117] The only reason for this
clarification requirement is that certain ethical considerations operative in one profession may not be so
in the other.[118]
Debt Relief Package
Not Availed Of
We also affirm the CA’s disquisition on the debt relief package (DRP).
Respondent’s Circular is not an outright grant of assistance or extension of payment, [119] but a mere
offer subject to specific terms and conditions.
Petitioner NSBCI failed to establish satisfactorily that it had been seriously and directly affected by the
economic slowdown in the peripheral areas of the then US military bases. Its allegations, devoid of any
verification, cannot lead to a supportable conclusion. In fact, for short-term loans, there is still a need to
conduct a thorough review of the borrower’s repayment possibilities.[120]
Neither has Petitioner NSBCI shown enough margin of equity, [121] based on the latest loan value of hard
collaterals,[122] to be eligible for the package. Additional accommodations on an unsecured basis may be
granted only when regular payment amortizations have been established, or when the merits of the
credit application would so justify.[123]
The branch manager’s recommendation to restructure or extend a total outstanding loan not
exceeding P8,000,000 is not final, but subject to the approval of respondent’s Branches Department
Credit Committee, chaired by its executive vice-president.[124] Aside from being further conditioned on
other pertinent policies of respondent,[125]such approval nevertheless needs to be reported to its Board
of Directors for confirmation.[126] In fact, under the General Banking Law of 2000,[127] banks shall grant
loans and other credit accommodations only in amounts and for periods of time essential to the effective
completion of operations to be financed, “consistent with safe and sound banking practices.”[128] The
Monetary Board -- then and now -- still prescribes, by regulation, the conditions and limitations under
which banks may grant extensions or renewals of their loans and other credit accommodations. [129]
Entries in Subsidiary Ledgers
Regular and Correct
Contrary to petitioners’ assertions, the subsidiary ledgers of respondent properly reflected all entries
pertaining to Petitioner NSBCI’s loan accounts. In accordance with the Generally Accepted Accounting
Principles (GAAP) for the Banking Industry,[130] all interests accrued or earned on such loans, except
those that were restructured and non-accruing,[131] have been periodically taken into income.[132] Without
a doubt, the subsidiary ledgers in a manual accounting system are mere private documents[133] that
support and are controlled by the general ledger.[134] Such ledgers are neither foolproof nor standard in
format, but are periodically subject to audit. Besides, we go by the presumption that the recording of
private transactions has been fair and regular, and that the ordinary course of business has been
followed.
Second Main Issue:
Extrajudicial Foreclosure Valid, But
Deficiency Claims Excessive
Respondent aptly exercised its option to “foreclose the mortgage,”[135] after petitioners had failed to pay
all the Notes in full when they fell due.[136] The extrajudicial sale and subsequent proceedings are
therefore valid, but the alleged deficiency claim cannot be recovered.
Auction Price Adequate
In the accessory contract[137] of real mortgage,[138] in which immovable property or real rights thereto are
used as security[139] for the fulfillment of the principal loan obligation, [140] the bid price may be lower than
the property’s fair market value.[141] In fact, the loan value itself is only 70 percent of the appraised
value.[142] As correctly emphasized by the appellate court, a low bid price will make it easier [143] for the
owner to effect redemption[144] by subsequently reacquiring the property or by selling the right to redeem
and thus recover alleged losses. Besides, the public auction sale has been regularly and fairly
conducted,[145] there has been ample authority to effect the sale,[146] and the Certificates of Title can be
relied upon. No personal notice[147] is even required,[148] because an extrajudicial foreclosure is an
action in rem, requiring only notice by publication and posting, in order to bind parties interested in the
foreclosed property.[149]
As no redemption[150] was exercised within one year after the date of registration of the Certificate of
Sale with the Registry of Deeds,[151] respondent -- being the highest bidder -- has the right to a writ of
possession, the final process that will consummate the extrajudicial foreclosure. On the other hand,
petitioner-spouses, who are mortgagors herein, shall lose all their rights to the property. [152]
No Deficiency Claim Receivable
After the foreclosure and sale of the mortgaged property, the Real Estate Mortgage is extinguished.
Although the mortgagors, being third persons, are not liable for any deficiency in the absence of a
contrary stipulation,[153] the action for recovery of such amount -- being clearly sureties to the principal
obligation -- may still be directed against them.[154] However, respondent may impose only the stipulated
interest rates of 19.5 percent and 21.5 percent on the respective availments -- subject to the 12 percent
legal rate revision upon automatic conversion into medium-term loans -- plus 1 percent attorney’s fees,
without additional charges on penalty, insurance or any increases thereof.
Accordingly, the excessive interest rates in the Statements of Account sent to petitioners are reduced to
19.5 percent and 21.5 percent, as stipulated in the Promissory Notes; upon loan conversion, these rates
are further reduced to the legal rate of 12 percent. Payments made by petitioners are pro-rated, the
charges on penalty and insurance eliminated, and the resulting total unpaid principal and interest
of P6,582,077.70 as of the date of public auction is then subjected to 1 percent attorney’s fees. The total
outstanding obligation is compared to the bid price. On the basis of these rates and the comparison
made, the deficiency claim receivable amounting to P2,172,476.43 in fact vanishes. Instead, there is an
overpayment by more than P3 million, as shown in the following Schedules:
In the preparation of the above-mentioned schedules, these basic legal principles were followed:
First, the payments were applied to debts that were already due.[155] Thus, when the first payment was
made and applied on January 5, 1990, all Promissory Notes were already due.
Second, payments of the principal were not made until the interests had been covered. [156] For instance,
the first payment on January 15, 1990 had initially been applied to all interests due on the notes, before
deductions were made from their respective principal amounts. The resulting decrease in interest
balances served as the bases for subsequent pro-ratings.
Third, payments were proportionately applied to all interests that were due and of the same nature and
burden.[157]This legal principle was the rationale for the pro-rated computations shown on Schedule 4.
Fourth, since there was no stipulation on capitalization, no interests due and unpaid were added to the
principal; hence, such interests did not earn any additional interest. [158]The simple -- not compounded --
method of interest calculation[159] was used on all Notes until the date of public auction.
In fine, under solutio indebiti[160] or payment by mistake,[161] there is no deficiency receivable in favor of
PNB, but rather an excess claim or surplus[162] payable by respondent; this excess should immediately
be returned to petitioner-spouses or their assigns -- not to mention the buildings and
improvements[163] on and the fruits of the property -- to the end that no one may be unjustly enriched or
benefited at the expense of another.[164] Such surplus is in the amount of P3,686,101.52, computed as
follows:
Total unpaid principal and interest on the
promissory notes as of February 26,
1992:
Drawdown on June 29, 1989
(Schedule 1)
P4,037,204.10
Drawdown on September 1, 1989
(Schedule 2) 2,289,040.38
Drawdown on September 6, 1989
(Schedule 3) 255,833.22
6,582,077.70
Add: 1% attorney’s fees
65,820.78
Total outstanding obligation
6,647,898.48
Less: Bid price
10,334,000.00
Excess
P3,686,101.52
Joint and Solidary Agreement. Contrary to the contention of the petitioner-spouses, their Joint and
Solidary Agreement (JSA)[165] was indubitably a surety, not a guaranty.[166] They consented to be jointly
and severally liable with Petitioner NSBCI -- the borrower -- not only for the payment of all sums due
and payable in favor of respondent, but also for the faithful and prompt performance of all the terms and
conditions thereof.[167] Additionally, the corporate secretary of Petitioner NSBCI certified as early as
February 23, 1989, that the spouses should act as such surety. [168] But, their solidary liability should be
carefully studied, not sweepingly assumed to cover all availments instantly.
First, the JSA was executed on August 31, 1989. As correctly adverted to by petitioners, [169] it covered
only the Promissory Notes of P2,700,000 and P300,000 made after that date. The terms of a contract of
suretyship undeniably determine the surety’s liability[170] and cannot extend beyond what is stipulated
therein.[171] Yet, the total amount petitioner-spouses agreed to be held liable for was P7,700,000; by the
time the JSA was executed, the first Promissory Note was still unpaid and was thus brought within the
JSA’s ambit.[172]
Second, while the JSA included all costs, charges and expenses that respondent might incur or sustain
in connection with the credit documents,[173] only the interest was imposed under the pertinent Credit
Agreements. Moreover, the relevant Promissory Notes had to be resorted to for proper valuation of the
interests charged.
Third, although the JSA, as a contract of adhesion, should be taken contra proferentum against the
party who may have caused any ambiguity therein, no such ambiguity was found. Petitioner-spouses,
who agreed to be accommodation mortgagors,[174] can no longer be held individually liable for the entire
onerous obligation[175] because, as it turned out, it was respondent that still owed them.
To summarize, to give full force to the Truth in Lending Act, only the interest rates of 19.5 percent and
21.5 percent stipulated in the Promissory Notes may be imposed by respondent on the respective
availments. After 730 days, the portions remaining unpaid are automatically converted into medium-
term loans at the legal rate of 12 percent. In all instances, the simple method of interest computation is
followed. Payments made by petitioners are applied and pro-rated according to basic legal principles.
Charges on penalty and insurance are eliminated, and 1 percent attorney’s fees imposed upon the total
unpaid balance of the principal and interest as of the date of public auction. The P2 million deficiency
claim therefore vanishes, and a refund of P3,686,101.52 arises.
WHEREFORE, this Petition is hereby PARTLY GRANTED. The Decision of the Court of Appeals
is AFFIRMED, with the MODIFICATION that PNB is ORDERED to refund the sum of P3,686,101.52
representing the overcollection computed above, plus interest thereon at the legal rate of six percent
(6%) per annum from the filing of the Complaint until the finality of this Decision. After this Decision
becomes final and executory, the applicable rate shall be twelve percent (12%) per annum until its
satisfaction. No costs.
G.R. No. 107508 April 25, 1996
PHILIPPINE NATIONAL BANK, petitioner,
vs.
COURT OF APPEALS, CAPITOL CITY DEVELOPMENT BANK, PHILIPPINE BANK OF
COMMUNICATIONS, and F. ABANTE MARKETING, respondents.
KAPUNAN, J.:p
This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the decision dated
April 29, 1992 of respondent Court of Appeals in CA-G.R. CV No. 24776 and its resolution dated
September 16, 1992, denying petitioner Philippine National Bank's motion for reconsideration of said
decision.
The facts of the case are as follows.
A check with serial number 7-3666-223-3, dated August 7, 1981 in the amount of P97,650.00 was
issued by the Ministry of Education and Culture (now Department of Education, Culture and Sports
[DECS]) payable to F. Abante Marketing. This check was drawn against Philippine National Bank
(herein petitioner).
On August 11, 1981, F. Abante Marketing, a client of Capitol City Development Bank (Capitol),
deposited the questioned check in its savings account with said bank. In turn, Capitol deposited the
same in its account with the Philippine Bank of Communications (PBCom) which, in turn, sent the check
to petitioner for clearing.
Petitioner cleared the check as good and, thereafter, PBCom credited Capitol's account for the amount
stated in the check. However, on October 19, 1981, petitioner returned the check to PBCom and
debited PBCom's account for the amount covered by the check, the reason being that there was a
"material alteration" of the check number.
PBCom, as collecting agent of Capitol, then proceeded to debit the latter's account for the same
amount, and subsequently, sent the check back to petitioner. Petitioner, however, returned the check to
PBCom.
On the other hand, Capitol could not, in turn, debit F. Abante Marketing's account since the latter had
already withdrawn the amount of the check as of October 15, 1981. Capitol sought clarification from
PBCom and demanded the re-crediting of the amount. PBCom followed suit by requesting an
explanation and re-crediting from petitioner.
Since the demands of Capitol were not heeded, it filed a civil suit with the Regional Trial Court of Manila
against PBCom which, in turn, filed a third-party complaint against petitioner for
reimbursement/indemnity with respect to the claims of Capitol. Petitioner, on its part, filed a fourth-party
complaint against F. Abante Marketing.
On October 3, 1989; the Regional Trial Court rendered its decision the dispositive portion of which
reads:
WHEREFORE, judgment is hereby rendered as follows:
1.) On plaintiffs complaint, defendant Philippine Bank of Communications is ordered
to re-credit or reimburse plaintiff Capitol City Development Bank the amount of
P97,650.00, plus interest of 12 percent thereto from October 19, 1981 until the
amount is fully paid;
2.) On Philippine Bank of Communications third-party complaint third-party defendant
PNB is ordered to reimburse and indemnify Philippine Bank of Communications for
whatever amount PBCom pays to plaintiff;
3.) On Philippine National Bank's fourth-party complaint, F. Abante Marketing is
ordered to reimburse and indemnify PNB for whatever amount PNB pays to PBCom;
4.) On attorney's fees, Philippine Bank of Communications is ordered to pay Capitol
City Development Bank attorney's fees in the amount of Ten Thousand (P10,000.00)
Pesos; but PBCom is entitled to reimbursement/indemnity from PNB; and Philippine
National Bank to be, in turn reimbursed or indemnified by F. Abante Marketing for the
same amount;
5.) The Counterclaims of PBCom and PNB are hereby dismissed;
6.) No pronouncement as to costs.
SO ORDERED.1
An appeal was interposed before the respondent Court of Appeals which rendered its decision on April
29, 1992, the decretal portion of which reads:
WHEREFORE, the judgment appealed from is modified by exempting PBCom from
liability to plaintiff-appellee for attorney's fees and ordering PNB to honor the check
for P97,650.00, with interest as declared by the trial court, and pay plaintiff-appellee
attorney's fees of P10,000.00. After the check shall have been honored by PNB,
PBCom shall re-credit plaintiff-appellee's account with it with the amount. No
pronouncement as to costs.
SO ORDERED.2
A motion for reconsideration of the decision was denied by the respondent Court in its resolution dated
September 16, 1992 for lack of merit.3
Hence, petitioner filed the instant petition which raises the following issues:
I
WHETHER OR NOT AN ALTERATION OF THE SERIAL NUMBER OF A CHECK IS
A MATERIAL ALTERATION UNDER THE NEGOTIABLE INSTRUMENTS LAW.
II
WHETHER OR NOT A CERTIFICATION HEREIN ISSUED BY THE MINISTRY OF
EDUCATION CAN BE GIVEN WEIGHT IN EVIDENCE.
III
WHETHER OR NOT A DRAWEE BANK WHO FAILED TO RETURN A. CHECK
WITHIN THE TWENTY FOUR (24) HOUR CLEARING PERIOD MAY RECOVER
THE VALUE OF THE CHECK FROM THE COLLECTING BANK.
 IV
WHETHER OR NOT IN THE ABSENCE OF MALICE OR ILL WILL PETITIONER
PNB MAY BE HELD LIABLE FOR ATTORNEY'S FEES.4
We find no merit in the petition.
We shall first deal with the effect of the alteration of the serial number on the negotiability of the check in
question.
Petitioner anchors its position on Section 125 of the Negotiable Instruments Law (ACT No. 2031) 5 which
provides:
Sec. 225. What constitutes a material alteration. Any alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
(f) Or which adds a place of payment where no place of payment is specified, or any
other change or addition which alters the effect of the instrument in any respect, is a
material alteration.
Petitioner alleges that there is no hard and fast rule in the interpretation of the aforequoted provision of
the Negotiable Instruments Law. It maintains that under Section 125(f), any change that alters the effect
of the instrument is a material alteration.6
We do not agree.
An alteration is said to be material if it alters the effect of the
instrument.7 It means an unauthorized change in an instrument that purports to modify in any respect
the obligation of a party or an unauthorized addition of words or numbers or other change to an
incomplete instrument relating to the obligation of a party.8 In other words, a material alteration is one
which changes the items which are required to be stated under Section 1 of the Negotiable Instruments
Law.
Section 1 of the Negotiable Instruments Law provides:
Sec. 1. — Form of negotiable instruments. An instrument to be negotiable must
conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
In his book entitled "Pandect of Commercial Law and Jurisprudence," Justice Jose C. Vitug opines that
"an innocent alteration (generally, changes on items other than those required to be stated under Sec.
1, N.I.L.) and spoliation (alterations done by a stranger) will not avoid the instrument, but the holder may
enforce it only according to its original tenor."9
Reproduced hereunder are some examples of material and immaterial alterations:
A. Material Alterations:
(1) Substituting the words "or bearer" for "order."
(2) Writing "protest waived" above blank indorsements.
(3) A change in the date from which interest is to run.
(4) A check was originally drawn as follows: "Iron County Bank, Crystal Falls, Mich.
Aug. 5, 1901. Pay to G.L. or order $9 fifty cents CTR" The insertion of the figure 5
before the figure 9, the instrument being otherwise unchanged.
(5) Adding the words "with interest" with or without a fixed rate.
(6) An alteration in the maturity of a note, whether the time for payment is thereby
curtailed or extended.
(7) An instrument was payable "First Nat'l Bank" the plaintiff added the word "Marion."
(8) Plaintiff, without consent of the defendant, struck out the name of the defendant as
payee and inserted the name of the maker of the original note.
(9) Striking out the name of the payee and substituting that of the person who actually
discounted the note.
(10) Substituting the address of the maker for the name of a co-maker.10
B. Immaterial Alterations:
(1) Changing "I promise to pay" to "We promise to pay", where there are two makers.
(2) Adding the word "annual" after the interest clause.
(3) Adding the date of maturity as a marginal notation.
(4) Filling in the date of actual delivery where the makers of a note gave it with the
date in blank, "July ____."
(5) An alteration of the marginal figures of a note where the sum stated in words in the
body remained unchanged.
(6) The insertion of the legal rate of interest where the note had a provision for
"interest at _______ per cent."
(7) A printed form of promissory note had on the margin the printed words, "Extended
to ________." The holder on or after maturity wrote in the blank space the words
"May 1, 1913," as a reference memorandum of a promise made by him to the
principal maker at the time the words were written to extend the time of payment.
(8) Where there was a blank for the place of payment, filling in the blank with the
place desired.
(9) Adding to an indorsee's name the abbreviation "Cash" when it had been agreed
that the draft should be discounted by the trust company of which the indorsee was
cashier.
(10) The indorsement of a note by a stranger after its delivery to the payee at the time
the note was negotiated to the plaintiff.
(11) An extension of time given by the holder of a note to the principal maker, without
the consent of a surety co-maker.11
The case at bench is unique in the sense that what was altered is the serial number of the check in
question, an item which, it can readily be observed, is not an essential requisite for negotiability under
Section 1 of the Negotiable Instruments Law. The aforementioned alteration did not change the
relations between the parties. The name of the drawer and the drawee were not altered. The intended
payee was the same. The sum of money due to the payee remained the same. Despite these findings,
however, petitioner insists, that:
xxx xxx xxx
It is an accepted concept, besides being a negotiable instrument itself, that a TCAA
check by its very nature is the medium of exchange of governments (sic)
instrumentalities of agencies. And as (a) safety measure, every government office o(r)
agency (is) assigned TCAA checks bearing different number series.
A concrete example is that of the disbursements of the Ministry of Education and
Culture. It is issued by the Bureau of Treasury sizeable bundles of checks in booklet
form with serial numbers different from other government office or agency. Now, for
fictitious payee to succeed in its malicious intentions to defraud the government, all it
need do is to get hold of a TCAA Check and have the serial numbers of portion (sic)
thereof changed or altered to make it appear that the same was issued by the MEG.
Otherwise, stated, it is through the serial numbers that (a) TCAA Check is determined
to have been issued by a particular office or agency of the government.12
xxx xxx xxx
Petitioner's arguments fail to convince. The check's serial number is not the sole indication of its origin..
As succinctly found by the Court of Appeals, the name of the government agency which issued the
subject check was prominently printed therein. The check's issuer was therefore sufficiently identified,
rendering the referral to the serial number redundant and inconsequential. Thus, we quote with favor the
findings of the respondent court:
xxx xxx xxx
If the purpose of the serial number is merely to identify the issuing government office
or agency, its alteration in this case had no material effect whatsoever on the integrity
of the check. The identity of the issuing government office or agency was not changed
thereby and the amount of the check was not charged against the account of another
government office or agency which had no liability under the check. The owner and
issuer of the check is boldly and clearly printed on its face, second line from the
top: "MINISTRY OF EDUCATION AND CULTURE," and below the name of the payee
are the rubber-stamped words: "Ministry of Educ. & Culture." These words are not
alleged to have been falsely or fraudulently intercalated into the check. The ownership
of the check is established without the necessity of recourse to the serial number.
Neither there any proof that the amount of the check was erroneously charged
against the account of a government office or agency other than the Ministry of
Education and Culture. Hence, the alteration in the number of the check did not affect
or change the liability of the Ministry of Education and Culture under the check and,
therefore, is immaterial. The genuineness of the amount and the signatures therein of
then Deputy Minister of Education Hermenegildo C. Dumlao and of the resident
Auditor, Penomio C. Alvarez are not challenged. Neither is the authenticity of the
different codes appearing therein questioned . . .13(Emphasis ours.)
Petitioner, thus cannot refuse to accept the check in question on the ground that the serial number was
altered, the same being an immaterial or innocent one.
We now go to the second issue. It is petitioner's submission that the certification issued by Minrado C.
Batonghinog, Cashier III of the MEC clearly shows that the check was altered. Said certification reads:
TO WHOM IT MAY CONCERN:
This is to certify that according to the records of this Office, TCAA PNB Check Mo.
SN7-3666223-3 dated August 7, 1981 drawn in favor of F. Abante Marketing in the
amount of NINETY (S)EVEN THOUSAND SIX HUNDRED FIFTY PESOS ONLY
(P97,650.00) was not issued by this Office nor released to the payee concerned. The
series number of said check was not included among those requisition by this Office
from the Bureau of Treasury.,
(SGD.) MINRADO C. BATONGHINOG
Petitioner claims that even if the author of the certification issued by the Ministry of Education and
Culture (MEG) was not presented, still the best evidence of the material alteration would be the disputed
check itself and the serial number thereon. Petitioner thus assails the refusal of respondent court to give
weight to the certification because the author thereof was not presented to identify it and to be cross-
examined thereon.15
We agree with the respondent court.
The one who signed the certification was not presented before the trial court to prove that the said
document was really the document he prepared and that the signature below the said document is his
own signature. Neither did petitioner present an eyewitness to the execution of the questioned
document who could possibly identify it. 16 Absent this proof, we cannot rule on the authenticity of the
contents of the certification. Moreover, as we previously emphasized, there was no material alteration
on the check, the change of its serial number not being substantial to its negotiability.
Anent the third issue — whether or not the drawee bank may still recover the value of the check from
the collecting bank even if it failed to return the check within the twenty-four (24) hour clearing period
because the check was tampered — suffice it to state that since there is no material alteration in the
check, petitioner has no right to dishonor it and return it to PBCom, the same being in all respects
negotiable.
However, the amount of P10,000.00 as attorney's fees is hereby deleted. In their respective decisions,
the trial court and the Court of Appeals failed to explicitly state the rationale for the said award. The trial
court merely ruled as follows:
With respect to Capitol's claim for damages consisting of alleged loss of opportunity,
this Court finds that Capitol failed to adequately substantiate its claim. What Capitol
had presented was a self-serving, unsubstantiated and speculative computation of
what it allegedly could have earned or realized were it not for the debit made by
PBCom which was triggered by the return and debit made by PNB. However, this
Court finds that it would be fair and reasonable to impose interest at 12% per
 annum on the principal amount of the check computed from October 19, 1981 (the
date PBCom debited Capitol's account) until the amount is fully paid and reasonable
attorney's fees.17 (Emphasis ours.)
And contrary to the Court of Appeal's resolution, petitioner unambiguously questioned before it the
award of attorney's fees, assigning the latter as one of the errors committed by the trial court. 18
The foregoing is in conformity with the guiding principles laid down in a long line of cases and reiterated
recently in Consolidated Bank & Trust Corporation (Solidbank) v. Court of Appeals:19
The award of attorney's fees lies within the discretion of the court and depends upon
the circumstances of each case. However, the discretion of the court to award
attorney's fees under Article 2208 of the Civil Code of the Philippines demands
factual, legal and equitable justification, without which the award is a conclusion
without a premise and improperly left to speculation and conjecture. It becomes a
violation of the proscription against the imposition of a penalty on the right to litigate
(Universal Shipping Lines, Inc. v. Intermediate Appellate Court, 188 SCRA 170
[1990]). The reason for the award must be stated in the text of the court's decision. If
it is stated only in the dispositive portion of the decision, the same shall be disallowed.
As to the award of attorney's fees being an exception rather than the rule, it is
necessary for the court to make findings of fact and law that would bring the case
within the exception and justify the grant of the award (Refractories Corporation of the
Philippines v. Intermediate Appellate Court, 176 SCRA 539 [176 SCRA 539]).
WHEREFORE, premises considered, except for the deletion of the award of attorney's fees, the
decision of the Court of Appeals is hereby AFFIRMED.
G.R. No. 154159. March 31, 2005
PEOPLE OF THE PHILIPPINES, Appellee,
vs.
aloma reyes and trichia mae reyes (AT LARGE), accused. ALOMA REYES, Appellant.
DECISION
PUNO, J.:
This is a direct appeal1 from the Sentence2 of the Regional Trial Court of Davao City, Branch 11, finding
appellant Alamo Reyes guilty beyond reasonable doubt of estafa by postdating a bouncing check under
Article 315, paragraph 2(d) of the Revised Penal Code, as amended by Presidential Decree No. 818,
and sentencing her to an indeterminate penalty of six (6) years and one (1) day to twelve (12) years
of prision mayor as minimum to thirty (30) years of reclusion perpetua as maximum.3
Appellant claims that she issued the subject check in payment of a pre-existing obligation. Thus, her
liability must be civil, not criminal. Private complainant Jules-Berne Alabastro counters that appellant,
together with her daughter and co-accused Trichia Mae Reyes, issued him the check for rediscounting.
He was allegedly lured to part with his money due to their seeming honest representations that the
check was good and would never bounce.
The following information dated May 26, 1999 was filed against the appellant and Trichia Mae Reyes:
That sometime in February 1998, in the City of Davao, Philippines, and within the jurisdiction of this
Honorable Court, the above-mentioned accused, conspiring and confederating together, by means of
false pretense and with intent to defraud, willfully, unlawfully and feloniously issued to JULES-BERNE I.
ALABASTRO, Allied Bank, Toril Branch[,] Davao City Check No. 066815 – A dated March 31, 1998 in
the amount of ₱280,000.00 in payment of an obligation, which the accused was able to obtain by
reason of and simultaneously with the issuance of the said check, that when said check was presented
to the drawee bank for encashment, the same was dishonored for the reason "ACCOUNT CLOSED"
and after having been notified by such dishonor said accused failed and refused to redeem said check
despite repeated demands, to the damage and prejudice of the complainant in the aforesaid amount.
CONTRARY TO LAW.4
A Warrant5 for their arrest was subsequently issued. However, only appellant was arrested. She posted
a cash bond for her provisional liberty.6 Her co-accused had flown to Australia before her arrest warrant
could be served. She remains at large.
Appellant pleaded not guilty upon arraignment.7 Trial ensued.
Danilo Go, acting Branch Head of Allied Bank, Toril Branch, Davao City, testified for the prosecution. He
presented an account ledger card8 dated December 31, 1997. The account ledger card contained the
transaction records of Allied Bank NOW (Negotiable Order of Withdrawal) Account No. 1333-00033-8
under the name Aloma Reyes and Trichia Mae Reyes 9 which was opened on January 27, 1997 and
closed on March 26, 1997.10 He explained that a NOW Account is a savings account where the drawer
may issue checks payable only to a specific payee. A NOW check cannot be issued payable to
"BEARER." Hence, it cannot be further negotiated.
Go identified the subject check as a NOW check issued under appellant’s NOW Account. It was
presented for payment with Allied Bank, the drawee bank of appellant, on April 2, 1998 but was returned
to Metrobank, the depository bank of private complainant, on April 3, 1998 for the reason "account
closed."11
On cross-examination, Go explained the other entries in the account ledger card. He reiterated that
appellant only had a two-month transaction with Allied Bank under the NOW Account. On re-direct
examination, he identified another document12 containing "referral items." The document showed a list
of NOW checks (the "referral items") presented to Allied Bank for clearing after the NOW Account had
been closed.13 These "referral items" were not listed in the account ledger card which he previously
presented because once an account is closed, no further entries are entered in the account ledger card.
Private complainant Jules-Berne I. Alabastro was also presented by the prosecution. He testified that he
was first introduced by Estrella Paulino to appellant and her daughter sometime in 1996 at his office in
Davao City. The latter allegedly begged to have their personal checks discounted. Upon the assurance
that their checks were good and considering that appellant and her sister used to be province mates of
private complainant’s parents, he allegedly discounted more or less five or six checks. When asked to
present the checks, he explained that he had returned the checks each time they bounce. Upon return,
appellant replaced them with cash. He only had in his possession the subject check -- the only check
that appellant has not replaced with cash.14
He further testified that like the other checks which he previously discounted, he gave them cash for the
subject check. When he deposited it to his account on its due date, it was dishonored by the drawee
bank upon presentment for the reason "account closed." 15 He immediately notified appellant but the
latter allegedly refused to replace it with cash.16 He sent a demand letter by registered mail but
appellant did not heed his demand. He thus filed the instant case.
On cross-examination, private complainant recounted that when he met appellant in 1996, she applied
for a loan. He had also previously discounted five or six checks of appellant at varying amounts on
different occasions. He, however, said that he was not a moneylender; he helped his wife in the flower
shop business. He also refused to disclose the source of the money he used in allegedly discounting
the subject ₱280,000.00-check. He said the source was "quite personal."17
To strengthen his rediscounting theory, private complainant averred that the subject check was
complete when it was issued to him: his name, the signatures of appellant and her daughter, the date,
and the amount of the subject check were already written on the instrument. He denied that he was the
one who filled in the date and the amount of the subject check. 18
The defense presented the sole testimony of appellant. She admitted that she started borrowing money
from private complainant in 1996 when she was still engaged in the wholesale of softdrinks. Whenever
she borrowed money, she replaced it with checks. However, she suffered business reverses and closed
shop.
To pay her outstanding obligations with private complainant, the latter allegedly made her issue, in one
and the same occasion, sixteen (16) NOW checks as installment payments. The first installment
payment was to start at ₱6,000.00; the succeeding fifteen payments were to be at ₱13,000.00 each.
The last installment was to fall on March 31, 1998.
Appellant explained that the subject check was one of the sixteen (16) checks. Four (4) of these checks
were offered in evidence and marked as exhibits.19 None of the checks was supposed to exceed the
amount of ₱13,000.00. Hence, during her arrest, she was surprised to learn for the first time about the
₱280,000.00-check. She got confused that there were two (2) NOW checks dated March 31, 1998: the
subject check (Check No. 066815) with the amount of ₱280,000.00, and the other check (Check No.
066816),20 with the amount of ₱13,000.00.21
On cross-examination, she said that she could not produce the other eleven (11) of the sixteen (16)
checks. She admitted signing the checks with her daughter but maintained that the maximum amount
she agreed to pay for her obligation was ₱13,000.00 per check. When asked about a ₱2,000.00 22 check
she issued as recorded in her account ledger card, she said that she probably issued it when her
business was still good.23 She also claimed that she was not able to receive the demand letter sent to
her home address. Most of the times, she was in the farm. 24
On re-direct examination, appellant claimed that it was private complainant who wrote the date and the
amount in the subject check. She alleged that he was also the one who filled in the dates and the
amounts on the other checks on exhibit. She allegedly authorized private complainant to fill in the blank
entries for the dates and the amounts because she was grateful that the latter assented to the payment
arrangement of ₱13,000.00 per installment. Furthermore, it was private complainant who would
schedule the payment dates.25
Appellant’s outstanding obligation was allegedly ₱232,000.00 when she delivered the instruments. She
placed all sixteen (16) checks on the office table of private complainant. They were already signed by
her and her daughter. Private complainant thereafter wrote the dates and the amounts. She did not
examine the checks after private complainant filled in the dates and the amounts. She was also not
aware if private complainant wrote "₱280,000.00" on the subject check. She allegedly only saw him
write "₱13,000.00" on the checks.26
On rebuttal, private complainant maintained that the subject check was complete when it was handed to
him for rediscounting. He did not know who filled in the date and the amount. He countered that it was
appellant’s and her daughter’s signatures that were missing. They signed the checks in his presence.
He speculated that appellant probably needed a big amount for their softdrinks business at that time.
When asked to explain why there were two checks similarly dated March 31, 1998, he merely stated
that "there was one check that bounced, Check No. 066815, in the amount of ₱280,000.00[,] dated
March 31, 1998."27
The court a quo convicted appellant upon finding that the prosecution had sufficiently proven the
essential elements of estafa. Hence, this appeal.
Appellant raises the following Assignment of Errors:
I
The trial court seriously erred in treating the NOW Instrument as a cheCk within the meaning of Article
315 Paragraph 2(D) of the Revised Penal Code, considerING that it is a non-negotiable instrument, the
same being payable only to the person specified therein and cannot be made payable to bearer or casH
or be indorsed to a third person.
II
Assuming arguendo that the NOW Instrument is a check within the ambit of Article 315 Paragraph 2(D)
of the Revised Penal Code, the trial court seriously erred in finding that fraud and/or deceit attended the
issuance of the NOW instrument. From the prosecution’s as welL as the defense’S evidence glare (sic)
the fact that:
A. The NOW instrument, together with the other NOW Instruments, was issued in payment of a pre-
existing debt.
B. The NOW instrument was a mere evidence of a loan or security thereof serving The same purpose
as a promissory note.
III
The trial court seriously erred in concluding that the prosecution sufficiently proved the essential
elements of the crime charged. To be sure, the prosecution’s evidence fell short of the degree of proof,
that is proof beyond reasonable doubt, required by law to be established in order to overcome the
constitutionally enshrined presumption of innocence in favor of accused-appellant. Verily:
A. The prosecution’s evidence are severely flawed, and, by themselves, insufficient and unreliable.
B. The inconsistencies in the testimony of the defense’s lone witness are harmless and should not have
prejudiced the defense in light of the principle of law that the prosecution must establish the guilt of the
accused by the strength of its own evidence and not on the weakness of the defense’s evidence or lack
of it.
C. The prosecution’s evidence does not fulfill the test of moral certainty and therefore is insufficient to
support a judgment of conviction.28
We shall resolve the appeal by determining the pivotal issue: whether all the elements of estafa under
Article 315, paragraph 2(d) of the Revised Penal Code were sufficiently established in the case at bar.
Under Article 315, paragraph 2(d) of the Revised Penal Code, estafa is committed by any person who
shall defraud another by false pretenses or fraudulent acts executed prior to or simultaneously with the
commission of the fraud. It is committed with the following essential elements which must be proved to
sustain a conviction:
1. postdating or issuance of a check in payment of an obligation contracted at the time the check was
issued;
2. lack of sufficiency of funds to cover the check; and
3. damage to the payee thereof.29
Appellant avers that the subject check does not fall within the meaning of Section 185 of the Negotiable
Instruments Law which defines a "check" as a "bill of exchange drawn on a bank payable on demand."
First, the NOW check is drawn against the savings, not the current account, of appellant. Second, it is
payable only to a specific person or the "payee" and is not valid when made payable to "bearer" or to
"cash." 30 Appellant quotes the restriction written on the face of a NOW check:
"NOW" shall be payable only to a specific person, natural or juridical. It is not valid when made payable
to "BEARER" or to "CASH" or when [i]ndorsed by the payee to another person. Only the payee can
encash this "NOW" with the drawee bank or deposit it in his account with the drawee bank or with any
other bank.
Appellant posits that this condition strips the subject check the character of negotiability. Hence, it is not
a negotiable instrument under the Negotiable Instruments Law, and not the "check" contemplated in
Criminal Law.31
We disagree.
Section X223 of the Manual of Regulations for Banks defines Negotiable Order of Withdrawal (NOW)
Accounts as interest-bearing deposit accounts that combine the payable on demand feature of
checks and the investment feature of savings accounts.
The fact that a NOW check shall be payable only to a specific person, and not valid when made payable
to "BEARER" or to "CASH" or when indorsed by the payee to another person, is inconsequential. The
same restriction is produced when a check is crossed: only the payee named in the check may deposit
it in his bank account. If a third person accepts a cross check and pays cash for its value despite the
warning of the crossing, he cannot be considered in good faith and thus not a holder in due course. The
purpose of the crossing is to ensure that the check will be encashed by the rightful payee only. 32 Yet,
despite the restriction on the negotiability of cross checks, we held that they are negotiable
instruments.33
To be sure, negotiability is not the gravamen of the crime of estafa through bouncing checks. It is the
fraud or deceit employed by the accused in issuing a worthless check that is penalized.
Deceit, to constitute estafa, should be the efficient cause of defraudation. It must have been committed
either prior or simultaneous with the defraudation complained of.34 There must be concomitance: the
issuance of a check should be the means to obtain money or property from the payee. Hence, a check
issued in payment of a pre-existing obligation does not constitute estafa even if there is no fund in the
bank to cover the amount of the check.35
Appellant maintains that the subject check was one of the sixteen (16) checks she issued at once to
private complainant in payment of a pre-existing obligation.36 The court a quo however upheld private
complainant’s theory that appellant issued him the subject check for rediscounting in February 1998,
long after her account was closed on March 26, 1997.
We reverse.
While findings of fact of trial courts are accorded not only respect, but at times, finality, this rule admits
of exceptions, as when there is a misappreciation of facts.
The evidence on record debunks the rediscounting theory of private complainant. He did not part with
his money out of the fraudulent assurances of appellant that the subject check was good and would
never bounce.
A careful examination of the records establishes that appellant issued him the subject check in payment
of a pre-existing obligation. Both private complainant and appellant concur in their testimonies that they
met sometime in 1996. Both parties also admit that at this point, appellant started borrowing money
from private complainant.
It cannot be denied that the subject check, like the four other NOW checks on exhibit, was issued and
signed by the same persons and charged to the same NOW Account at Allied Bank. Private
complainant’s theory that these checks were previously issued to him for rediscounting at different times
is incredulous:
Atty. Zamora- The question is, how many checks were discounted for the accused. More or less 5 or 6
checks[?]
xxx
Witness- There were previous checks discounted but on different occasions. 37
Atty. Zamora- xxx You said there were 5 or six checks discounted. You have list of those?
Atty. Alabastro- Already answered. No list.38
It puzzles the Court that after the NOW check dated August 31, 1997 bounced on September 3, 1997
for the reason "ACCOUNT CLOSED," private complainant would still discount appellant’s checks in
succession. It baffles us more that private complainant would discount a ₱280,000.00-check in February
1998 despite knowledge of the closure of appellant’s NOW Account.
We held in Pacheco v. Court of Appeals39 that there is no estafa through bouncing checks when it is
shown that private complainant knew that the drawer did not have sufficient funds in the bank at the
time the check was issued to him. Such knowledge negates the element of deceit and constitutes a
defense in estafa through bouncing checks.
In the case at bar, private complainant knew that appellant did not only have insufficient funds; he knew
her NOW Account was closed at the time he allegedly discounted the subject check. This is proven by
the following undisputed facts:
First. Appellant presented four (4) NOW checks, each bearing the amount of ₱13,000.00, and
respectively dated August 31, 1997, January 31, 1998, March 1, 1998 and March 31, 1998.
The evidence on record shows that private complainant deposited the NOW check dated August 31,
1997 to his Metrobank account on September 1, 1997. On September 2, 1997, Metrobank returned the
instrument to Allied Bank with the notation "ACCOUNT CLOSED." Hence, as early as September 2,
1997, private complainant already knew that appellant’s NOW Account had been closed. 40
Second. Fatal to private complainant’s case are his own admissions as to when he received the subject
check. In his Affidavit-Complaint41 dated February 25, 1999, private complainant stated, viz.:
x x x That sometime in Feb. 1998, a certain ALOMA REYES AND TRICHIA MAE REYES x x x came
to me and begged to have their personal check discounted with earnest representations that their check
was good check and would never bounce and because of their seeming honest representations I was
lured to discount their check which is ---
ALLIED BANK CHECK NO. 066815-A DATED MAR. 31, 1998 AMOUNTING TO ₱280,000.00.
They handed the check to me and I simultaneously gave them the money; 42 (emphasis supplied)
In the Information filed, it was stated, viz.:
That sometime in February 1998, in the City of Davao, Philippines, and within the jurisdiction of this
Honorable Court, the above-mentioned accused, conspiring and confederating together, by means of
false pretense and with intent to defraud, willfully, unlawfully and feloniously issued to JULES-BERNE I.
ALABASTRO, Allied Bank, Toril Branch[,] Davao City Check No. 066815 – A dated March 31, 1998 in
the amount of ₱280,000.00 x x x43 (emphasis supplied)
If the subject check was issued to him in February 1998, as he alleges, at that time he already knew
that the NOW Account where the subject NOW check is charged was closed. The NOW checks on
record are irrefragable pieces of evidence that private complainant knew the NOW Account was closed.
In light of the established facts, private complainant’s rediscounting theory must fail. Appellant issued
the subject check in payment of a pre-existing obligation. When the NOW Account was closed on March
26, 1997, private complainant already had in his possession the NOW check in question. It was one of
the sixteen (16) NOW checks previously issued by private complainant before the closure of the NOW
Account. No deceit or damage attended the transaction. There being none in the case at bar, there can
be no estafa through bouncing checks.
Despite the inconsistencies44 in the testimony of appellant, these were minor and did not destroy her
credibility nor shatter the theory of the defense. To be sure, the prosecution failed to prove the guilt of
appellant beyond reasonable doubt. As a matter of right, the constitutional presumption of innocence of
appellant must be favored regardless of the inconsistencies in her testimony or the weakness of her
own defense.
Appellant, however, is not without liability. An accused acquitted of estafa may be held civilly liable in
the same case where the facts established by the evidence so warrant. In the case at bar, the records
lack sufficient evidence to determine the amount of her remaining obligation.
This Court is not a trier of facts and where the evidence on record is not sufficient to warrant a
conclusion, the case should be remanded to the court a quo for reception of further evidence.
IN VIEW WHEREOF, appellant Aloma Reyes is ACQUITTED of estafa under Article 315, paragraph
2(d) of the Revised Penal Code, as amended. The assailed Sentence of the Regional Trial Court of
Davao City, Branch 11, dated March 13, 2002 is REVERSED and SET ASIDE. The case is
REMANDED to the court a quo for the determination of appellant’s civil liability. The Director of the
Bureau of Corrections is DIRECTED to release her IMMEDIATELY unless she is being lawfully held for
another offense.
G.R. No. 154159. March 31, 2005
PEOPLE OF THE PHILIPPINES, Appellee,
vs.
aloma reyes and trichia mae reyes (AT LARGE), accused. ALOMA REYES, Appellant.
DECISION
PUNO, J.:
This is a direct appeal1 from the Sentence2 of the Regional Trial Court of Davao City, Branch 11, finding
appellant Alamo Reyes guilty beyond reasonable doubt of estafa by postdating a bouncing check under
Article 315, paragraph 2(d) of the Revised Penal Code, as amended by Presidential Decree No. 818,
and sentencing her to an indeterminate penalty of six (6) years and one (1) day to twelve (12) years
of prision mayor as minimum to thirty (30) years of reclusion perpetua as maximum.3
Appellant claims that she issued the subject check in payment of a pre-existing obligation. Thus, her
liability must be civil, not criminal. Private complainant Jules-Berne Alabastro counters that appellant,
together with her daughter and co-accused Trichia Mae Reyes, issued him the check for rediscounting.
He was allegedly lured to part with his money due to their seeming honest representations that the
check was good and would never bounce.
The following information dated May 26, 1999 was filed against the appellant and Trichia Mae Reyes:
That sometime in February 1998, in the City of Davao, Philippines, and within the jurisdiction of this
Honorable Court, the above-mentioned accused, conspiring and confederating together, by means of
false pretense and with intent to defraud, willfully, unlawfully and feloniously issued to JULES-BERNE I.
ALABASTRO, Allied Bank, Toril Branch[,] Davao City Check No. 066815 – A dated March 31, 1998 in
the amount of ₱280,000.00 in payment of an obligation, which the accused was able to obtain by
reason of and simultaneously with the issuance of the said check, that when said check was presented
to the drawee bank for encashment, the same was dishonored for the reason "ACCOUNT CLOSED"
and after having been notified by such dishonor said accused failed and refused to redeem said check
despite repeated demands, to the damage and prejudice of the complainant in the aforesaid amount.
CONTRARY TO LAW.4
A Warrant5 for their arrest was subsequently issued. However, only appellant was arrested. She posted
a cash bond for her provisional liberty.6 Her co-accused had flown to Australia before her arrest warrant
could be served. She remains at large.
Appellant pleaded not guilty upon arraignment.7 Trial ensued.
Danilo Go, acting Branch Head of Allied Bank, Toril Branch, Davao City, testified for the prosecution. He
presented an account ledger card8 dated December 31, 1997. The account ledger card contained the
transaction records of Allied Bank NOW (Negotiable Order of Withdrawal) Account No. 1333-00033-8
under the name Aloma Reyes and Trichia Mae Reyes 9 which was opened on January 27, 1997 and
closed on March 26, 1997.10 He explained that a NOW Account is a savings account where the drawer
may issue checks payable only to a specific payee. A NOW check cannot be issued payable to
"BEARER." Hence, it cannot be further negotiated.
Go identified the subject check as a NOW check issued under appellant’s NOW Account. It was
presented for payment with Allied Bank, the drawee bank of appellant, on April 2, 1998 but was returned
to Metrobank, the depository bank of private complainant, on April 3, 1998 for the reason "account
closed."11
On cross-examination, Go explained the other entries in the account ledger card. He reiterated that
appellant only had a two-month transaction with Allied Bank under the NOW Account. On re-direct
examination, he identified another document12 containing "referral items." The document showed a list
of NOW checks (the "referral items") presented to Allied Bank for clearing after the NOW Account had
been closed.13 These "referral items" were not listed in the account ledger card which he previously
presented because once an account is closed, no further entries are entered in the account ledger card.
Private complainant Jules-Berne I. Alabastro was also presented by the prosecution. He testified that he
was first introduced by Estrella Paulino to appellant and her daughter sometime in 1996 at his office in
Davao City. The latter allegedly begged to have their personal checks discounted. Upon the assurance
that their checks were good and considering that appellant and her sister used to be province mates of
private complainant’s parents, he allegedly discounted more or less five or six checks. When asked to
present the checks, he explained that he had returned the checks each time they bounce. Upon return,
appellant replaced them with cash. He only had in his possession the subject check -- the only check
that appellant has not replaced with cash.14
He further testified that like the other checks which he previously discounted, he gave them cash for the
subject check. When he deposited it to his account on its due date, it was dishonored by the drawee
bank upon presentment for the reason "account closed." 15 He immediately notified appellant but the
latter allegedly refused to replace it with cash.16 He sent a demand letter by registered mail but
appellant did not heed his demand. He thus filed the instant case.
On cross-examination, private complainant recounted that when he met appellant in 1996, she applied
for a loan. He had also previously discounted five or six checks of appellant at varying amounts on
different occasions. He, however, said that he was not a moneylender; he helped his wife in the flower
shop business. He also refused to disclose the source of the money he used in allegedly discounting
the subject ₱280,000.00-check. He said the source was "quite personal."17
To strengthen his rediscounting theory, private complainant averred that the subject check was
complete when it was issued to him: his name, the signatures of appellant and her daughter, the date,
and the amount of the subject check were already written on the instrument. He denied that he was the
one who filled in the date and the amount of the subject check. 18
The defense presented the sole testimony of appellant. She admitted that she started borrowing money
from private complainant in 1996 when she was still engaged in the wholesale of softdrinks. Whenever
she borrowed money, she replaced it with checks. However, she suffered business reverses and closed
shop.
To pay her outstanding obligations with private complainant, the latter allegedly made her issue, in one
and the same occasion, sixteen (16) NOW checks as installment payments. The first installment
payment was to start at ₱6,000.00; the succeeding fifteen payments were to be at ₱13,000.00 each.
The last installment was to fall on March 31, 1998.
Appellant explained that the subject check was one of the sixteen (16) checks. Four (4) of these checks
were offered in evidence and marked as exhibits.19 None of the checks was supposed to exceed the
amount of ₱13,000.00. Hence, during her arrest, she was surprised to learn for the first time about the
₱280,000.00-check. She got confused that there were two (2) NOW checks dated March 31, 1998: the
subject check (Check No. 066815) with the amount of ₱280,000.00, and the other check (Check No.
066816),20 with the amount of ₱13,000.00.21
On cross-examination, she said that she could not produce the other eleven (11) of the sixteen (16)
checks. She admitted signing the checks with her daughter but maintained that the maximum amount
she agreed to pay for her obligation was ₱13,000.00 per check. When asked about a ₱2,000.0022 check
she issued as recorded in her account ledger card, she said that she probably issued it when her
business was still good.23 She also claimed that she was not able to receive the demand letter sent to
her home address. Most of the times, she was in the farm.24
On re-direct examination, appellant claimed that it was private complainant who wrote the date and the
amount in the subject check. She alleged that he was also the one who filled in the dates and the
amounts on the other checks on exhibit. She allegedly authorized private complainant to fill in the blank
entries for the dates and the amounts because she was grateful that the latter assented to the payment
arrangement of ₱13,000.00 per installment. Furthermore, it was private complainant who would
schedule the payment dates.25
Appellant’s outstanding obligation was allegedly ₱232,000.00 when she delivered the instruments. She
placed all sixteen (16) checks on the office table of private complainant. They were already signed by
her and her daughter. Private complainant thereafter wrote the dates and the amounts. She did not
examine the checks after private complainant filled in the dates and the amounts. She was also not
aware if private complainant wrote "₱280,000.00" on the subject check. She allegedly only saw him
write "₱13,000.00" on the checks.26
On rebuttal, private complainant maintained that the subject check was complete when it was handed to
him for rediscounting. He did not know who filled in the date and the amount. He countered that it was
appellant’s and her daughter’s signatures that were missing. They signed the checks in his presence.
He speculated that appellant probably needed a big amount for their softdrinks business at that time.
When asked to explain why there were two checks similarly dated March 31, 1998, he merely stated
that "there was one check that bounced, Check No. 066815, in the amount of ₱280,000.00[,] dated
March 31, 1998."27
The court a quo convicted appellant upon finding that the prosecution had sufficiently proven the
essential elements of estafa. Hence, this appeal.
Appellant raises the following Assignment of Errors:
I
The trial court seriously erred in treating the NOW Instrument as a cheCk within the meaning of Article
315 Paragraph 2(D) of the Revised Penal Code, considerING that it is a non-negotiable instrument, the
same being payable only to the person specified therein and cannot be made payable to bearer or casH
or be indorsed to a third person.
II
Assuming arguendo that the NOW Instrument is a check within the ambit of Article 315 Paragraph 2(D)
of the Revised Penal Code, the trial court seriously erred in finding that fraud and/or deceit attended the
issuance of the NOW instrument. From the prosecution’s as welL as the defense’S evidence glare (sic)
the fact that:
A. The NOW instrument, together with the other NOW Instruments, was issued in payment of a pre-
existing debt.
B. The NOW instrument was a mere evidence of a loan or security thereof serving The same purpose
as a promissory note.
III
The trial court seriously erred in concluding that the prosecution sufficiently proved the essential
elements of the crime charged. To be sure, the prosecution’s evidence fell short of the degree of proof,
that is proof beyond reasonable doubt, required by law to be established in order to overcome the
constitutionally enshrined presumption of innocence in favor of accused-appellant. Verily:
A. The prosecution’s evidence are severely flawed, and, by themselves, insufficient and unreliable.
B. The inconsistencies in the testimony of the defense’s lone witness are harmless and should not have
prejudiced the defense in light of the principle of law that the prosecution must establish the guilt of the
accused by the strength of its own evidence and not on the weakness of the defense’s evidence or lack
of it.
C. The prosecution’s evidence does not fulfill the test of moral certainty and therefore is insufficient to
support a judgment of conviction.28
We shall resolve the appeal by determining the pivotal issue: whether all the elements of estafa under
Article 315, paragraph 2(d) of the Revised Penal Code were sufficiently established in the case at bar.
Under Article 315, paragraph 2(d) of the Revised Penal Code, estafa is committed by any person who
shall defraud another by false pretenses or fraudulent acts executed prior to or simultaneously with the
commission of the fraud. It is committed with the following essential elements which must be proved to
sustain a conviction:
1. postdating or issuance of a check in payment of an obligation contracted at the time the check was
issued;
2. lack of sufficiency of funds to cover the check; and
3. damage to the payee thereof.29
Appellant avers that the subject check does not fall within the meaning of Section 185 of the Negotiable
Instruments Law which defines a "check" as a "bill of exchange drawn on a bank payable on demand."
First, the NOW check is drawn against the savings, not the current account, of appellant. Second, it is
payable only to a specific person or the "payee" and is not valid when made payable to "bearer" or to
"cash." 30 Appellant quotes the restriction written on the face of a NOW check:
"NOW" shall be payable only to a specific person, natural or juridical. It is not valid when made payable
to "BEARER" or to "CASH" or when [i]ndorsed by the payee to another person. Only the payee can
encash this "NOW" with the drawee bank or deposit it in his account with the drawee bank or with any
other bank.
Appellant posits that this condition strips the subject check the character of negotiability. Hence, it is not
a negotiable instrument under the Negotiable Instruments Law, and not the "check" contemplated in
Criminal Law.31
We disagree.
Section X223 of the Manual of Regulations for Banks defines Negotiable Order of Withdrawal (NOW)
Accounts as interest-bearing deposit accounts that combine the payable on demand feature of
checks and the investment feature of savings accounts.
The fact that a NOW check shall be payable only to a specific person, and not valid when made payable
to "BEARER" or to "CASH" or when indorsed by the payee to another person, is inconsequential. The
same restriction is produced when a check is crossed: only the payee named in the check may deposit
it in his bank account. If a third person accepts a cross check and pays cash for its value despite the
warning of the crossing, he cannot be considered in good faith and thus not a holder in due course. The
purpose of the crossing is to ensure that the check will be encashed by the rightful payee only. 32 Yet,
despite the restriction on the negotiability of cross checks, we held that they are negotiable
instruments.33
To be sure, negotiability is not the gravamen of the crime of estafa through bouncing checks. It is the
fraud or deceit employed by the accused in issuing a worthless check that is penalized.
Deceit, to constitute estafa, should be the efficient cause of defraudation. It must have been committed
either prior or simultaneous with the defraudation complained of. 34 There must be concomitance: the
issuance of a check should be the means to obtain money or property from the payee. Hence, a check
issued in payment of a pre-existing obligation does not constitute estafa even if there is no fund in the
bank to cover the amount of the check.35
Appellant maintains that the subject check was one of the sixteen (16) checks she issued at once to
private complainant in payment of a pre-existing obligation.36 The court a quo however upheld private
complainant’s theory that appellant issued him the subject check for rediscounting in February 1998,
long after her account was closed on March 26, 1997.
We reverse.
While findings of fact of trial courts are accorded not only respect, but at times, finality, this rule admits
of exceptions, as when there is a misappreciation of facts.
The evidence on record debunks the rediscounting theory of private complainant. He did not part with
his money out of the fraudulent assurances of appellant that the subject check was good and would
never bounce.
A careful examination of the records establishes that appellant issued him the subject check in payment
of a pre-existing obligation. Both private complainant and appellant concur in their testimonies that they
met sometime in 1996. Both parties also admit that at this point, appellant started borrowing money
from private complainant.
It cannot be denied that the subject check, like the four other NOW checks on exhibit, was issued and
signed by the same persons and charged to the same NOW Account at Allied Bank. Private
complainant’s theory that these checks were previously issued to him for rediscounting at different times
is incredulous:
Atty. Zamora- The question is, how many checks were discounted for the accused. More or less 5 or 6
checks[?]
xxx
Witness- There were previous checks discounted but on different occasions. 37
Atty. Zamora- xxx You said there were 5 or six checks discounted. You have list of those?
Atty. Alabastro- Already answered. No list.38
It puzzles the Court that after the NOW check dated August 31, 1997 bounced on September 3, 1997
for the reason "ACCOUNT CLOSED," private complainant would still discount appellant’s checks in
succession. It baffles us more that private complainant would discount a ₱280,000.00-check in February
1998 despite knowledge of the closure of appellant’s NOW Account.
We held in Pacheco v. Court of Appeals39 that there is no estafa through bouncing checks when it is
shown that private complainant knew that the drawer did not have sufficient funds in the bank at the
time the check was issued to him. Such knowledge negates the element of deceit and constitutes a
defense in estafa through bouncing checks.
In the case at bar, private complainant knew that appellant did not only have insufficient funds; he knew
her NOW Account was closed at the time he allegedly discounted the subject check. This is proven by
the following undisputed facts:
First. Appellant presented four (4) NOW checks, each bearing the amount of ₱13,000.00, and
respectively dated August 31, 1997, January 31, 1998, March 1, 1998 and March 31, 1998.
The evidence on record shows that private complainant deposited the NOW check dated August 31,
1997 to his Metrobank account on September 1, 1997. On September 2, 1997, Metrobank returned the
instrument to Allied Bank with the notation "ACCOUNT CLOSED." Hence, as early as September 2,
1997, private complainant already knew that appellant’s NOW Account had been closed. 40
Second. Fatal to private complainant’s case are his own admissions as to when he received the subject
check. In his Affidavit-Complaint41 dated February 25, 1999, private complainant stated, viz.:
x x x That sometime in Feb. 1998, a certain ALOMA REYES AND TRICHIA MAE REYES x x x came
to me and begged to have their personal check discounted with earnest representations that their check
was good check and would never bounce and because of their seeming honest representations I was G.R. No. 107382/G.R. No. 107612 January 31, 1996
lured to discount their check which is ---
ASSOCIATED BANK, petitioner,
ALLIED BANK CHECK NO. 066815-A DATED MAR. 31, 1998 AMOUNTING TO ₱280,000.00. vs.
HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE NATIONAL
They handed the check to me and I simultaneously gave them the money; 42 (emphasis supplied) BANK, respondents.

In the Information filed, it was stated, viz.: xxxxxxxxxxxxxxxxxxxxx

That sometime in February 1998, in the City of Davao, Philippines, and within the jurisdiction of this
Honorable Court, the above-mentioned accused, conspiring and confederating together, by means of
false pretense and with intent to defraud, willfully, unlawfully and feloniously issued to JULES-BERNE I.
ALABASTRO, Allied Bank, Toril Branch[,] Davao City Check No. 066815 – A dated March 31, 1998 in
the amount of ₱280,000.00 x x x43 (emphasis supplied)
If the subject check was issued to him in February 1998, as he alleges, at that time he already knew
that the NOW Account where the subject NOW check is charged was closed. The NOW checks on
record are irrefragable pieces of evidence that private complainant knew the NOW Account was closed.
In light of the established facts, private complainant’s rediscounting theory must fail. Appellant issued
the subject check in payment of a pre-existing obligation. When the NOW Account was closed on March
26, 1997, private complainant already had in his possession the NOW check in question. It was one of
the sixteen (16) NOW checks previously issued by private complainant before the closure of the NOW
Account. No deceit or damage attended the transaction. There being none in the case at bar, there can
be no estafa through bouncing checks.
Despite the inconsistencies44 in the testimony of appellant, these were minor and did not destroy her
credibility nor shatter the theory of the defense. To be sure, the prosecution failed to prove the guilt of
appellant beyond reasonable doubt. As a matter of right, the constitutional presumption of innocence of
appellant must be favored regardless of the inconsistencies in her testimony or the weakness of her
own defense.
Appellant, however, is not without liability. An accused acquitted of estafa may be held civilly liable in
the same case where the facts established by the evidence so warrant. In the case at bar, the records
lack sufficient evidence to determine the amount of her remaining obligation.
This Court is not a trier of facts and where the evidence on record is not sufficient to warrant a
conclusion, the case should be remanded to the court a quo for reception of further evidence.
IN VIEW WHEREOF, appellant Aloma Reyes is ACQUITTED of estafa under Article 315, paragraph
2(d) of the Revised Penal Code, as amended. The assailed Sentence of the Regional Trial Court of
Davao City, Branch 11, dated March 13, 2002 is REVERSED and SET ASIDE. The case is
REMANDED to the court a quo for the determination of appellant’s civil liability. The Director of the
Bureau of Corrections is DIRECTED to release her IMMEDIATELY unless she is being lawfully held for
another offense.
G.R. No. 107612 January 31, 1996
PHILIPPINE NATIONAL BANK, petitioner,
vs.
HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and ASSOCIATED
BANK, respondents.
DECISION
ROMERO, J.:
Where thirty checks bearing forged endorsements are paid, who bears the loss, the drawer, the drawee
bank or the collecting bank?
This is the main issue in these consolidated petitions for review assailing the decision of the Court of
Appeals in "Province of Tarlac v. Philippine National Bank v. Associated Bank v. Fausto Pangilinan, et.
al." (CA-G.R. No. CV No. 17962). 1
The facts of the case are as follows:
The Province of Tarlac maintains a current account with the Philippine National Bank (PNB) Tarlac
Branch where the provincial funds are deposited. Checks issued by the Province are signed by the
Provincial Treasurer and countersigned by the Provincial Auditor or the Secretary of the Sangguniang
Bayan.
A portion of the funds of the province is allocated to the Concepcion Emergency Hospital. 2 The
allotment checks for said government hospital are drawn to the order of "Concepcion Emergency
Hospital, Concepcion, Tarlac" or "The Chief, Concepcion Emergency Hospital, Concepcion, Tarlac."
The checks are released by the Office of the Provincial Treasurer and received for the hospital by its
administrative officer and cashier.
In January 1981, the books of account of the Provincial Treasurer were post-audited by the Provincial
Auditor. It was then discovered that the hospital did not receive several allotment checks drawn by the
Province.
On February 19, 1981, the Provincial Treasurer requested the manager of the PNB to return all of its
cleared checks which were issued from 1977 to 1980 in order to verify the regularity of their
encashment. After the checks were examined, the Provincial Treasurer learned that 30 checks
amounting to P203,300.00 were encashed by one Fausto Pangilinan, with the Associated Bank acting
as collecting bank.
It turned out that Fausto Pangilinan, who was the administrative officer and cashier of payee hospital
until his retirement on February 28, 1978, collected the questioned checks from the office of the
Provincial Treasurer. He claimed to be assisting or helping the hospital follow up the release of the
checks and had official receipts. 3Pangilinan sought to encash the first check 4 with Associated Bank.
However, the manager of Associated Bank refused and suggested that Pangilinan deposit the check in
his personal savings account with the same bank. Pangilinan was able to withdraw the money when the
check was cleared and paid by the drawee bank, PNB.
After forging the signature of Dr. Adena Canlas who was chief of the payee hospital, Pangilinan followed
the same procedure for the second check, in the amount of P5,000.00 and dated April 20, 1978, 5 as
well as for twenty-eight other checks of various amounts and on various dates. The last check
negotiated by Pangilinan was for f8,000.00 and dated February 10, 1981. 6 All the checks bore the
stamp of Associated Bank which reads "All prior endorsements guaranteed ASSOCIATED BANK."
Jesus David, the manager of Associated Bank testified that Pangilinan made it appear that the checks
were paid to him for certain projects with the hospital. 7 He did not find as irregular the fact that the
checks were not payable to Pangilinan but to the Concepcion Emergency Hospital. While he admitted
that his wife and Pangilinan's wife are first cousins, the manager denied having given Pangilinan
preferential treatment on this account. 8
On February 26, 1981, the Provincial Treasurer wrote the manager of the PNB seeking the restoration
of the various amounts debited from the current account of the Province. 9
In turn, the PNB manager demanded reimbursement from the Associated Bank on May 15, 1981. 10
As both banks resisted payment, the Province of Tarlac brought suit against PNB which, in turn,
impleaded Associated Bank as third-party defendant. The latter then filed a fourth-party complaint
against Adena Canlas and Fausto Pangilinan. 11
After trial on the merits, the lower court rendered its decision on March 21, 1988, disposing as follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered:
1. On the basic complaint, in favor of plaintiff Province of Tarlac and against defendant
Philippine National Bank (PNB), ordering the latter to pay to the former, the sum of Two
Hundred Three Thousand Three Hundred (P203,300.00) Pesos with legal interest thereon
from March 20, 1981 until fully paid;
2. On the third-party complaint, in favor of defendant/third-party plaintiff Philippine National
Bank (PNB) and against third-party defendant/fourth-party plaintiff Associated Bank ordering
the latter to reimburse to the former the amount of Two Hundred Three Thousand Three
Hundred (P203,300.00) Pesos with legal interests thereon from March 20, 1981 until fully
paid;.
3. On the fourth-party complaint, the same is hereby ordered dismissed for lack of cause of
action as against fourth-party defendant Adena Canlas and lack of jurisdiction over the person
of fourth-party defendant Fausto Pangilinan as against the latter.
4. On the counterclaims on the complaint, third-party complaint and fourth-party complaint, the
same are hereby ordered dismissed for lack of merit.
SO ORDERED. 12
13 Respondent
PNB and Associated Bank appealed to the Court of Appeals. court affirmed the trial
court's decision in toto on September 30, 1992.
Hence these consolidated petitions which seek a reversal of respondent appellate court's decision.
PNB assigned two errors. First, the bank contends that respondent court erred in exempting the
Province of Tarlac from liability when, in fact, the latter was negligent because it delivered and released
the questioned checks to Fausto Pangilinan who was then already retired as the hospital's cashier and
administrative officer. PNB also maintains its innocence and alleges that as between two innocent
persons, the one whose act was the cause of the loss, in this case the Province of Tarlac, bears the
loss.
Next, PNB asserts that it was error for the court to order it to pay the province and then seek
reimbursement from Associated Bank. According to petitioner bank, respondent appellate Court should
have directed Associated Bank to pay the adjudged liability directly to the Province of Tarlac to avoid
circuity. 14
Associated Bank, on the other hand, argues that the order of liability should be totally reversed, with the
drawee bank (PNB) solely and ultimately bearing the loss.
Respondent court allegedly erred in applying Section 23 of the Philippine Clearing House Rules instead
of Central Bank Circular No. 580, which, being an administrative regulation issued pursuant to law, has
the force and effect of law. 15 The PCHC Rules are merely contractual stipulations among and between
member-banks. As such, they cannot prevail over the aforesaid CB Circular.
It likewise contends that PNB, the drawee bank, is estopped from asserting the defense of guarantee of
prior indorsements against Associated Bank, the collecting bank. In stamping the guarantee (for all prior
indorsements), it merely followed a mandatory requirement for clearing and had no choice but to place
the stamp of guarantee; otherwise, there would be no clearing. The bank will be in a "no-win" situation
and will always bear the loss as against the drawee bank. 16
Associated Bank also claims that since PNB already cleared and paid the value of the forged checks in
question, it is now estopped from asserting the defense that Associated Bank guaranteed prior
indorsements. The drawee bank allegedly has the primary duty to verify the genuineness of payee's
indorsement before paying the check. 17
While both banks are innocent of the forgery, Associated Bank claims that PNB was at fault and should
solely bear the loss because it cleared and paid the forged checks.
 xxx xxx xxx
The case at bench concerns checks payable to the order of Concepcion Emergency Hospital or its
Chief. They were properly issued and bear the genuine signatures of the drawer, the Province of Tarlac.
The infirmity in the questioned checks lies in the payee's (Concepcion Emergency Hospital)
indorsements which are forgeries. At the time of their indorsement, the checks were order instruments.
Checks having forged indorsements should be differentiated from forged checks or checks bearing the
forged signature of the drawer.
Section 23 of the Negotiable Instruments Law (NIL) provides:
Sec. 23. FORGED SIGNATURE, EFFECT OF. — When a signature is forged or made without
authority of the person whose signature it purports to be, it is wholly inoperative, and no right to
retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any
party thereto, can be acquired through or under such signature unless the party against whom
it is sought to enforce such right is precluded from setting up the forgery or want of authority.
A forged signature, whether it be that of the drawer or the payee, is wholly inoperative and no one can
gain title to the instrument through it. A person whose signature to an instrument was forged was never
a party and never consented to the contract which allegedly gave rise to such instrument. 18 Section 23
does not avoid the instrument but only the forged signature. 19 Thus, a forged indorsement does not
operate as the payee's indorsement.
The exception to the general rule in Section 23 is where "a party against whom it is sought to enforce a
right is precluded from setting up the forgery or want of authority." Parties who warrant or admit the
genuineness of the signature in question and those who, by their acts, silence or negligence are
estopped from setting up the defense of forgery, are precluded from using this defense. Indorsers,
persons negotiating by delivery and acceptors are warrantors of the genuineness of the signatures on
the instrument. 20
In bearer instruments, the signature of the payee or holder is unnecessary to pass title to the
instrument. Hence, when the indorsement is a forgery, only the person whose signature is forged can
raise the defense of forgery against a holder in due course. 21
The checks involved in this case are order instruments, hence, the following discussion is made with
reference to the effects of a forged indorsement on an instrument payable to order.
Where the instrument is payable to order at the time of the forgery, such as the checks in this case, the
signature of its rightful holder (here, the payee hospital) is essential to transfer title to the same
instrument. When the holder's indorsement is forged, all parties prior to the forgery may raise the real
defense of forgery against all parties subsequent thereto. 22
An indorser of an order instrument warrants "that the instrument is genuine and in all respects what it
purports to be; that he has a good title to it; that all prior parties had capacity to contract; and that the
instrument is at the time of his indorsement valid and subsisting." 23 He cannot interpose the defense
that signatures prior to him are forged.
A collecting bank where a check is deposited and which indorses the check upon presentment with the
drawee bank, is such an indorser. So even if the indorsement on the check deposited by the banks's
client is forged, the collecting bank is bound by his warranties as an indorser and cannot set up the
defense of forgery as against the drawee bank.
The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay the check
to the order of the payee. The drawer's instructions are reflected on the face and by the terms of the
check. Payment under a forged indorsement is not to the drawer's order. When the drawee bank pays a
person other than the payee, it does not comply with the terms of the check and violates its duty to
charge its customer's (the drawer) account only for properly payable items. Since the drawee bank did
not pay a holder or other person entitled to receive payment, it has no right to reimbursement from the
drawer. 24 The general rule then is that the drawee bank may not debit the drawer's account and is not
entitled to indemnification from the drawer. 25 The risk of loss must perforce fall on the drawee bank.
However, if the drawee bank can prove a failure by the customer/drawer to exercise ordinary care that
substantially contributed to the making of the forged signature, the drawer is precluded from asserting
the forgery.
If at the same time the drawee bank was also negligent to the point of substantially contributing to the
loss, then such loss from the forgery can be apportioned between the negligent drawer and the
negligent bank. 26
In cases involving a forged check, where the drawer's signature is forged, the drawer can recover from
the drawee bank. No drawee bank has a right to pay a forged check. If it does, it shall have to recredit
the amount of the check to the account of the drawer. The liability chain ends with the drawee bank
whose responsibility it is to know the drawer's signature since the latter is its customer. 27
In cases involving checks with forged indorsements, such as the present petition, the chain of liability
does not end with the drawee bank. The drawee bank may not debit the account of the drawer but may
generally pass liability back through the collection chain to the party who took from the forger and, of
course, to the forger himself, if available. 28 In other words, the drawee bank canseek reimbursement or
a return of the amount it paid from the presentor bank or person. 29 Theoretically, the latter can demand
reimbursement from the person who indorsed the check to it and so on. The loss falls on the party who
took the check from the forger, or on the forger himself.
In this case, the checks were indorsed by the collecting bank (Associated Bank) to the drawee bank
(PNB). The former will necessarily be liable to the latter for the checks bearing forged indorsements. If
the forgery is that of the payee's or holder's indorsement, the collecting bank is held liable, without
prejudice to the latter proceeding against the forger.
Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the drawee
bank. The former must necessarily return the money paid by the latter because it was paid wrongfully. 30
More importantly, by reason of the statutory warranty of a general indorser in section 66 of the
Negotiable Instruments Law, a collecting bank which indorses a check bearing a forged indorsement
and presents it to the drawee bank guarantees all prior indorsements, including the forged indorsement.
It warrants that the instrument is genuine, and that it is valid and subsisting at the time of his
indorsement. Because the indorsement is a forgery, the collecting bank commits a breach of this
warranty and will be accountable to the drawee bank. This liability scheme operates without regard to
fault on the part of the collecting/presenting bank. Even if the latter bank was not negligent, it would still
be liable to the drawee bank because of its indorsement.
The Court has consistently ruled that "the collecting bank or last endorser generally suffers the loss
because it has the duty to ascertain the genuineness of all prior endorsements considering that the act
of presenting the check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the endorsements." 31
The drawee bank is not similarly situated as the collecting bank because the former makes no warranty
as to the genuineness. of any indorsement. 32 The drawee bank's duty is but to verify the genuineness
of the drawer's signature and not of the indorsement because the drawer is its client.
Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the
check. The bank knows him, his address and history because he is a client. It has taken a risk on his
deposit. The bank is also in a better position to detect forgery, fraud or irregularity in the indorsement.
Hence, the drawee bank can recover the amount paid on the check bearing a forged indorsement from
the collecting bank. However, a drawee bank has the duty to promptly inform the presentor of the
forgery upon discovery. If the drawee bank delays in informing the presentor of the forgery, thereby
depriving said presentor of the right to recover from the forger, the former is deemed negligent and can
no longer recover from the presentor. 33
Applying these rules to the case at bench, PNB, the drawee bank, cannot debit the current account of
the Province of Tarlac because it paid checks which bore forged indorsements. However, if the Province
of Tarlac as drawer was negligent to the point of substantially contributing to the loss, then the drawee
bank PNB can charge its account. If both drawee bank-PNB and drawer-Province of Tarlac were
negligent, the loss should be properly apportioned between them.
The loss incurred by drawee bank-PNB can be passed on to the collecting bank-Associated Bank which
presented and indorsed the checks to it. Associated Bank can, in turn, hold the forger, Fausto
Pangilinan, liable.
If PNB negligently delayed in informing Associated Bank of the forgery, thus depriving the latter of the
opportunity to recover from the forger, it forfeits its right to reimbursement and will be made to bear the
loss.
After careful examination of the records, the Court finds that the Province of Tarlac was equally
negligent and should, therefore, share the burden of loss from the checks bearing a forged indorsement.
The Province of Tarlac permitted Fausto Pangilinan to collect the checks when the latter, having already
retired from government service, was no longer connected with the hospital. With the exception of the
first check (dated January 17, 1978), all the checks were issued and released after Pangilinan's
retirement on February 28, 1978. After nearly three years, the Treasurer's office was still releasing the
checks to the retired cashier. In addition, some of the aid allotment checks were released to Pangilinan
and the others to Elizabeth Juco, the new cashier. The fact that there were now two persons collecting
the checks for the hospital is an unmistakable sign of an irregularity which should have alerted
employees in the Treasurer's office of the fraud being committed. There is also evidence indicating that
the provincial employees were aware of Pangilinan's retirement and consequent dissociation from the
hospital. Jose Meru, the Provincial Treasurer, testified:.
ATTY. MORGA:
Q Now, is it true that for a given month there were two releases of checks, one went to Mr.
Pangilinan and one went to Miss Juco?
JOSE MERU:
A Yes, sir.
Q Will you please tell us how at the time (sic) when the authorized representative of
Concepcion Emergency Hospital is and was supposed to be Miss Juco?
A Well, as far as my investigation show (sic) the assistant cashier told me that Pangilinan
represented himself as also authorized to help in the release of these checks and we were
apparently misled because they accepted the representation of Pangilinan that he was helping
them in the release of the checks and besides according to them they were, Pangilinan, like
the rest, was able to present an official receipt to acknowledge these receipts and according to
them since this is a government check and believed that it will eventually go to the hospital
following the standard procedure of negotiating government checks, they released the checks
to Pangilinan aside from Miss Juco.34
The failure of the Province of Tarlac to exercise due care contributed to a significant degree to the loss
tantamount to negligence. Hence, the Province of Tarlac should be liable for part of the total amount
paid on the questioned checks.
The drawee bank PNB also breached its duty to pay only according to the terms of the check. Hence, it
cannot escape liability and should also bear part of the loss.
As earlier stated, PNB can recover from the collecting bank.
In the case of Associated Bank v. CA, 35 six crossed checks with forged indorsements were deposited in
the forger's account with the collecting bank and were later paid by four different drawee banks. The
Court found the collecting bank (Associated) to be negligent and held:
The Bank should have first verified his right to endorse the crossed checks, of which he was
not the payee, and to deposit the proceeds of the checks to his own account. The Bank was by
reason of the nature of the checks put upon notice that they were issued for deposit only to the
private respondent's account. . . .
The situation in the case at bench is analogous to the above case, for it was not the payee who
deposited the checks with the collecting bank. Here, the checks were all payable to Concepcion
Emergency Hospital but it was Fausto Pangilinan who deposited the checks in his personal savings
account.
Although Associated Bank claims that the guarantee stamped on the checks (All prior and/or lack of
endorsements guaranteed) is merely a requirement forced upon it by clearing house rules, it cannot but
remain liable. The stamp guaranteeing prior indorsements is not an empty rubric which a bank must
fulfill for the sake of convenience. A bank is not required to accept all the checks negotiated to it. It is
within the bank's discretion to receive a check for no banking institution would consciously or
deliberately accept a check bearing a forged indorsement. When a check is deposited with the
collecting bank, it takes a risk on its depositor. It is only logical that this bank be held accountable for
checks deposited by its customers.
A delay in informing the collecting bank (Associated Bank) of the forgery, which deprives it of the
opportunity to go after the forger, signifies negligence on the part of the drawee bank (PNB) and will
preclude it from claiming reimbursement.
It is here that Associated Bank's assignment of error concerning C.B. Circular No. 580 and Section 23
of the Philippine Clearing House Corporation Rules comes to fore. Under Section 4(c) of CB Circular
No. 580, items bearing a forged endorsement shall be returned within twenty-Sour (24) hours after
discovery of the forgery but in no event beyond the period fixed or provided by law for filing of a legal
action by the returning bank. Section 23 of the PCHC Rules deleted the requirement that items bearing
a forged endorsement should be returned within twenty-four hours. Associated Bank now argues that
the aforementioned Central Bank Circular is applicable. Since PNB did not return the questioned checks
within twenty-four hours, but several days later, Associated Bank alleges that PNB should be
considered negligent and not entitled to reimbursement of the amount it paid on the checks.
The Court deems it unnecessary to discuss Associated Bank's assertions that CB Circular No. 580 is an
administrative regulation issued pursuant to law and as such, must prevail over the PCHC rule. The
Central Bank circular was in force for all banks until June 1980 when the Philippine Clearing House
Corporation (PCHC) was set up and commenced operations. Banks in Metro Manila were covered by
the PCHC while banks located elsewhere still had to go through Central Bank Clearing. In any event,
the twenty-four-hour return rule was adopted by the PCHC until it was changed in 1982. The contending
banks herein, which are both branches in Tarlac province, are therefore not covered by PCHC Rules
but by CB Circular No. 580. Clearly then, the CB circular was applicable when the forgery of the checks
was discovered in 1981.
The rule mandates that the checks be returned within twenty-four hours after discovery of the forgery
but in no event beyond the period fixed by law for filing a legal action. The rationale of the rule is to give
the collecting bank (which indorsed the check) adequate opportunity to proceed against the forger. If
prompt notice is not given, the collecting bank maybe prejudiced and lose the opportunity to go after its
depositor.
The Court finds that even if PNB did not return the questioned checks to Associated Bank within twenty-
four hours, as mandated by the rule, PNB did not commit negligent delay. Under the circumstances,
PNB gave prompt notice to Associated Bank and the latter bank was not prejudiced in going after
Fausto Pangilinan. After the Province of Tarlac informed PNB of the forgeries, PNB necessarily had to
inspect the checks and conduct its own investigation. Thereafter, it requested the Provincial Treasurer's
office on March 31, 1981 to return the checks for verification. The Province of Tarlac returned the
checks only on April 22, 1981. Two days later, Associated Bank received the checks from PNB. 36
Associated Bank was also furnished a copy of the Province's letter of demand to PNB dated March 20,
1981, thus giving it notice of the forgeries. At this time, however, Pangilinan's account with Associated
had only P24.63 in it. 37Had Associated Bank decided to debit Pangilinan's account, it could not have
recovered the amounts paid on the questioned checks. In addition, while Associated Bank filed a fourth-
party complaint against Fausto Pangilinan, it did not present evidence against Pangilinan and even
presented him as its rebuttal witness. 38 Hence, Associated Bank was not prejudiced by PNB's failure to
comply with the twenty-four-hour return rule.
Next, Associated Bank contends that PNB is estopped from requiring reimbursement because the latter
paid and cleared the checks. The Court finds this contention unmeritorious. Even if PNB cleared and
paid the checks, it can still recover from Associated Bank. This is true even if the payee's Chief Officer
who was supposed to have indorsed the checks is also a customer of the drawee bank. 39 PNB's duty
was to verify the genuineness of the drawer's signature and not the genuineness of payee's
indorsement. Associated Bank, as the collecting bank, is the entity with the duty to verify the
genuineness of the payee's indorsement.
PNB also avers that respondent court erred in adjudging circuitous liability by directing PNB to return to
the Province of Tarlac the amount of the checks and then directing Associated Bank to reimburse PNB.
The Court finds nothing wrong with the mode of the award. The drawer, Province of Tarlac, is a clientor
customer of the PNB, not of Associated Bank. There is no privity of contract between the drawer and
the collecting bank.
The trial court made PNB and Associated Bank liable with legal interest from March 20, 1981, the date
of extrajudicial demand made by the Province of Tarlac on PNB. The payments to be made in this case
stem from the deposits of the Province of Tarlac in its current account with the PNB. Bank deposits are
considered under the law as loans. 40 Central Bank Circular No. 416 prescribes a twelve percent (12%)
interest per annum for loans, forebearance of money, goods or credits in the absence of express
stipulation. Normally, current accounts are likewise interest-bearing, by express contract, thus excluding
them from the coverage of CB Circular No. 416. In this case, however, the actual interest rate, if any, for
the current account opened by the Province of Tarlac with PNB was not given in evidence. Hence, the
Court deems it wise to affirm the trial court's use of the legal interest rate, or six percent (6%) per
annum. The interest rate shall be computed from the date of default, or the date of judicial or
extrajudicial demand. 41 The trial court did not err in granting legal interest from March 20, 1981, the
date of extrajudicial demand.
The Court finds as reasonable, the proportionate sharing of fifty percent - fifty percent (50%-50%). Due
to the negligence of the Province of Tarlac in releasing the checks to an unauthorized person (Fausto
Pangilinan), in allowing the retired hospital cashier to receive the checks for the payee hospital for a
period close to three years and in not properly ascertaining why the retired hospital cashier was
collecting checks for the payee hospital in addition to the hospital's real cashier, respondent Province
contributed to the loss amounting to P203,300.00 and shall be liable to the PNB for fifty (50%) percent
thereof. In effect, the Province of Tarlac can only recover fifty percent (50%) of P203,300.00 from PNB.
The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00. It is
liable on its warranties as indorser of the checks which were deposited by Fausto Pangilinan, having
guaranteed the genuineness of all prior indorsements, including that of the chief of the payee hospital,
Dr. Adena Canlas. Associated Bank was also remiss in its duty to ascertain the genuineness of the
payee's indorsement.
IN VIEW OF THE FOREGOING, the petition for review filed by the Philippine National Bank (G.R. No.
107612) is hereby PARTIALLY GRANTED. The petition for review filed by the Associated Bank (G.R.
No. 107382) is hereby DENIED. The decision of the trial court is MODIFIED. The Philippine National
Bank shall pay fifty percent (50%) of P203,300.00 to the Province of Tarlac, with legal interest from
March 20, 1981 until the payment thereof. Associated Bank shall pay fifty percent (50%) of P203,300.00
to the Philippine National Bank, likewise, with legal interest from March 20, 1981 until payment is made.
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.
Asianbank’s and Bitanga’s [sic] counterclaims are 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 III. x x x in finding that all the elements of a cause of action by BA Finance Corporation against
the former the amounts the latter is ordered to pay the plaintiff in Nos. 1, 2 and 3 above- Asianbank Corporation are present.
mentioned.
IV. x x x in finding that Article 1208 of the Civil Code is not applicable.
SO ORDERED.18 (emphasis and underscoring supplied)
V. x x x in awarding of exemplary damages even in the absence of moral, temperate,
Before the Court of Appeals, Asianbank, in its Appellant’s Brief, submitted the following issues for liquidated or compensatory damages and a finding of fact that Asianbank acted in a wanton,
consideration: fraudulent, reckless, oppressive or malevolent manner.
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 xxxx
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. VII. x x x in dismissing Asianbank’s counterclaim and Third Party complaint [against Malayan
3.01.1.4 Whether Malayan is liable to Asianbank for reimbursement of any sum of money which this Insurance].23(italics in the original; underscoring supplied)
Honorable Court may award to BA Finance in this case.19 (underscoring supplied)
And it proffered the following arguments: Petitioner proffers the following arguments against the application of Associated Bank v. CA to the case:
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 x x x [T]he rule established in the Associated Bank case has provided a speedier remedy for the payee
holder thereof under the Negotiable Instruments Law. to recover from erring collecting banks despite the absence of delivery of the negotiable instrument.
B. Asianbank, as collecting bank, is not liable to BA Finance as there was no privity of contract However, the application of the rule demands careful consideration of the factual settings and issues
between them. raised in the case x x x.
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 One of the relevant circumstances raised in Associated Bank is the existence of forgery or unauthorized
damage to BA Finance was due to the negligence of Chinabank. indorsement. x x x
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. xxxx
E. Assuming Asianbank is liable, BA Finance can claim only his proportionate interest on the
check as it is a joint payee thereof.
In the case at bar, Bitanga is authorized to indorse the check as the drawer names him as one of the
F. Bitanga alone is liable for the amount to BA Finance on the ground of unjust enrichment or
payees. Moreover, his signature is not a forgery nor has he or anyone forged the signature of the
solutio indebiti.
representative of BA Finance Corporation. No unauthorized indorsement appears on the check.
G. BA Finance is liable to pay Asianbank actual and exemplary damages.20 (underscoring
supplied)
xxxx
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 Absent the indispensable fact of forgery or unauthorized indorsement, the desirable shortcut rule cannot
delivered to…BA Finance by the issuer itself," held in the affirmative and accordingly affirmed the trial be applied,24 (underscoring supplied)
court’s decision but deleted the award of ₱20,000 as actual damages. 21
The petition fails.
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 Section 41 of the Negotiable Instruments Law provides:

I. x x x in applying the case of Associated Bank v. Court of Appeals, in the absence of factual Where an instrument is payable to the order of two or more payees or indorsees who are not
similarity and of the legal relationships necessary for the application of the desirable shortcut partners, all must indorse unless the one indorsing has authority to indorse for the others. (emphasis
rule. x x x and underscoring supplied)

II. x x x in not finding that x x x the general rule that the payee has no cause of action against Bitanga alone endorsed the crossed check, and petitioner allowed the deposit and release of the
the collecting bank absent delivery to him must be applied. 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.
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, 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 Fixed savings, and current deposits of money in banks and similar institutions shall be governed by the
check was further negotiated) can turn to either Bitanga or BA Finance for full recompense. provisions concerning simple loan,

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
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.

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:
G.R. No. 129015 August 13, 2004
SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC., petitioner,
vs.
FAR EAST BANK AND TRUST COMPANY AND COURT OF APPEALS, respondents.
DECISION
TINGA, J.:
Called to fore in the present petition is a classic textbook question – if a bank pays out on a forged
check, is it liable to reimburse the drawer from whose account the funds were paid out? The Court of
Appeals, in reversing a trial court decision adverse to the bank, invoked tenuous reasoning to acquit the
bank of liability. We reverse, applying time-honored principles of law.
The salient facts follow.
Plaintiff Samsung Construction Company Philippines, Inc. ("Samsung Construction"), while based in
Biñan, Laguna, maintained a current account with defendant Far East Bank and Trust
Company1 ("FEBTC") at the latter’s Bel-Air, Makati branch.2 The sole signatory to Samsung
Construction’s account was Jong Kyu Lee ("Jong"), its Project Manager, 3 while the checks remained in
the custody of the company’s accountant, Kyu Yong Lee ("Kyu").4
On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC Check No. 432100 to the
bank’s branch in Bel-Air, Makati. The check, payable to cash and drawn against Samsung
Construction’s current account, was in the amount of Nine Hundred Ninety Nine Thousand Five
Hundred Pesos (P999,500.00). The bank teller, Cleofe Justiani, first checked the balance of Samsung
Construction’s account. After ascertaining there were enough funds to cover the check, 5 she compared
the signature appearing on the check with the specimen signature of Jong as contained in the specimen
signature card with the bank. After comparing the two signatures, Justiani was satisfied as to the
authenticity of the signature appearing on the check. She then asked Gonzaga to submit proof of his
identity, and the latter presented three (3) identification cards.6
At the same time, Justiani forwarded the check to the branch Senior Assistant Cashier Gemma Velez,
as it was bank policy that two bank branch officers approve checks exceeding One Hundred Thousand
Pesos, for payment or encashment. Velez likewise counterchecked the signature on the check as
against that on the signature card. He too concluded that the check was indeed signed by Jong. Velez
then forwarded the check and signature card to Shirley Syfu, another bank officer, for approval. Syfu
then noticed that Jose Sempio III ("Sempio"), the assistant accountant of Samsung Construction, was
also in the bank. Sempio was well-known to Syfu and the other bank officers, he being the assistant
accountant of Samsung Construction. Syfu showed the check to Sempio, who vouched for the
genuineness of Jong’s signature. Confirming the identity of Gonzaga, Sempio said that the check was
for the purchase of equipment for Samsung Construction. Satisfied with the genuineness of the
signature of Jong, Syfu authorized the bank’s encashment of the check to Gonzaga.
The following day, the accountant of Samsung Construction, Kyu, examined the balance of the bank
account and discovered that a check in the amount of Nine Hundred Ninety Nine Thousand Five
Hundred Pesos (P999,500.00) had been encashed. Aware that he had not prepared such a check for
Jong’s signature, Kyu perused the checkbook and found that the last blank check was missing.7 He
reported the matter to Jong, who then proceeded to the bank. Jong learned of the encashment of the
check, and realized that his signature had been forged. The Bank Manager reputedly told Jong that he
would be reimbursed for the amount of the check.8 Jong proceeded to the police station and consulted
with his lawyers.9 Subsequently, a criminal case for qualified theft was filed against Sempio before the
Laguna court.10
In a letter dated 6 May 1992, Samsung Construction, through counsel, demanded that FEBTC credit to
it the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), with
interest.11 In response, FEBTC said that it was still conducting an investigation on the matter.
Unsatisfied, Samsung Construction filed a Complaint on 10 June 1992 for violation of Section 23 of the
Negotiable Instruments Law, and prayed for the payment of the amount debited as a result of the
questioned check plus interest, and attorney’s fees.12 The case was docketed as Civil Case No. 92-
61506 before the Regional Trial Court ("RTC") of Manila, Branch 9. 13
During the trial, both sides presented their respective expert witnesses to testify on the claim that Jong’s
signature was forged. Samsung Corporation, which had referred the check for investigation to the NBI,
presented Senior NBI Document Examiner Roda B. Flores. She testified that based on her examination,
she concluded that Jong’s signature had been forged on the check. On the other hand, FEBTC, which
had sought the assistance of the Philippine National Police (PNP),14 presented Rosario C. Perez, a
document examiner from the PNP Crime Laboratory. She testified that her findings showed that Jong’s
signature on the check was genuine.15
Confronted with conflicting expert testimony, the RTC chose to believe the findings of the NBI expert. In
a Decisiondated 25 April 1994, the RTC held that Jong’s signature on the check was forged and
accordingly directed the bank to pay or credit back to Samsung Construction’s account the amount of
Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), together with interest tolled
from the time the complaint was filed, and attorney’s fees in the amount of Fifteen Thousand Pesos
(P15,000.00).
FEBTC timely appealed to the Court of Appeals. On 28 November 1996, the Special Fourteenth
Division of the Court of Appeals rendered a Decision,16 reversing the RTC Decision and absolving
FEBTC from any liability. The Court of Appeals held that the contradictory findings of the NBI and the
PNP created doubt as to whether there was forgery.17 Moreover, the appellate court also held that
assuming there was forgery, it occurred due to the negligence of Samsung Construction, imputing
blame on the accountant Kyu for lack of care and prudence in keeping the checks, which if observed
would have prevented Sempio from gaining access thereto. 18 The Court of Appeals invoked the ruling
in PNB v. National City Bank of New York19 that, if a loss, which must be borne by one or two innocent
persons, can be traced to the neglect or fault of either, such loss would be borne by the negligent party,
even if innocent of intentional fraud.20
Samsung Construction now argues that the Court of Appeals had seriously misapprehended the facts
when it overturned the RTC’s finding of forgery. It also contends that the appellate court erred in finding
that it had been negligent in safekeeping the check, and in applying the equity principle enunciated
in PNB v. National City Bank of New York.
Since the trial court and the Court of Appeals arrived at contrary findings on questions of fact, the Court
is obliged to examine the record to draw out the correct conclusions. Upon examination of the record,
and based on the applicable laws and jurisprudence, we reverse the Court of Appeals.
Section 23 of the Negotiable Instruments Law states:
When a signature is forged or made without the authority of the person whose signature it
purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against any party thereto, can be acquired
through or under such signature, unless the party against whom it is sought to enforce such
right is precluded from setting up the forgery or want of authority. (Emphasis supplied)
The general rule is to the effect that a forged signature is "wholly inoperative," and payment made
"through or under such signature" is ineffectual or does not discharge the instrument.21 If payment is
made, the drawee cannot charge it to the drawer’s account. The traditional justification for the result is
that the drawee is in a superior position to detect a forgery because he has the maker’s signature and is
expected to know and compare it.22 The rule has a healthy cautionary effect on banks by encouraging
care in the comparison of the signatures against those on the signature cards they have on file.
Moreover, the very opportunity of the drawee to insure and to distribute the cost among its customers
who use checks makes the drawee an ideal party to spread the risk to insurance. 23
Brady, in his treatise The Law of Forged and Altered Checks, elucidates:
When a person deposits money in a general account in a bank, against which he has the
privilege of drawing checks in the ordinary course of business, the relationship between the
bank and the depositor is that of debtor and creditor. So far as the legal relationship between
the two is concerned, the situation is the same as though the bank had borrowed money from
the depositor, agreeing to repay it on demand, or had bought goods from the depositor,
agreeing to pay for them on demand. The bank owes the depositor money in the same sense
that any debtor owes money to his creditor. Added to this, in the case of bank and depositor,
there is, of course, the bank’s obligation to pay checks drawn by the depositor in proper form
and presented in due course. When the bank receives the deposit, it impliedly agrees to pay
only upon the depositor’s order. When the bank pays a check, on which the depositor’s
signature is a forgery, it has failed to comply with its contract in this respect. Therefore, the
bank is held liable.
The fact that the forgery is a clever one is immaterial. The forged signature may so closely
resemble the genuine as to defy detection by the depositor himself. And yet, if a bank pays the
check, it is paying out its own money and not the depositor’s.
The forgery may be committed by a trusted employee or confidential agent. The bank still must
bear the loss. Even in a case where the forged check was drawn by the depositor’s partner,
the loss was placed upon the bank. The case referred to is Robinson v. Security Bank, Ark.,
216 S. W. Rep. 717. In this case, the plaintiff brought suit against the defendant bank for
money which had been deposited to the plaintiff’s credit and which the bank had paid out on
checks bearing forgeries of the plaintiff’s signature.
xxx
It was held that the bank was liable. It was further held that the fact that the plaintiff waited
eight or nine months after discovering the forgery, before notifying the bank, did not, as a
matter of law, constitute a ratification of the payment, so as to preclude the plaintiff from
holding the bank liable. xxx
This rule of liability can be stated briefly in these words: "A bank is bound to know its
depositors’ signature." The rule is variously expressed in the many decisions in which the
question has been considered. But they all sum up to the proposition that a bank must know
the signatures of those whose general deposits it carries.24
By no means is the principle rendered obsolete with the advent of modern commercial transactions.
Contemporary texts still affirm this well-entrenched standard. Nickles, in his book Negotiable
Instruments and Other Related Commercial Paper wrote, thus:
The deposit contract between a payor bank and its customer determines who can draw against
the customer’s account by specifying whose signature is necessary on checks that are
chargeable against the customer’s account. Therefore, a check drawn against the account of
an individual customer that is signed by someone other than the customer, and without
authority from her, is not properly payable and is not chargeable to the customer’s account,
inasmuch as any "unauthorized signature on an instrument is ineffective" as the signature of
the person whose name is signed.25
Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute defense by the party
whose signature is forged.26 On the premise that Jong’s signature was indeed forged, FEBTC is liable
for the loss since it authorized the discharge of the forged check. Such liability attaches even if the bank
exerts due diligence and care in preventing such faulty discharge. Forgeries often deceive the eye of
the most cautious experts; and when a bank has been so deceived, it is a harsh rule which compels it to
suffer although no one has suffered by its being deceived.27 The forgery may be so near like the
genuine as to defy detection by the depositor himself, and yet the bank is liable to the depositor if it pays
the check.28
Thus, the first matter of inquiry is into whether the check was indeed forged. A document formally
presented is presumed to be genuine until it is proved to be fraudulent. In a forgery trial, this
presumption must be overcome but this can only be done by convincing testimony and effective
illustrations.29
In ruling that forgery was not duly proven, the Court of Appeals held:
[There] is ground to doubt the findings of the trial court sustaining the alleged forgery in view of
the conflicting conclusions made by handwriting experts from the NBI and the PNP, both
agencies of the government.
xxx
These contradictory findings create doubt on whether there was indeed a forgery. In the case
of Tenio-Obsequio v. Court of Appeals, 230 SCRA 550, the Supreme Court held that forgery
cannot be presumed; it must be proved by clear, positive and convincing evidence.
This reasoning is pure sophistry. Any litigator worth his or her salt would never allow an opponent’s
expert witness to stand uncontradicted, thus the spectacle of competing expert witnesses is not
unusual. The trier of fact will have to decide which version to believe, and explain why or why not such
version is more credible than the other. Reliance therefore cannot be placed merely on the fact that
there are colliding opinions of two experts, both clothed with the presumption of official duty, in order to
draw a conclusion, especially one which is extremely crucial. Doing so is tantamount to a jurisprudential
cop-out.
Much is expected from the Court of Appeals as it occupies the penultimate tier in the judicial hierarchy.
This Court has long deferred to the appellate court as to its findings of fact in the understanding that it
has the appropriate skill and competence to plough through the minutiae that scatters the factual field.
In failing to thoroughly evaluate the evidence before it, and relying instead on presumptions haphazardly
drawn, the Court of Appeals was sadly remiss. Of course, courts, like humans, are fallible, and not
every error deserves a stern rebuke. Yet, the appellate court’s error in this case warrants special
attention, as it is absurd and even dangerous as a precedent. If this rationale were adopted as a
governing standard by every court in the land, barely any actionable claim would prosper, defeated as it
would be by the mere invocation of the existence of a contrary "expert" opinion.
On the other hand, the RTC did adjudge the testimony of the NBI expert as more credible than that of
the PNP, and explained its reason behind the conclusion:
After subjecting the evidence of both parties to a crucible of analysis, the court arrived at the
conclusion that the testimony of the NBI document examiner is more credible because the
testimony of the PNP Crime Laboratory Services document examiner reveals that there are a
lot of differences in the questioned signature as compared to the standard specimen signature.
Furthermore, as testified to by Ms. Rhoda Flores, NBI expert, the manner of execution of the
standard signatures used reveals that it is a free rapid continuous execution or stroke as
shown by the tampering terminal stroke of the signatures whereas the questioned signature is
a hesitating slow drawn execution stroke. Clearly, the person who executed the questioned
signature was hesitant when the signature was made.30
During the testimony of PNP expert Rosario Perez, the RTC bluntly noted that "apparently, there [are]
differences on that questioned signature and the standard signatures."31 This Court, in examining the
signatures, makes a similar finding. The PNP expert excused the noted "differences" by asserting that
they were mere "variations," which are normal deviations found in writing. 32 Yet the RTC, which had the
opportunity to examine the relevant documents and to personally observe the expert witness, clearly
disbelieved the PNP expert. The Court similarly finds the testimony of the PNP expert as unconvincing.
During the trial, she was confronted several times with apparent differences between strokes in the
questioned signature and the genuine samples. Each time, she would just blandly assert that these
differences were just "variations,"33 as if the mere conjuration of the word would sufficiently disquiet
whatever doubts about the deviations. Such conclusion, standing alone, would be of little or no value
unless supported by sufficiently cogent reasons which might amount almost to a demonstration. 34
The most telling difference between the questioned and genuine signatures examined by the PNP is in
the final upward stroke in the signature, or "the point to the short stroke of the terminal in the capital
letter ‘L,’" as referred to by the PNP examiner who had marked it in her comparison chart as "point no.
6." To the plain eye, such upward final stroke consists of a vertical line which forms a ninety degree
(90º) angle with the previous stroke. Of the twenty one (21) other genuine samples examined by the
PNP, at least nine (9) ended with an upward stroke.35 However, unlike the questioned signature, the
upward strokes of eight (8) of these signatures are looped, while the upward stroke of the
seventh36 forms a severe forty-five degree (45º) with the previous stroke. The difference is glaring, and
indeed, the PNP examiner was confronted with the inconsistency in point no. 6.
Q: Now, in this questioned document point no. 6, the "s" stroke is directly upwards.
A: Yes, sir.
Q: Now, can you look at all these standard signature (sic) were (sic) point 6 is repeated or the
last stroke "s" is pointing directly upwards?
A: There is none in the standard signature, sir.37
Again, the PNP examiner downplayed the uniqueness of the final stroke in the questioned signature as
a mere variation,38 the same excuse she proffered for the other marked differences noted by the Court
and the counsel for petitioner.39
There is no reason to doubt why the RTC gave credence to the testimony of the NBI examiner, and not
the PNP expert’s. The NBI expert, Rhoda Flores, clearly qualifies as an expert witness. A document
examiner for fifteen years, she had been promoted to the rank of Senior Document Examiner with the
NBI, and had held that rank for twelve years prior to her testimony. She had placed among the top five
examinees in the Competitive Seminar in Question Document Examination, conducted by the NBI
Academy, which qualified her as a document examiner. 40She had trained with the Royal Hongkong
Police Laboratory and is a member of the International Association for Identification. 41 As of the time she
testified, she had examined more than fifty to fifty-five thousand questioned documents, on an average
of fifteen to twenty documents a day.42 In comparison, PNP document examiner Perez admitted to
having examined only around five hundred documents as of her testimony. 43
In analyzing the signatures, NBI Examiner Flores utilized the scientific comparative examination method
consisting of analysis, recognition, comparison and evaluation of the writing habits with the use of
instruments such as a magnifying lense, a stereoscopic microscope, and varied lighting substances.
She also prepared enlarged photographs of the signatures in order to facilitate the necessary
comparisons.44 She compared the questioned signature as against ten (10) other sample signatures of
Jong. Five of these signatures were executed on checks previously issued by Jong, while the other five
contained in business letters Jong had signed.45 The NBI found that there were significant differences in
the handwriting characteristics existing between the questioned and the sample signatures, as to
manner of execution, link/connecting strokes, proportion characteristics, and other identifying details. 46
The RTC was sufficiently convinced by the NBI examiner’s testimony, and explained her reasons in
its Decisions. While the Court of Appeals disagreed and upheld the findings of the PNP, it failed to
convincingly demonstrate why such findings were more credible than those of the NBI expert. As a
throwaway, the assailed Decision noted that the PNP, not the NBI, had the opportunity to examine the
specimen signature card signed by Jong, which was relied upon by the employees of FEBTC in
authenticating Jong’s signature. The distinction is irrelevant in establishing forgery. Forgery can be
established comparing the contested signatures as against those of any sample signature duly
established as that of the persons whose signature was forged.
FEBTC lays undue emphasis on the fact that the PNP examiner did compare the questioned signature
against the bank signature cards. The crucial fact in question is whether or not the check was
forged, not whether the bank could have detected the forgery. The latter issue becomes relevant
only if there is need to weigh the comparative negligence between the bank and the party whose
signature was forged.
At the same time, the Court of Appeals failed to assess the effect of Jong’s testimony that the signature
on the check was not his.47 The assertion may seem self-serving at first blush, yet it cannot be ignored
that Jong was in the best position to know whether or not the signature on the check was his. While his
claim should not be taken at face value, any averments he would have on the matter, if adjudged as
truthful, deserve primacy in consideration. Jong’s testimony is supported by the findings of the NBI
examiner. They are also backed by factual circumstances that support the conclusion that the assailed
check was indeed forged. Judicial notice can be taken that is highly unusual in practice for a business
establishment to draw a check for close to a million pesos and make it payable to cash or bearer, and
not to order. Jong immediately reported the forgery upon its discovery. He filed the appropriate criminal
charges against Sempio, the putative forger.48
Now for determination is whether Samsung Construction was precluded from setting up the defense of
forgery under Section 23 of the Negotiable Instruments Law. The Court of Appeals concluded that
Samsung Construction was negligent, and invoked the doctrines that "where a loss must be borne by
one of two innocent person, can be traced to the neglect or fault of either, it is reasonable that it would
be borne by him, even if innocent of any intentional fraud, through whose means it has succeeded 49 or
who put into the power of the third person to perpetuate the wrong." 50 Applying these rules, the Court of
Appeals determined that it was the negligence of Samsung Construction that allowed the encashment
of the forged check.
In the case at bar, the forgery appears to have been made possible through the acts of one
Jose Sempio III, an assistant accountant employed by the plaintiff Samsung [Construction] Co.
Philippines, Inc. who supposedly stole the blank check and who presumably is responsible for
its encashment through a forged signature of Jong Kyu Lee. Sempio was assistant to the
Korean accountant who was in possession of the blank checks and who through negligence,
enabled Sempio to have access to the same. Had the Korean accountant been more careful
and prudent in keeping the blank checks Sempio would not have had the chance to steal a
page thereof and to effect the forgery. Besides, Sempio was an employee who appears to
have had dealings with the defendant Bank in behalf of the plaintiff corporation and on the date
the check was encashed, he was there to certify that it was a genuine check issued to
purchase equipment for the company.51
We recognize that Section 23 of the Negotiable Instruments Law bars a party from setting up the
defense of forgery if it is guilty of negligence.52 Yet, we are unable to conclude that Samsung
Construction was guilty of negligence in this case. The appellate court failed to explain precisely how
the Korean accountant was negligent or how more care and prudence on his part would have prevented
the forgery. We cannot sustain this "tar and feathering" resorted to without any basis.
The bare fact that the forgery was committed by an employee of the party whose signature was forged
cannot necessarily imply that such party’s negligence was the cause for the forgery. Employers do not
possess the preternatural gift of cognition as to the evil that may lurk within the hearts and minds of their
employees. The Court’s pronouncement in PCI Bank v. Court of Appeals53 applies in this case, to wit:
[T]he mere fact that the forgery was committed by a drawer-payor’s confidential employee or
agent, who by virtue of his position had unusual facilities for perpetrating the fraud and
imposing the forged paper upon the bank, does not entitle the bank to shift the loss to the
drawer-payor, in the absence of some circumstance raising estoppel against the drawer. 54
Admittedly, the record does not clearly establish what measures Samsung Construction employed to
safeguard its blank checks. Jong did testify that his accountant, Kyu, kept the checks inside a "safety
box,"55 and no contrary version was presented by FEBTC. However, such testimony cannot prove that
the checks were indeed kept in a safety box, as Jong’s testimony on that point is hearsay, since Kyu,
and not Jong, would have the personal knowledge as to how the checks were kept.
Still, in the absence of evidence to the contrary, we can conclude that there was no negligence on
Samsung Construction’s part. The presumption remains that every person takes ordinary care of his
concerns,56 and that the ordinary course of business has been followed. 57 Negligence is not presumed,
but must be proven by him who alleges it.58 While the complaint was lodged at the instance of Samsung
Construction, the matter it had to prove was the claim it had alleged - whether the check was forged. It
cannot be required as well to prove that it was not negligent, because the legal presumption remains
that ordinary care was employed.
Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact that Samsung Construction
was negligent. While the payee, as in this case, may not have the personal knowledge as to the
standard procedures observed by the drawer, it well has the means of disputing the presumption of
regularity. Proving a negative fact may be "a difficult office," 59 but necessarily so, as it seeks to
overcome a presumption in law. FEBTC was unable to dispute the presumption of ordinary care
exercised by Samsung Construction, hence we cannot agree with the Court of Appeals’ finding of
negligence.
The assailed Decision replicated the extensive efforts which FEBTC devoted to establish that there was
no negligence on the part of the bank in its acceptance and payment of the forged check. However, the
degree of diligence exercised by the bank would be irrelevant if the drawer is not precluded from setting
up the defense of forgery under Section 23 by his own negligence. The rule of equity enunciated in PNB
v. National City Bank of New York, 60 as relied upon by the Court of Appeals, deserves careful
examination.
The point in issue has sometimes been said to be that of negligence. The drawee who has
paid upon the forged signature is held to bear the loss, because he has been negligent
in failing to recognize that the handwriting is not that of his customer. But it follows
obviously that if the payee, holder, or presenter of the forged paper has himself been in default,
if he has himself been guilty of a negligence prior to that of the banker, or if by any act of his
own he has at all contributed to induce the banker's negligence, then he may lose his right to
cast the loss upon the banker.61 (Emphasis supplied)
Quite palpably, the general rule remains that the drawee who has paid upon the forged signature bears
the loss. The exception to this rule arises only when negligence can be traced on the part of the drawer
whose signature was forged, and the need arises to weigh the comparative negligence between the
drawer and the drawee to determine who should bear the burden of loss. The Court finds no basis to
conclude that Samsung Construction was negligent in the safekeeping of its checks. For one, the
settled rule is that the mere fact that the depositor leaves his check book lying around does not
constitute such negligence as will free the bank from liability to him, where a clerk of the depositor or
other persons, taking advantage of the opportunity, abstract some of the check blanks, forges the
depositor’s signature and collect on the checks from the bank. 62 And for another, in point of fact
Samsung Construction was not negligent at all since it reported the forgery almost immediately upon
discovery.63
It is also worth noting that the forged signatures in PNB v. National City Bank of New York were not of
the drawer, but of indorsers. The same circumstance attends PNB v. Court of Appeals,64 which was also
cited by the Court of Appeals. It is accepted that a forged signature of the drawer differs in treatment
than a forged signature of the indorser.
 The justification for the distinction between forgery of the signature of the drawer and forgery of
an indorsement is that the drawee is in a position to verify the drawer’s signature by
comparison with one in his hands, but has ordinarily no opportunity to verify an indorsement.65
Thus, a drawee bank is generally liable to its depositor in paying a check which bears either a
forgery of the drawer’s signature or a forged indorsement. But the bank may, as a general rule,
recover back the money which it has paid on a check bearing a forged indorsement, whereas it
has not this right to the same extent with reference to a check bearing a forgery of the drawer’s
signature.66
The general rule imputing liability on the drawee who paid out on the forgery holds in this case.
Since FEBTC puts into issue the degree of care it exercised before paying out on the forged check, we
might as well comment on the bank’s performance of its duty. It might be so that the bank complied with
its own internal rules prior to paying out on the questionable check. Yet, there are several troubling
circumstances that lead us to believe that the bank itself was remiss in its duty.
encashed.74 In fact, Velez had to inquire with the other officers of the bank as to whether Sempio was
actually known to the employees of the bank.75 Obviously, Velez had no personal knowledge as to the
past relationship between FEBTC and Sempio, and any averments of her to that effect should be
deemed hearsay evidence. Interestingly, FEBTC did not present as a witness any other employee of
their Bel-Air branch, including those who supposedly had transacted with Sempio before.
Even assuming that FEBTC had a standing habit of dealing with Sempio, acting in behalf of Samsung
Construction, the irregular circumstances attending the presentment of the forged check should have
put the bank on the highest degree of alert. The Court recently emphasized that the highest degree of
care and diligence is required of banks.
Banks are engaged in a business impressed with public interest, and it is their duty to protect
in return their many clients and depositors who transact business with them. They have the
obligation to treat their client’s account meticulously and with the highest degree of care,
considering the fiduciary nature of their relationship. The diligence required of banks, therefore,
is more than that of a good father of a family.76

The fact that the check was made out in the amount of nearly one million pesos is unusual enough to
require a higher degree of caution on the part of the bank. Indeed, FEBTC confirms this through its own
internal procedures. Checks below twenty-five thousand pesos require only the approval of the teller;
those between twenty-five thousand to one hundred thousand pesos necessitate the approval of one
bank officer; and should the amount exceed one hundred thousand pesos, the concurrence of two bank
officers is required.67
In this case, not only did the amount in the check nearly total one million pesos, it was also payable to
cash. That latter circumstance should have aroused the suspicion of the bank, as it is not ordinary
business practice for a check for such large amount to be made payable to cash or to bearer, instead of
to the order of a specified person.68Moreover, the check was presented for payment by one Roberto
Gonzaga, who was not designated as the payee of the check, and who did not carry with him any
written proof that he was authorized by Samsung Construction to encash the check. Gonzaga, a
stranger to FEBTC, was not even an employee of Samsung Construction. 69 These circumstances are
already suspicious if taken independently, much more so if they are evaluated in concurrence. Given
the shadiness attending Gonzaga’s presentment of the check, it was not sufficient for FEBTC to have
merely complied with its internal procedures, but mandatory that all earnest efforts be undertaken to
ensure the validity of the check, and of the authority of Gonzaga to collect payment therefor.
Given the circumstances, extraordinary diligence dictates that FEBTC should have ascertained from
Jong personally that the signature in the questionable check was his.
Still, even if the bank performed with utmost diligence, the drawer whose signature was forged may still
recover from the bank as long as he or she is not precluded from setting up the defense of forgery. After
all, Section 23 of the Negotiable Instruments Law plainly states that no right to enforce the payment of a
check can arise out of a forged signature. Since the drawer, Samsung Construction, is not precluded by
negligence from setting up the forgery, the general rule should apply. Consequently, if a bank pays a
forged check, it must be considered as paying out of its funds and cannot charge the amount so paid to
the account of the depositor.77 A bank is liable, irrespective of its good faith, in paying a forged check. 78
WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 28 November
1996 is REVERSED, and the Decision of the Regional Trial Court of Manila, Branch 9, dated 25 April
1994 is REINSTATED. Costs against respondent.
SO ORDERED.

According to FEBTC Senior Assistant Cashier Gemma Velez, the bank tried, but failed, to contact Jong
over the phone to verify the check.70 She added that calling the issuer or drawer of the check to verify
the same was not part of the standard procedure of the bank, but an "extra effort."71 Even assuming that
such personal verification is tantamount to extraordinary diligence, it cannot be denied that FEBTC still
paid out the check despite the absence of any proof of verification from the drawer. Instead, the bank
seems to have relied heavily on the say-so of Sempio, who was present at the bank at the time the
check was presented.

FEBTC alleges that Sempio was well-known to the bank officers, as he had regularly transacted with
the bank in behalf of Samsung Construction. It was even claimed that everytime FEBTC would contact
Jong about problems with his account, Jong would hand the phone over to Sempio.72 However, the only
proof of such allegations is the testimony of Gemma Velez, who also testified that she did not know
Sempio personally,73 and had met Sempio for the first time only on the day the check was
G.R. No. 150228 July 30, 2009
BANK OF AMERICA NT & SA, Petitioner,
vs.
PHILIPPINE RACING CLUB, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court from the
Decision1 promulgated on July 16, 2001 by the former Second Division of the Court of Appeals (CA), in
CA-G.R. CV No. 45371 entitled "Philippine Racing Club, Inc. v. Bank of America NT & SA," affirming the
Decision2 dated March 17, 1994 of the Regional Trial Court (RTC) of Makati, Branch 135 in Civil Case
No. 89-5650, in favor of the respondent. Likewise, the present petition assails the
Resolution3 promulgated on September 28, 2001, denying the Motion for Reconsideration of the CA
Decision.
The facts of this case as narrated in the assailed CA Decision are as follows:
Plaintiff-appellee PRCI is a domestic corporation which maintains several accounts with different banks
in the Metro Manila area. Among the accounts maintained was Current Account No. 58891-012 with
defendant-appellant BA (Paseo de Roxas Branch). The authorized joint signatories with respect to said
Current Account were plaintiff-appellee’s President (Antonia Reyes) and Vice President for Finance
(Gregorio Reyes).
On or about the 2nd week of December 1988, the President and Vice President of plaintiff-appellee
corporation were scheduled to go out of the country in connection with the corporation’s business. In
order not to disrupt operations in their absence, they pre-signed several checks relating to Current
Account No. 58891-012. The intention was to insure continuity of plaintiff-appellee’s operations by
making available cash/money especially to settle obligations that might become due. These checks
were entrusted to the accountant with instruction to make use of the same as the need arose. The
internal arrangement was, in the event there was need to make use of the checks, the accountant would
prepare the corresponding voucher and thereafter complete the entries on the pre-signed checks.
It turned out that on December 16, 1988, a John Doe presented to defendant-appellant bank for
encashment a couple of plaintiff-appellee corporation’s checks (Nos. 401116 and 401117) with the
indicated value of P110,000.00 each. It is admitted that these 2 checks were among those presigned by
plaintiff-appellee corporation’s authorized signatories.
The two (2) checks had similar entries with similar infirmities and irregularities. On the space where the
name of the payee should be indicated (Pay To The Order Of) the following 2-line entries were instead
typewritten: on the upper line was the word "CASH" while the lower line had the following typewritten
words, viz: "ONE HUNDRED TEN THOUSAND PESOS ONLY." Despite the highly irregular entries on
the face of the checks, defendant-appellant bank, without as much as verifying and/or confirming the
legitimacy of the checks considering the substantial amount involved and the obvious infirmity/defect of
the checks on their faces, encashed said checks. A verification process, even by was of a telephone call
to PRCI office, would have taken less than ten (10) minutes. But this was not done by BA. Investigation
conducted by plaintiff-appellee corporation yielded the fact that there was no transaction involving PRCI
that call for the payment of P220,000.00 to anyone. The checks appeared to have come into the hands
of an employee of PRCI (one Clarita Mesina who was subsequently criminally charged for qualified
theft) who eventually completed without authority the entries on the pre-signed checks. PRCI’s demand
for defendant-appellant to pay fell on deaf ears. Hence, the complaint. 4
After due proceedings, the trial court rendered a Decision in favor of respondent, the dispositive portion
of which reads:
PREMISES CONSIDERED, judgment is hereby rendered in favor of plaintiff and against the defendant,
and the latter is ordered to pay plaintiff:
(1) The sum of Two Hundred Twenty Thousand (₱220,000.00) Pesos, with legal interest to be
computed from date of the filing of the herein complaint;
(2) The sum of Twenty Thousand (₱20,000.00) Pesos by way of attorney’s fees;
(3) The sum of Ten Thousand (₱10,000.00) Pesos for litigation expenses, and
(4) To pay the costs of suit.
SO ORDERED.5
Petitioner appealed the aforesaid trial court Decision to the CA which, however, affirmed said decision
in toto in its July 16, 2001 Decision. Petitioner’s Motion for Reconsideration of the CA Decision was
subsequently denied on September 28, 2001.
Petitioner now comes before this Court arguing that:
I. The Court of Appeals gravely erred in holding that the proximate cause of respondent’s loss was
petitioner’s encashment of the checks.
A. The Court of Appeals gravely erred in holding that petitioner was liable for the
amount of the checks despite the fact that petitioner was merely fulfilling its obligation
under law and contract.
B. The Court of Appeals gravely erred in holding that petitioner had a duty to verify
the encashment, despite the absence of any obligation to do so.
C. The Court of Appeals gravely erred in not applying Section 14 of the Negotiable
Instruments Law, despite its clear applicability to this case;
II. The Court of Appeals gravely erred in not holding that the proximate cause of respondent’s loss was
its own grossly negligent practice of pre-signing checks without payees and amounts and delivering
these pre-signed checks to its employees (other than their signatories).
III. The Court of Appeals gravely erred in affirming the trial court’s award of attorney’s fees despite the
absence of any applicable ground under Article 2208 of the Civil Code.
IV. The Court of Appeals gravely erred in not awarding attorney’s fees, moral and exemplary damages,
and costs of suit in favor of petitioner, who clearly deserves them. 6
From the discussions of both parties in their pleadings, the key issue to be resolved in the present case
is whether the proximate cause of the wrongful encashment of the checks in question was due to (a)
petitioner’s failure to make a verification regarding the said checks with the respondent in view of the
misplacement of entries on the face of the checks or (b) the practice of the respondent of pre-signing
blank checks and leaving the same with its employees.
Petitioner insists that it merely fulfilled its obligation under law and contract when it encashed the
aforesaid checks. Invoking Sections 1267 and 1858 of the Negotiable Instruments Law (NIL), petitioner
claims that its duty as a drawee bank to a drawer-client maintaining a checking account with it is to pay
orders for checks bearing the drawer-client’s genuine signatures. The genuine signatures of the client’s
duly authorized signatories affixed on the checks signify the order for payment. Thus, pursuant to the
said obligation, the drawee bank has the duty to determine whether the signatures appearing on the
check are the drawer-client’s or its duly authorized signatories. If the signatures are genuine, the bank
has the unavoidable legal and contractual duty to pay. If the signatures are forged and falsified, the
drawee bank has the corollary, but equally unavoidable legal and contractual, duty not to pay. 9
Furthermore, petitioner maintains that there exists a duty on the drawee bank to inquire from the drawer
before encashing a check only when the check bears a material alteration. A material alteration is
defined in Section 125 of the NIL to be one which changes the date, the sum payable, the time or place
of payment, the number or relations of the parties, the currency in which payment is to be made or one
which adds a place of payment where no place of payment is specified, or any other change or addition
which alters the effect of the instrument in any respect. With respect to the checks at issue, petitioner
points out that they do not contain any material alteration.10 This is a fact which was affirmed by the trial
court itself.11
There is no dispute that the signatures appearing on the subject checks were genuine signatures of the
respondent’s authorized joint signatories; namely, Antonia Reyes and Gregorio Reyes who were
respondent’s President and Vice-President for Finance, respectively. Both pre-signed the said checks
since they were both scheduled to go abroad and it was apparently their practice to leave with the
company accountant checks signed in black to answer for company obligations that might fall due
during the signatories’ absence. It is likewise admitted that neither of the subject checks contains any
material alteration or erasure.
However, on the blank space of each check reserved for the payee, the following typewritten words
appear: "ONE HUNDRED TEN THOUSAND PESOS ONLY." Above the same is the typewritten word,
"CASH." On the blank reserved for the amount, the same amount of One Hundred Ten Thousand
Pesos was indicated with the use of a check writer. The presence of these irregularities in each check
should have alerted the petitioner to be cautious before proceeding to encash them which it did not do.
It is well-settled that banks are engaged in a business impressed with public interest, and it is their duty
to protect in return their many clients and depositors who transact business with them. They have the
obligation to treat their client’s account meticulously and with the highest degree of care, considering the
fiduciary nature of their relationship. The diligence required of banks, therefore, is more than that of a
good father of a family.12
Petitioner asserts that it was not duty-bound to verify with the respondent since the amount below the
typewritten word "CASH," expressed in words, is the very same amount indicated in figures by means of
a check writer on the amount portion of the check. The amount stated in words is, therefore, a mere
reiteration of the amount stated in figures. Petitioner emphasizes that a reiteration of the amount in
words is merely a repetition and that a repetition is not an alteration which if present and material would
have enjoined it to commence verification with respondent. 13
We do not agree with petitioner’s myopic view and carefully crafted defense. Although not in the strict
sense "material alterations," the misplacement of the typewritten entries for the payee and the amount
on the same blank and the repetition of the amount using a check writer were glaringly obvious
irregularities on the face of the check. Clearly, someone made a mistake in filling up the checks and the
repetition of the entries was possibly an attempt to rectify the mistake. Also, if the check had been filled
up by the person who customarily accomplishes the checks of respondent, it should have occurred to
petitioner’s employees that it would be unlikely such mistakes would be made. All these circumstances
should have alerted the bank to the possibility that the holder or the person who is attempting to encash
the checks did not have proper title to the checks or did not have authority to fill up and encash the
same. As noted by the CA, petitioner could have made a simple phone call to its client to clarify the
irregularities and the loss to respondent due to the encashment of the stolen checks would have been
prevented.
In the case at bar, extraordinary diligence demands that petitioner should have ascertained from
respondent the authenticity of the subject checks or the accuracy of the entries therein not only because
of the presence of highly irregular entries on the face of the checks but also of the decidedly unusual
circumstances surrounding their encashment. Respondent’s witness testified that for checks in amounts
greater than Twenty Thousand Pesos (₱20,000.00) it is the company’s practice to ensure that the
payee is indicated by name in the check.14 This was not rebutted by petitioner. Indeed, it is highly
uncommon for a corporation to make out checks payable to "CASH" for substantial amounts such as in
this case. If each irregular circumstance in this case were taken singly or isolated, the bank’s employees
might have been justified in ignoring them. However, the confluence of the irregularities on the face of
the checks and circumstances that depart from the usual banking practice of respondent should have
put petitioner’s employees on guard that the checks were possibly not issued by the respondent in due
course of its business. Petitioner’s subtle sophistry cannot exculpate it from behavior that fell extremely
short of the highest degree of care and diligence required of it as a banking institution.
Indeed, taking this with the testimony of petitioner’s operations manager that in case of an irregularity on
the face of the check (such as when blanks were not properly filled out) the bank may or may not call
the client depending on how busy the bank is on a particular day, 15 we are even more convinced that
petitioner’s safeguards to protect clients from check fraud are arbitrary and subjective. Every client
should be treated equally by a banking institution regardless of the amount of his deposits and each
client has the right to expect that every centavo he entrusts to a bank would be handled with the same
degree of care as the accounts of other clients. Perforce, we find that petitioner plainly failed to adhere
to the high standard of diligence expected of it as a banking institution.
In defense of its cashier/teller’s questionable action, petitioner insists that pursuant to Sections 14 16 and
1617 of the NIL, it could validly presume, upon presentation of the checks, that the party who filled up
the blanks had authority and that a valid and intentional delivery to the party presenting the checks had
taken place. Thus, in petitioner’s view, the sole blame for this debacle should be shifted to respondent
for having its signatories pre-sign and deliver the subject checks.18 Petitioner argues that there was
indeed delivery in this case because, following American jurisprudence, the gross negligence of
respondent’s accountant in safekeeping the subject checks which resulted in their theft should be
treated as a voluntary delivery by the maker who is estopped from claiming non-delivery of the
instrument.19
Petitioner’s contention would have been correct if the subject checks were correctly and properly filled
out by the thief and presented to the bank in good order. In that instance, there would be nothing to give
notice to the bank of any infirmity in the title of the holder of the checks and it could validly presume that
there was proper delivery to the holder. The bank could not be faulted if it encashed the checks under
those circumstances. However, the undisputed facts plainly show that there were circumstances that
should have alerted the bank to the likelihood that the checks were not properly delivered to the person
who encashed the same. In all, we see no reason to depart from the finding in the assailed CA Decision
that the subject checks are properly characterized as incomplete and undelivered instruments thus
making Section 1520 of the NIL applicable in this case.
However, we do agree with petitioner that respondent’s officers’ practice of pre-signing of blank checks
should be deemed seriously negligent behavior and a highly risky means of purportedly ensuring the
efficient operation of businesses. It should have occurred to respondent’s officers and managers that
the pre-signed blank checks could fall into the wrong hands as they did in this case where the said
checks were stolen from the company accountant to whom the checks were entrusted.
Nevertheless, even if we assume that both parties were guilty of negligent acts that led to the loss,
petitioner will still emerge as the party foremost liable in this case. In instances where both parties are at
fault, this Court has consistently applied the doctrine of last clear chance in order to assign liability.
In Westmont Bank v. Ong,21 we ruled:
…[I]t is petitioner [bank] which had the last clear chance to stop the fraudulent encashment of the
subject checks had it exercised due diligence and followed the proper and regular banking procedures
in clearing checks. As we had earlier ruled, the one who had a last clear opportunity to avoid the
impending harm but failed to do so is chargeable with the consequences thereof. 22 (emphasis ours)
In the case at bar, petitioner cannot evade responsibility for the loss by attributing negligence on the
part of respondent because, even if we concur that the latter was indeed negligent in pre-signing blank
checks, the former had the last clear chance to avoid the loss. To reiterate, petitioner’s own operations
manager admitted that they could have called up the client for verification or confirmation before
honoring the dubious checks. Verily, petitioner had the final opportunity to avert the injury that befell the
respondent. Failing to make the necessary verification due to the volume of banking transactions on that
particular day is a flimsy and unacceptable excuse, considering that the "banking business is so
impressed with public interest where the trust and confidence of the public in general is of paramount
importance such that the appropriate standard of diligence must be a high degree of diligence, if not the
utmost diligence."23 Petitioner’s negligence has been undoubtedly established and, thus, pursuant to
Art. 1170 of the NCC,24 it must suffer the consequence of said negligence.
In the interest of fairness, however, we believe it is proper to consider respondent’s own negligence to
mitigate petitioner’s liability. Article 2179 of the Civil Code provides:
Art. 2179. When the plaintiff’s own negligence was the immediate and proximate cause of his injury, he
cannot recover damages. But if his negligence was only contributory, the immediate and proximate
cause of the injury being the defendant’s lack of due care, the plaintiff may recover damages, but the
courts shall mitigate the damages to be awarded.1avvph!1
Explaining this provision in Lambert v. Heirs of Ray Castillon, 25 the Court held:
The underlying precept on contributory negligence is that a plaintiff who is partly responsible for his own
injury should not be entitled to recover damages in full but must bear the consequences of his own
negligence. The defendant must thus be held liable only for the damages actually caused by his
negligence. xxx xxx xxx
As we previously stated, respondent’s practice of signing checks in blank whenever its authorized bank
signatories would travel abroad was a dangerous policy, especially considering the lack of evidence on
record that respondent had appropriate safeguards or internal controls to prevent the pre-signed blank
checks from falling into the hands of unscrupulous individuals and being used to commit a fraud against
the company. We cannot believe that there was no other secure and reasonable way to guarantee the
non-disruption of respondent’s business. As testified to by petitioner’s expert witness, other corporations
would ordinarily have another set of authorized bank signatories who would be able to sign checks in
the absence of the preferred signatories.26 Indeed, if not for the fortunate happenstance that the thief
failed to properly fill up the subject checks, respondent would expectedly take the blame for the entire
loss since the defense of forgery of a drawer’s signature(s) would be unavailable to it. Considering that
respondent knowingly took the risk that the pre-signed blank checks might fall into the hands of
wrongdoers, it is but just that respondent shares in the responsibility for the loss.
We also cannot ignore the fact that the person who stole the pre-signed checks subject of this case
from respondent’s accountant turned out to be another employee, purportedly a clerk in respondent’s
accounting department. As the employer of the "thief," respondent supposedly had control and
supervision over its own employee. This gives the Court more reason to allocate part of the loss to
respondent.
Following established jurisprudential precedents, 27 we believe the allocation of sixty percent (60%) of
the actual damages involved in this case (represented by the amount of the checks with legal interest)
to petitioner is proper under the premises. Respondent should, in light of its contributory negligence,
bear forty percent (40%) of its own loss.
Finally, we find that the awards of attorney’s fees and litigation expenses in favor of respondent are not
justified under the circumstances and, thus, must be deleted. The power of the court to award attorney’s
fees and litigation expenses under Article 2208 of the NCC28 demands factual, legal, and equitable
justification.
An adverse decision does not ipso facto justify an award of attorney’s fees to the winning party. 29 Even
when a claimant is compelled to litigate with third persons or to incur expenses to protect his rights, still
attorney’s fees may not be awarded where no sufficient showing of bad faith could be reflected in a
party’s persistence in a case other than an erroneous conviction of the righteousness of his cause. 30
WHEREFORE, the Decision of the Court of Appeals dated July 16, 2001 and its Resolution dated
September 28, 2001 are AFFIRMED with the following MODIFICATIONS: (a) petitioner Bank of
America NT & SA shall pay to respondent Philippine Racing Club sixty percent (60%) of the sum of Two
Hundred Twenty Thousand Pesos (₱220,000.00) with legal interest as awarded by the trial court and (b)
the awards of attorney’s fees and litigation expenses in favor of respondent are deleted.
Proportionate costs.
SO ORDERED.