I.

GENERAL CONCEPT OF NEGOTIABLE INSTRUMENTS

a. Definition, Nature and Characteristics

1
BENITO SY y ONG vs. PEOPLE and CA
G.R. No. L-85785 April 24, 1989
MELENCIO-HERRERA, J.:

2
PAL vs. CA
G.R. No. L-49188 January 30, 1990
GUTIERREZ, JR., J.:

Behind the simple issue of validity of an alias writ of execution in this case is a more fundamental question. Should
the Court allow a too literal interpretation of the Rules with an open invitation to knavery to prevail over a more
discerning and just approach? Should we not apply the ancient rule of statutory construction that laws are to be
interpreted by the spirit which vivifies and not by the letter which killeth?

This is a petition to review on certiorari the decision of the Court of Appeals in CA-G.R. No. 07695 entitled "Philippine
Airlines, Inc. v. Hon. Judge Ricardo D. Galano, et al.", dismissing the petition for certiorari against the order of the
Court of First Instance of Manila which issued an alias writ of execution against the petitioner.

The petition involving the alias writ of execution had its beginnings on November 8, 1967, when respondent Amelia
Tan, under the name and style of Able Printing Press commenced a complaint for damages before the Court of First
Instance of Manila. The case was docketed as Civil Case No. 71307, entitled Amelia Tan, et al. v. Philippine Airlines,
Inc.

After trial, the Court of First Instance of Manila, Branch 13, then presided over by the late Judge Jesus P. Morfe
rendered judgment on June 29, 1972, in favor of private respondent Amelia Tan and against petitioner Philippine
Airlines, Inc. (PAL) as follows:

WHEREFORE, judgment is hereby rendered, ordering the defendant Philippine Air Lines:

1. On the first cause of action, to pay to the plaintiff the amount of P75,000.00 as actual damages,
with legal interest thereon from plaintiffs extra-judicial demand made by the letter of July 20, 1967;

2. On the third cause of action, to pay to the plaintiff the amount of P18,200.00, representing the
unrealized profit of 10% included in the contract price of P200,000.00 plus legal interest thereon from
July 20,1967;

3. On the fourth cause of action, to pay to the plaintiff the amount of P20,000.00 as and for moral
damages, with legal interest thereon from July 20, 1 967;

4. On the sixth cause of action, to pay to the plaintiff the amount of P5,000.00 damages as and for
attorney's fee.

Plaintiffs second and fifth causes of action, and defendant's counterclaim, are dismissed.

With costs against the defendant. (CA Rollo, p. 18)

On July 28, 1972, the petitioner filed its appeal with the Court of Appeals. The case was docketed as CA-G.R. No.
51079-R.

On February 3, 1977, the appellate court rendered its decision, the dispositive portion of which reads:

IN VIEW WHEREOF, with the modification that PAL is condemned to pay plaintiff the sum of P25,000.00 as
damages and P5,000.00 as attorney's fee, judgment is affirmed, with costs. (CA Rollo, p. 29)

Notice of judgment was sent by the Court of Appeals to the trial court and on dates subsequent thereto, a motion for
reconsideration was filed by respondent Amelia Tan, duly opposed by petitioner PAL.

1
On May 23,1977, the Court of Appeals rendered its resolution denying the respondent's motion for reconsideration
for lack of merit.

No further appeal having been taken by the parties, the judgment became final and executory and on May 31, 1977,
judgment was correspondingly entered in the case.

The case was remanded to the trial court for execution and on September 2,1977, respondent Amelia Tan filed a
motion praying for the issuance of a writ of execution of the judgment rendered by the Court of Appeals. On October
11, 1977, the trial court, presided over by Judge Galano, issued its order of execution with the corresponding writ in
favor of the respondent. The writ was duly referred to Deputy Sheriff Emilio Z. Reyes of Branch 13 of the Court of
First Instance of Manila for enforcement.

Four months later, on February 11, 1978, respondent Amelia Tan moved for the issuance of an alias writ of execution
stating that the judgment rendered by the lower court, and affirmed with modification by the Court of Appeals,
remained unsatisfied.

On March 1, 1978, the petitioner filed an opposition to the motion for the issuance of an alias writ of execution stating
that it had already fully paid its obligation to plaintiff through the deputy sheriff of the respondent court, Emilio Z.
Reyes, as evidenced by cash vouchers properly signed and receipted by said Emilio Z. Reyes.

On March 3,1978, the Court of Appeals denied the issuance of the alias writ for being premature, ordering the
executing sheriff Emilio Z. Reyes to appear with his return and explain the reason for his failure to surrender the
amounts paid to him by petitioner PAL. However, the order could not be served upon Deputy Sheriff Reyes who had
absconded or disappeared.

On March 28, 1978, motion for the issuance of a partial alias writ of execution was filed by respondent Amelia Tan.

On April 19, 1978, respondent Amelia Tan filed a motion to withdraw "Motion for Partial Alias Writ of Execution" with
Substitute Motion for Alias Writ of Execution. On May 1, 1978, the respondent Judge issued an order which reads:

As prayed for by counsel for the plaintiff, the Motion to Withdraw 'Motion for Partial Alias Writ of Execution
with Substitute Motion for Alias Writ of Execution is hereby granted, and the motion for partial alias writ of
execution is considered withdrawn.

Let an Alias Writ of Execution issue against the defendant for the fall satisfaction of the judgment rendered.
Deputy Sheriff Jaime K. del Rosario is hereby appointed Special Sheriff for the enforcement thereof. (CA
Rollo, p. 34)

On May 18, 1978, the petitioner received a copy of the first alias writ of execution issued on the same day directing
Special Sheriff Jaime K. del Rosario to levy on execution in the sum of P25,000.00 with legal interest thereon from
July 20,1967 when respondent Amelia Tan made an extra-judicial demand through a letter. Levy was also ordered
for the further sum of P5,000.00 awarded as attorney's fees.

On May 23, 1978, the petitioner filed an urgent motion to quash the alias writ of execution stating that no return of
the writ had as yet been made by Deputy Sheriff Emilio Z. Reyes and that the judgment debt had already been fully
satisfied by the petitioner as evidenced by the cash vouchers signed and receipted by the server of the writ of
execution, Deputy Sheriff Emilio Z. Reyes.

On May 26,1978, the respondent Jaime K. del Rosario served a notice of garnishment on the depository bank of
petitioner, Far East Bank and Trust Company, Rosario Branch, Binondo, Manila, through its manager and garnished
the petitioner's deposit in the said bank in the total amount of P64,408.00 as of May 16, 1978. Hence, this petition
for certiorari filed by the Philippine Airlines, Inc., on the grounds that:

AN ALIAS WRIT OF EXECUTION CANNOT BE ISSUED WITHOUT PRIOR RETURN OF THE ORIGINAL
WRIT BY THE IMPLEMENTING OFFICER.

II

PAYMENT OF JUDGMENT TO THE IMPLEMENTING OFFICER AS DIRECTED IN THE WRIT OF

EXECUTION CONSTITUTES SATISFACTION OF JUDGMENT.

III

INTEREST IS NOT PAYABLE WHEN THE DECISION IS SILENT AS TO THE PAYMENT THEREOF.
2
 IV

SECTION 5, RULE 39, PARTICULARLY REFERS TO LEVY OF PROPERTY OF JUDGMENT DEBTOR

AND DISPOSAL OR SALE THEREOF TO SATISFY JUDGMENT.

Can an alias writ of execution be issued without a prior return of the original writ by the implementing officer?

We rule in the affirmative and we quote the respondent court's decision with approval:

The issuance of the questioned alias writ of execution under the circumstances here obtaining is justified
because even with the absence of a Sheriffs return on the original writ, the unalterable fact remains that such
a return is incapable of being obtained (sic) because the officer who is to make the said return has absconded
and cannot be brought to the Court despite the earlier order of the court for him to appear for this purpose.
(Order of Feb. 21, 1978, Annex C, Petition). Obviously, taking cognizance of this circumstance, the order of
May 11, 1978 directing the issuance of an alias writ was therefore issued. (Annex D. Petition). The need for
such a return as a condition precedent for the issuance of an alias writ was justifiably dispensed with by the
court below and its action in this regard meets with our concurrence. A contrary view will produce an abhorent
situation whereby the mischief of an erring officer of the court could be utilized to impede indefinitely the
undisputed and awarded rights which a prevailing party rightfully deserves to obtain and with dispatch. The
final judgment in this case should not indeed be permitted to become illusory or incapable of execution for
an indefinite and over extended period, as had already transpired. (Rollo, pp. 35-36)

Judicium non debet esse illusorium; suum effectum habere debet (A judgment ought not to be illusory it ought to
have its proper effect).

Indeed, technicality cannot be countenanced to defeat the execution of a judgment for execution is the fruit and end
of the suit and is very aptly called the life of the law (Ipekdjian Merchandising Co. v. Court of Tax Appeals, 8 SCRA
59 [1963]; Commissioner of Internal Revenue v. Visayan Electric Co., 19 SCRA 697, 698 [1967]). A judgment cannot
be rendered nugatory by the unreasonable application of a strict rule of procedure. Vested rights were never intended
to rest on the requirement of a return, the office of which is merely to inform the court and the parties, of any and all
actions taken under the writ of execution. Where such information can be established in some other manner, the
absence of an executing officer's return will not preclude a judgment from being treated as discharged or being
executed through an alias writ of execution as the case may be. More so, as in the case at bar. Where the return
cannot be expected to be forthcoming, to require the same would be to compel the enforcement of rights under a
judgment to rest on an impossibility, thereby allowing the total avoidance of judgment debts. So long as a judgment
is not satisfied, a plaintiff is entitled to other writs of execution (Government of the Philippines v. Echaus and
Gonzales, 71 Phil. 318). It is a well known legal maxim that he who cannot prosecute his judgment with effect, sues
his case vainly.

More important in the determination of the propriety of the trial court's issuance of an alias writ of execution is the
issue of satisfaction of judgment.

Under the peculiar circumstances surrounding this case, did the payment made to the absconding sheriff by check
in his name operate to satisfy the judgment debt? The Court rules that the plaintiff who has won her case should not
be adjudged as having sued in vain. To decide otherwise would not only give her an empty but a pyrrhic victory.

It should be emphasized that under the initial judgment, Amelia Tan was found to have been wronged by PAL.

She filed her complaint in 1967.

After ten (10) years of protracted litigation in the Court of First Instance and the Court of Appeals, Ms. Tan won her
case.

It is now 1990.

Almost twenty-two (22) years later, Ms. Tan has not seen a centavo of what the courts have solemnly declared as
rightfully hers. Through absolutely no fault of her own, Ms. Tan has been deprived of what, technically, she should
have been paid from the start, before 1967, without need of her going to court to enforce her rights. And all because
PAL did not issue the checks intended for her, in her name.

Under the peculiar circumstances of this case, the payment to the absconding sheriff by check in his name did not
operate as a satisfaction of the judgment debt.

In general, a payment, in order to be effective to discharge an obligation, must be made to the proper person. Article
1240 of the Civil Code provides:

3
 Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in
interest, or any person authorized to receive it. (Emphasis supplied)

Thus, payment must be made to the obligee himself or to an agent having authority, express or implied, to receive
the particular payment (Ulen v. Knecttle 50 Wyo 94, 58 [2d] 446, 111 ALR 65). Payment made to one having apparent
authority to receive the money will, as a rule, be treated as though actual authority had been given for its receipt.
Likewise, if payment is made to one who by law is authorized to act for the creditor, it will work a discharge (Hendry
v. Benlisa 37 Fla. 609, 20 SO 800,34 LRA 283). The receipt of money due on ajudgment by an officer authorized by
law to accept it will, therefore, satisfy the debt (See 40 Am Jm 729, 25; Hendry v. Benlisa supra; Seattle v. Stirrat 55
Wash. 104 p. 834,24 LRA [NS] 1275).

The theory is where payment is made to a person authorized and recognized by the creditor, the payment to such a
person so authorized is deemed payment to the creditor. Under ordinary circumstances, payment by the judgment
debtor in the case at bar, to the sheriff should be valid payment to extinguish the judgment debt.

There are circumstances in this case, however, which compel a different conclusion.

The payment made by the petitioner to the absconding sheriff was not in cash or legal tender but in checks. The
checks were not payable to Amelia Tan or Able Printing Press but to the absconding sheriff.

Did such payments extinguish the judgment debt?

Article 1249 of the Civil Code provides:

The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver
such currency, then in the currency which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall
produce the effect of payment only when they have been cashed, or when through the fault of the creditor
they have been impaired.

In the meantime, the action derived from the original obligation shall be held in abeyance.

In the absence of an agreement, either express or implied, payment means the discharge of a debt or obligation in
money (US v. Robertson, 5 Pet. [US] 641, 8 L. ed. 257) and unless the parties so agree, a debtor has no rights,
except at his own peril, to substitute something in lieu of cash as medium of payment of his debt (Anderson v. Gill,
79 Md.. 312, 29 A 527, 25 LRA 200,47 Am. St. Rep. 402). Consequently, unless authorized to do so by law or by
consent of the obligee a public officer has no authority to accept anything other than money in payment of an
obligation under a judgment being executed. Strictly speaking, the acceptance by the sheriff of the petitioner's checks,
in the case at bar, does not, per se, operate as a discharge of the judgment debt.

Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does
not, by itself, operate as payment (See. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan Landon Co. v.
American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a manager's check
or ordinary cheek, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment
and may be refused receipt by the obligee or creditor. Mere delivery of checks does not discharge the obligation
under a judgment. The obligation is not extinguished and remains suspended until the payment by commercial
document is actually realized (Art. 1249, Civil Code, par. 3).

If bouncing checks had been issued in the name of Amelia Tan and not the Sheriff's, there would have been no
payment. After dishonor of the checks, Ms. Tan could have run after other properties of PAL. The theory is that she
has received no value for what had been awarded her. Because the checks were drawn in the name of Emilio Z.
Reyes, neither has she received anything. The same rule should apply.

It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been payment in full legal contemplation.
The reasoning is logical but is it valid and proper? Logic has its limits in decision making. We should not follow rulings
to their logical extremes if in doing so we arrive at unjust or absurd results.

In the first place, PAL did not pay in cash. It paid in cheeks.

And second, payment in cash always carries with it certain cautions. Nobody hands over big amounts of cash in a
careless and inane manner. Mature thought is given to the possibility of the cash being lost, of the bearer being
waylaid or running off with what he is carrying for another. Payment in checks is precisely intended to avoid the
possibility of the money going to the wrong party. The situation is entirely different where a Sheriff seizes a car, a
tractor, or a piece of land. Logic often has to give way to experience and to reality. Having paid with checks, PAL
should have done so properly.

4
Payment in money or cash to the implementing officer may be deemed absolute payment of the judgment debt but
the Court has never, in the least bit, suggested that judgment debtors should settle their obligations by turning over
huge amounts of cash or legal tender to sheriffs and other executing officers. Payment in cash would result in damage
or interminable litigations each time a sheriff with huge amounts of cash in his hands decides to abscond.

As a protective measure, therefore, the courts encourage the practice of payments by cheek provided adequate
controls are instituted to prevent wrongful payment and illegal withdrawal or disbursement of funds. If particularly big
amounts are involved, escrow arrangements with a bank and carefully supervised by the court would be the safer
procedure. Actual transfer of funds takes place within the safety of bank premises. These practices are perfectly
legal. The object is always the safe and incorrupt execution of the judgment.

It is, indeed, out of the ordinary that checks intended for a particular payee are made out in the name of another.
Making the checks payable to the judgment creditor would have prevented the encashment or the taking of undue
advantage by the sheriff, or any person into whose hands the checks may have fallen, whether wrongfully or in behalf
of the creditor. The issuance of the checks in the name of the sheriff clearly made possible the misappropriation of
the funds that were withdrawn.

As explained and held by the respondent court:

... [K]nowing as it does that the intended payment was for the private party respondent Amelia Tan, the
petitioner corporation, utilizing the services of its personnel who are or should be knowledgeable about the
accepted procedures and resulting consequences of the checks drawn, nevertheless, in this instance, without
prudence, departed from what is generally observed and done, and placed as payee in the checks the name
of the errant Sheriff and not the name of the rightful payee. Petitioner thereby created a situation which
permitted the said Sheriff to personally encash said checks and misappropriate the proceeds thereof to his
exclusive personal benefit. For the prejudice that resulted, the petitioner himself must bear the fault. The
judicial guideline which we take note of states as follows:

As between two innocent persons, one of whom must suffer the consequence of a breach of trust, the one
who made it possible by his act of confidence must bear the loss. (Blondeau, et al. v. Nano, et al., L-41377,
July 26, 1935, 61 Phil. 625)

Having failed to employ the proper safeguards to protect itself, the judgment debtor whose act made possible the
loss had but itself to blame.

The attention of this Court has been called to the bad practice of a number of executing officers, of requiring checks
in satisfaction of judgment debts to be made out in their own names. If a sheriff directs a judgment debtor to issue
the checks in the sheriff's name, claiming he must get his commission or fees, the debtor must report the sheriff
immediately to the court which ordered the execution or to the Supreme Court for appropriate disciplinary action.
Fees, commissions, and salaries are paid through regular channels. This improper procedure also allows such
officers, who have sixty (60) days within which to make a return, to treat the moneys as their personal finds and to
deposit the same in their private accounts to earn sixty (60) days interest, before said finds are turned over to the
court or judgment creditor (See Balgos v. Velasco, 108 SCRA 525 [1981]). Quite as easily, such officers could put
up the defense that said checks had been issued to them in their private or personal capacity. Without a receipt
evidencing payment of the judgment debt, the misappropriation of finds by such officers becomes clean and
complete. The practice is ingenious but evil as it unjustly enriches court personnel at the expense of litigants and the
proper administration of justice. The temptation could be far greater, as proved to be in this case of the absconding
sheriff. The correct and prudent thing for the petitioner was to have issued the checks in the intended payee's name.

The pernicious effects of issuing checks in the name of a person other than the intended payee, without the latter's
agreement or consent, are as many as the ways that an artful mind could concoct to get around the safeguards
provided by the law on negotiable instruments. An angry litigant who loses a case, as a rule, would not want the
winning party to get what he won in the judgment. He would think of ways to delay the winning party's getting what
has been adjudged in his favor. We cannot condone that practice especially in cases where the courts and their
officers are involved. We rule against the petitioner.
1âwphi 1

Anent the applicability of Section 15, Rule 39, as follows:

Section 15. Execution of money judgments. — The officer must enforce an execution of a money judgment
by levying on all the property, real and personal of every name and nature whatsoever, and which may be
disposed of for value, of the judgment debtor not exempt from execution, or on a sufficient amount of such
property, if they be sufficient, and selling the same, and paying to the judgment creditor, or his attorney, so
much of the proceeds as will satisfy the judgment. ...

the respondent court held:

5
 We are obliged to rule that the judgment debt cannot be considered satisfied and therefore the orders of the
respondent judge granting the alias writ of execution may not be pronounced as a nullity.

xxx xxx xxx

It is clear and manifest that after levy or garnishment, for a judgment to be executed there is the requisite of
payment by the officer to the judgment creditor, or his attorney, so much of the proceeds as will satisfy the
judgment and none such payment had been concededly made yet by the absconding Sheriff to the private
respondent Amelia Tan. The ultimate and essential step to complete the execution of the judgment not having
been performed by the City Sheriff, the judgment debt legally and factually remains unsatisfied.

Strictly speaking execution cannot be equated with satisfaction of a judgment. Under unusual circumstances as those
obtaining in this petition, the distinction comes out clearly.

Execution is the process which carries into effect a decree or judgment (Painter v. Berglund, 31 Cal. App. 2d. 63, 87
P 2d 360, 363; Miller v. London, 294 Mass 300, 1 NE 2d 198, 200; Black's Law Dictionary), whereas the satisfaction
of a judgment is the payment of the amount of the writ, or a lawful tender thereof, or the conversion by sale of the
debtor's property into an amount equal to that due, and, it may be done otherwise than upon an execution (Section
47, Rule 39). Levy and delivery by an execution officer are not prerequisites to the satisfaction of a judgment when
the same has already been realized in fact (Section 47, Rule 39). Execution is for the sheriff to accomplish while
satisfaction of the judgment is for the creditor to achieve. Section 15, Rule 39 merely provides the sheriff with his
duties as executing officer including delivery of the proceeds of his levy on the debtor's property to satisfy the
judgment debt. It is but to stress that the implementing officer's duty should not stop at his receipt of payments but
must continue until payment is delivered to the obligor or creditor.

Finally, we find no error in the respondent court's pronouncement on the inclusion of interests to be recovered under
the alias writ of execution. This logically follows from our ruling that PAL is liable for both the lost checks and interest.
The respondent court's decision in CA-G.R. No. 51079-R does not totally supersede the trial court's judgment in Civil
Case No. 71307. It merely modified the same as to the principal amount awarded as actual damages.

WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby DISMISSED. The judgment of the respondent
Court of Appeals is AFFIRMED and the trial court's issuance of the alias writ of execution against the petitioner is
upheld without prejudice to any action it should take against the errant sheriff Emilio Z. Reyes. The Court
Administrator is ordered to follow up the actions taken against Emilio Z. Reyes.

SO ORDERED.

Fernan, C.J., Cruz, Paras, Bidin, Griño-Aquino, Medialdea and Regalado, JJ., concur.

Separate Opinions

NARVASA, J., dissenting:

The execution of final judgments and orders is a function of the sheriff, an officer of the court whose authority is by
and large statutorily determined to meet the particular exigencies arising from or connected with the performance of
the multifarious duties of the office. It is the acknowledgment of the many dimensions of this authority, defined by
statute and chiselled by practice, which compels me to disagree with the decision reached by the majority.

A consideration of the wide latitude of discretion allowed the sheriff as the officer of the court most directly involved
with the implementation and execution of final judgments and orders persuades me that PAL's payment to the sheriff
of its judgment debt to Amelia Tan, though made by check issued in said officer's name, lawfully satisfied said
obligation and foreclosed further recourse therefor against PAL, notwithstanding the sheriffs failure to deliver to Tan
the proceeds of the check.

It is a matter of history that the judiciary .. is an inherit or of the Anglo-American tradition. While the common
law as such .. "is not in force" in this jurisdiction, "to breathe the breath of life into many of the institutions,
introduced [here] under American sovereignty, recourse must be had to the rules, principles and doctrines of
the common law under whose protecting aegis the prototypes of these institutions had their birth" A sheriff is
"an officer of great antiquity," and was also called the shire reeve. A shire in English law is a Saxon word
6
 signifying a division later called a county. A reeve is an ancient English officer of justice inferior in rank to an
alderman .. appointed to process, keep the King's peace, and put the laws in execution. From a very remote
period in English constitutional history .. the shire had another officer, namely the shire reeve or as we say,
the sheriff. .. The Sheriff was the special representative of the legal or central authority, and as such usually
nominated by the King. .. Since the earliest times, both in England and the United States, a sheriff has
continued his status as an adjunct of the court .. . As it was there, so it has been in the Philippines from the
time of the organization of the judiciary .. . (J. Fernando's concurring opinion in Bagatsing v. Herrera, 65
SCRA 434)

One of a sheriff s principal functions is to execute final judgments and orders. The Rules of Court require the writs of
execution to issue to him, directing him to enforce such judgments and orders in the manner therein provided (Rule
39). The mode of enforcement varies according to the nature of the judgment to be carried out: whether it be against
property of the judgment debtor in his hands or in the hands of a third person i e. money judgment), or for the sale of
property, real or personal (i.e. foreclosure of mortgage) or the delivery thereof, etc. (sec. 8, Rule 39).

Under sec. 15 of the same Rule, the sheriff is empowered to levy on so much of the judgment debtor's property as
may be sufficient to enforce the money judgment and sell these properties at public auction after due notice to satisfy
the adjudged amount. It is the sheriff who, after the auction sale, conveys to the purchaser the property thus sold
(secs. 25, 26, 27, Rule 39), and pays the judgment creditor so much of the proceeds as will satisfy the judgment.
When the property sold by him on execution is an immovable which consequently gives rise to a light of redemption
on the part of the judgment debtor and others (secs. 29, 30, Rule 39), it is to him (or to the purchaser or redemptioner
that the payments may be made by those declared by law as entitled to redeem (sec. 31, Rule 39); and in this
situation, it becomes his duty to accept payment and execute the certificate of redemption (Enage v. Vda. y Hijos de
Escano, 38 Phil. 657, cited in Moran, Comments on the Rules of Court, 1979 ed., vol. 2, pp. 326-327). It is also to
the sheriff that "written notice of any redemption must be given and a duplicate filed with the registrar of deeds of the
province, and if any assessments or taxes are paid by the redemptioner or if he has or acquires any lien other than
that upon which the redemption was made, notice thereof must in like manner be given to the officer and filed with
the registrar of deeds," the effect of failure to file such notice being that redemption may be made without paying
such assessments, taxes, or liens (sec. 30, Rule 39).

The sheriff may likewise be appointed a receiver of the property of the judgment debtor where the appointment of
the receiver is deemed necessary for the execution of the judgment (sec. 32, Rule 39).

At any time before the sale of property on execution, the judgment debtor may prevent the sale by paying the sheriff
the amount required by the execution and the costs that have been incurred therein (sec. 20, Rule 39).

The sheriff is also authorized to receive payments on account of the judgment debt tendered by "a person indebted
to the judgment debtor," and his "receipt shall be a sufficient discharge for the amount so paid or directed to be
credited by the judgment creditor on the execution" (sec. 41, Rule 39).

Now, obviously, the sheriff s sale extinguishes the liability of the judgment debtor either in fun, if the price paid by the
highest bidder is equal to, or more than the amount of the judgment or pro tanto if the price fetched at the sale be
less. Such extinction is not in any way dependent upon the judgment creditor's receiving the amount realized, so that
the conversion or embezzlement of the proceeds of the sale by the sheriff does not revive the judgment debt or
render the judgment creditor liable anew therefor.

So, also, the taking by the sheriff of, say, personal property from the judgment debtor for delivery to the judgment
creditor, in fulfillment of the verdict against him, extinguishes the debtor's liability; and the conversion of said property
by the sheriff, does not make said debtor responsible for replacing the property or paying the value thereof.

In the instances where the Rules allow or direct payments to be made to the sheriff, the payments may be made by
check, but it goes without saying that if the sheriff so desires, he may require payment to be made in lawful money.
If he accepts the check, he places himself in a position where he would be liable to the judgment creditor if any
damages are suffered by the latter as a result of the medium in which payment was made (Javellana v. Mirasol, et
al., 40 Phil. 761). The validity of the payment made by the judgment debtor, however, is in no wise affected and the
latter is discharged from his obligation to the judgment creditor as of the moment the check issued to the sheriff is
encashed and the proceeds are received by Id. office. The issuance of the check to a person authorized to receive
it (Art. 1240, Civil Code; See. 46 of the Code of Civil Procedure; Enage v. Vda y Hijos de Escano, 38 Phil. 657, cited
in Javellana v. Mirasol, 40 Phil. 761) operates to release the judgment debtor from any further obligations on the
judgment.

The sheriff is an adjunct of the court; a court functionary whose competence involves both discretion and personal
liability (concurring opinion of J. Fernando, citing Uy Piaoco v. Osmena, 9 Phil. 299, in Bagatsing v. Herrera, 65
SCRA 434). Being an officer of the court and acting within the scope of his authorized functions, the sheriff s receipt
of the checks in payment of the judgment execution, may be deemed, in legal contemplation, as received by the
court itself (Lara v. Bayona, 10 May 1955, No. L- 10919).

7
That the sheriff functions as a conduit of the court is further underscored by the fact that one of the requisites for
appointment to the office is the execution of a bond, "conditioned (upon) the faithful performance of his (the
appointee's) duties .. for the delivery or payment to Government, or the person entitled thereto, of all properties or
sums of money that shall officially come into his hands" (sec. 330, Revised Administrative Code).

There is no question that the checks came into the sheriffs possession in his official capacity. The court may require
of the judgment debtor, in complying with the judgment, no further burden than his vigilance in ensuring that the
person he is paying money or delivering property to is a person authorized by the court to receive it. Beyond this,
further expectations become unreasonable. To my mind, a proposal that would make the judgment debtor
unqualifiedly the insurer of the judgment creditor's entitlement to the judgment amount which is really what this case
is all about begs the question.

That the checks were made out in the sheriffs name (a practice, by the way, of long and common acceptance) is of
little consequence if juxtaposed with the extent of the authority explicitly granted him by law as the officer entrusted
with the power to execute and implement court judgments. The sheriffs requirement that the checks in payment of
the judgment debt be issued in his name was simply an assertion of that authority; and PAL's compliance cannot in
the premises be faulted merely because of the sheriffs subsequent malfeasance in absconding with the payment
instead of turning it over to the judgment creditor.

If payment had been in cash, no question about its validity or of the authority and duty of the sheriff to accept it in
settlement of PAL's judgment obligation would even have arisen. Simply because it was made by checks issued in
the sheriff s name does not warrant reaching any different conclusion.

As payment to the court discharges the judgment debtor from his responsibility on the judgment, so too must payment
to the person designated by such court and authorized to act in its behalf, operate to produce the same effect.

It is unfortunate and deserving of commiseration that Amelia Tan was deprived of what was adjudged to her when
the sheriff misappropriated the payment made to him by PAL in dereliction of his sworn duties. But I submit that her
remedy lies, not here and in reviving liability under a judgment already lawfully satisfied, but elsewhere.

ACCORDINGLY, I vote to grant the petition.

Melencio-Herrera, Gancayco, J., concurs.

FELICIANO, J., dissenting:

I concur in the able dissenting opinions of Narvasa and Padilla, JJ. and would merely wish to add a few footnotes to
their lucid opinions.

1. Narvasa, J. has demonstrated in detail that a sheriff is authorized by the Rules of Court and our case law
to receive either legal tender or checks from the judgment debtor in satisfaction of the judgment debt. In
addition, Padilla, J. has underscored the obligation of the sheriff, imposed upon him by the nature of his office
and the law, to turn over such legal tender, checks and proceeds of execution sales to the judgment creditor.
The failure of a sheriff to effect such turnover and his conversion of the funds (or goods) held by him to his
own uses, do not have the effect of frustrating payment by and consequent discharge of the judgment debtor.

To hold otherwise would be to throw the risk of the sheriff faithfully performing his duty as a public officer
upon those members of the general public who are compelled to deal with him. It seems to me that a judgment
debtor who turns over funds or property to the sheriff can not reasonably be made an insurer of the honesty
and integrity of the sheriff and that the risk of the sheriff carrying out his duties honestly and faithfully is
properly lodged in the State itself The sheriff, like all other officers of the court, is appointed and paid and
controlled and disciplined by the Government, more specifically by this Court. The public surely has a duty
to report possible wrongdoing by a sheriff or similar officer to the proper authorities and, if necessary, to testify
in the appropriate judicial and administrative disciplinary proceedings. But to make the individual members
of the general community insurers of the honest performance of duty of a sheriff, or other officer of the court,
over whom they have no control, is not only deeply unfair to the former. It is also a confession of
comprehensive failure and comes too close to an abdication of duty on the part of the Court itself. This Court
should have no part in that.

2. I also feel compelled to comment on the majority opinion written by Gutierrez, J. with all his customary and
special way with words. My learned and eloquent brother in the Court apparently accepts the proposition that
payment by a judgment debtor of cash to a sheriff produces the legal effects of payment, the sheriff being
authorized to accept such payment. Thus, in page 10 of his ponencia, Gutierrez, J. writes:

8
 The receipt of money due on a judgment by an officer authorized by law to accept it will satisfy the debt.
(Citations omitted)

The theory is where payment is made to a person authorized and recognized by the creditor, the payment to
such a person so authorized is deemed payment to the creditor. Under ordinary circumstances, payment by
the judgment debtor in the case at bar, to the sheriff would be valid payment to extinguish the judgment debt.

Shortly thereafter, however, Gutierrez, J. backs off from the above position and strongly implies that payment
in cash to the sheriff is sheer imprudence on the part of the judgment debtor and that therefore, should the
sheriff abscond with the cash, the judgment debtor has not validly discharged the judgment debt:

It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been payment in full legal
contemplation. The reasoning is logical but is it valid and proper?

In the first place, PAL did not pay in cash. It paid in checks.

And second, payment in cash always carries with it certain cautions. Nobody hands over big amounts of cash
in a careless and inane manner. Mature thought is given to the possibility of the cash being lost, of the bearer
being waylaid or running off with what he is carrying for another. Payment in checks is precisely intended to
avoid the possibility of the money going to the wrong party....

Payment in money or cash to the implementing officer may be deemed absolute payment of the judgment
debt but the court has never, in the least bit, suggested that judgment debtors should settle their obligations
by turning over huge amounts of cash or legal tender to sheriffs and other executing officers. ... (Emphasis
in the original) (Majority opinion, pp. 12-13)

There is no dispute with the suggestion apparently made that maximum safety is secured where the judgment debtor
delivers to the sheriff not cash but a check made out, not in the name of the sheriff, but in the judgment creditor's
name. The fundamental point that must be made, however, is that under our law only cash is legal tender and that
the sheriff can be compelled to accept only cash and not checks, even if made out to the name of the judgment
creditor. 1 The sheriff could have quite lawfully required PAL to deliver to him only cash, i.e., Philippine currency. If
the sheriff had done so, and if PAL had complied with such a requirement, as it would have had to, one would have
to agree that legal payment must be deemed to have been effected. It requires no particularly acute mind to note
that a dishonest sheriff could easily convert the money and abscond. The fact that the sheriff in the instant case
required, not cash to be delivered to him, but rather a check made out in his name, does not change the legal
situation. PAL did not thereby become negligent; it did not make the loss anymore possible or probable than if it had
instead delivered plain cash to the sheriffs.

It seems to me that the majority opinion's real premise is the unspoken one that the judgment debtor should bear the
risk of the fragility of the sheriff s virtue until the money or property parted with by the judgment debtor actually
reaches the hands of the judgment creditor. This brings me back to my earlier point that risk is most appropriately
borne not by the judgment debtor, nor indeed by the judgment creditor, but by the State itself. The Court requires all
sheriffs to post good and adequate fidelity bonds before entering upon the performance of their duties and,
presumably, to maintain such bonds in force and effect throughout their stay in office.2 The judgment creditor, in
circumstances like those of the instant case, could be allowed to execute upon the absconding sheriff s bond.3

I believe the Petition should be granted and I vote accordingly.

PADILLA, J., Dissenting Opinion

From the facts that appear to be undisputed, I reach a conclusion different from that of the majority. Sheriff Emilio Z.
Reyes, the trial court's authorized sheriff, armed with a writ of execution to enforce a final money judgment against
the petitioner Philippine Airlines (PAL) in favor of private respondent Amelia Tan, proceeded to petitioner PAL's office
to implement the writ.

There is no question that Sheriff Reyes, in enforcing the writ of execution, was acting with full authority as an officer
of the law and not in his personal capacity. Stated differently, PAL had every right to assume that, as an officer of
the law, Sheriff Reyes would perform his duties as enjoined by law. It would be grossly unfair to now charge PAL
with advanced or constructive notice that Mr. Reyes would abscond and not deliver to the judgment creditor the
proceeds of the writ of execution. If a judgment debtor cannot rely on and trust an officer of the law, as the Sheriff,
whom else can he trust?

9
Pursued to its logical extreme, if PAL had delivered to Sheriff Reyes the amount of the judgment in CASH, i.e.
Philippine currency, with the corresponding receipt signed by Sheriff Reyes, this would have been payment by PAL
in full legal contemplation, because under Article 1240 of the Civil Code, "payment shall be made to the person in
whose favor the obligation has been constituted or his successor in interest or any person authorized to receive it."
And said payment if made by PAL in cash, i.e., Philippine currency, to Sheriff Reyes would have satisfied PAL's
judgment obligation, as payment is a legally recognized mode for extinguishing one's obligation. (Article 1231, Civil
Code).

Under Sec. 15, Rule 39, Rules of Court which provides that-

Sec. 15. Execution of money judgments. — The officer must enforce an execution of a money judgment by
levying on all the property, real and personal of every name and nature whatsoever, and which may be
disposed of for value, of the judgment debtor not exempt from execution, or on a sufficient amount of such
property, if there be sufficient, and selling the same, and paying to the judgment creditor, or his attorney, so
much of the proceeds as will satisfy the judgment. ... .(emphasis supplied)

it would be the duty of Sheriff Reyes to pay to the judgment creditor the proceeds of the execution i.e., the cash
received from PAL (under the above assumption). But, the duty of the sheriff to pay the cash to the judgment creditor
would be a matter separate the distinct from the fact that PAL would have satisfied its judgment obligation to Amelia
Tan, the judgment creditor, by delivering the cash amount due under the judgment to Sheriff Reyes.

Did the situation change by PAL's delivery of its two (2) checks totalling P30,000.00 drawn against its bank account,
payable to Sheriff Reyes, for account of the judgment rendered against PAL? I do not think so, because when Sheriff
Reyes encashed the checks, the encashment was in fact a payment by PAL to Amelia Tan through Sheriff Reyes,
an officer of the law authorized to receive payment, and such payment discharged PAL'S obligation under the
executed judgment.

If the PAL cheeks in question had not been encashed by Sheriff Reyes, there would be no payment by PAL and,
consequently no discharge or satisfaction of its judgment obligation. But the checks had been encashed by Sheriff
Reyes giving rise to a situation as if PAL had paid Sheriff Reyes in cash, i.e., Philippine currency. This, we repeat, is
payment, in legal contemplation, on the part of PAL and this payment legally discharged PAL from its judgment
obligation to the judgment creditor. To be sure, the same encashment by Sheriff Reyes of PAL's checks delivered to
him in his official capacity as Sheriff, imposed an obligation on Sheriff Reyes to pay and deliver the proceeds of the
encashment to Amelia Tan who is deemed to have acquired a cause of action against Sheriff Reyes for his failure to
deliver to her the proceeds of the encashment. As held:

Payment of a judgment, to operate as a release or satisfaction, even pro tanto must be made to the plaintiff
or to some person authorized by him, or by law, to receive it. The payment of money to the sheriff having an
execution satisfies it, and, if the plaintiff fails to receive it, his only remedy is against the officer (Henderson
v. Planters' and Merchants Bank, 59 SO 493, 178 Ala. 420).

Payment of an execution satisfies it without regard to whether the officer pays it over to the creditor or
misapplies it (340, 33 C.J.S. 644, citing Elliot v. Higgins, 83 N.C. 459). If defendant consents to the Sheriff s
misapplication of the money, however, defendant is estopped to claim that the debt is satisfied (340, 33 C.J.S.
644, citing Heptinstall v. Medlin 83 N.C. 16).

The above rulings find even more cogent application in the case at bar because, as contended by petitioner PAL (not
denied by private respondent), when Sheriff Reyes served the writ of execution on PAL, he (Reyes) was
accompanied by private respondent's counsel. Prudence dictated that when PAL delivered to Sheriff Reyes the two
(2) questioned checks (payable to Sheriff Reyes), private respondent's counsel should have insisted on their
immediate encashment by the Sheriff with the drawee bank in order to promptly get hold of the amount belonging to
his client, the judgment creditor.

ACCORDINGLY, I vote to grant the petition and to quash the court a quo's alias writ of execution.

Melencio-Herrera, Gancayco, Sarmiento, Cortes, JJ., concurs.

3
Tibajia Jr. v. Court of Appeals
G.R. No. 100290. June 4, 1993
PADILLA, J.:

Petitioners, spouses Norberto Tibajia, Jr. and Carmen Tibajia, are before this Court assailing the decision * of
respondent appellate court dated 24 April 1991 in CA-G.R. SP No. 24164 denying their petition
for certiorari prohibition, and injunction which sought to annul the order of Judge Eutropio Migriño of the Regional
10
Trial Court, Branch 151, Pasig, Metro Manila in Civil Case No. 54863 entitled "Eden Tan vs. Sps. Norberto and
Carmen Tibajia."

Stated briefly, the relevant facts are as follows:

Case No. 54863 was a suit for collection of a sum of money filed by Eden Tan against the Tibajia spouses. A writ of
attachment was issued by the trial court on 17 August 1987 and on 17 September 1987, the Deputy Sheriff filed a
return stating that a deposit made by the Tibajia spouses in the Regional Trial Court of Kalookan City in the amount
of Four Hundred Forty Two Thousand Seven Hundred and Fifty Pesos (P442,750.00) in another case, had been
garnished by him. On 10 March 1988, the Regional Trial Court, Branch 151 of Pasig, Metro Manila rendered its
decision in Civil Case No. 54863 in favor of the plaintiff Eden Tan, ordering the Tibajia spouses to pay her an amount
in excess of Three Hundred Thousand Pesos (P300,000.00). On appeal, the Court of Appeals modified the decision
by reducing the award of moral and exemplary damages. The decision having become final, Eden Tan filed the
corresponding motion for execution and thereafter, the garnished funds which by then were on deposit with the
cashier of the Regional Trial Court of Pasig, Metro Manila, were levied upon.

On 14 December 1990, the Tibajia spouses delivered to Deputy Sheriff Eduardo Bolima the total money judgment in
the following form:

Cashier's Check P262,750.00

Cash 135,733.70
————
Total P398,483.70

Private respondent, Eden Tan, refused to accept the payment made by the Tibajia spouses and instead insisted that
the garnished funds deposited with the cashier of the Regional Trial Court of Pasig, Metro Manila be withdrawn to
satisfy the judgment obligation. On 15 January 1991, defendant spouses (petitioners) filed a motion to lift the writ of
execution on the ground that the judgment debt had already been paid. On 29 January 1991, the motion was denied
by the trial court on the ground that payment in cashier's check is not payment in legal tender and that payment was
made by a third party other than the defendant. A motion for reconsideration was denied on 8 February 1991.
Thereafter, the spouses Tibajia filed a petition for certiorari, prohibition and injunction in the Court of Appeals. The
appellate court dismissed the petition on 24 April 1991 holding that payment by cashier's check is not payment in
legal tender as required by Republic Act No. 529. The motion for reconsideration was denied on 27 May 1991.

In this petition for review, the Tibajia spouses raise the following issues:

I WHETHER OR NOT THE BPI CASHIER'S CHECK NO. 014021 IN THE AMOUNT OF P262,750.00
TENDERED BY PETITIONERS FOR PAYMENT OF THE JUDGMENT DEBT, IS "LEGAL TENDER".

II WHETHER OR NOT THE PRIVATE RESPONDENT MAY VALIDLY REFUSE THE TENDER OF
PAYMENT PARTLY IN CHECK AND PARTLY IN CASH MADE BY PETITIONERS, THRU AURORA
VITO AND COUNSEL, FOR THE SATISFACTION OF THE MONETARY OBLIGATION OF
PETITIONERS-SPOUSES.1

The only issue to be resolved in this case is whether or not payment by means of check (even by cashier's check) is
considered payment in legal tender as required by the Civil Code, Republic Act No. 529, and the Central Bank Act.

It is contended by the petitioners that the check, which was a cashier's check of the Bank of the Philippine Islands,
undoubtedly a bank of good standing and reputation, and which was a crossed check marked "For Payee's Account
Only" and payable to private respondent Eden Tan, is considered legal tender, payment with which operates to
discharge their monetary obligation.2 Petitioners, to support their contention, cite the case of New Pacific Timber and
Supply Co., Inc. v. Señeris3 where this Court held through Mr. Justice Hermogenes Concepcion, Jr. that "It is a well-
known and accepted practice in the business sector that a cashier's check is deemed as cash".

The provisions of law applicable to the case at bar are the following:

a. Article 1249 of the Civil Code which provides:

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not
possible to deliver such currency, then in the currency which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents
shall produce the effect of payment only when they have been cashed, or when through the fault of
the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in abeyance.;

11
b. Section 1 of Republic Act No. 529, as amended, which provides:

Sec. 1. Every provision contained in, or made with respect to, any obligation which purports to give
the obligee the right to require payment in gold or in any particular kind of coin or currency other than
Philippine currency or in an amount of money of the Philippines measured thereby, shall be as it is
hereby declared against public policy null and void, and of no effect, and no such provision shall be
contained in, or made with respect to, any obligation thereafter incurred. Every obligation heretofore
and hereafter incurred, whether or not any such provision as to payment is contained therein or made
with respect thereto, shall be discharged upon payment in any coin or currency which at the time of
payment is legal tender for public and private debts.

c. Section 63 of Republic Act No. 265, as amended (Central Bank Act) which provides:

Sec. 63. Legal character — Checks representing deposit money do not have legal tender power and
their acceptance in the payment of debts, both public and private, is at the option of the creditor:
Provided, however, that a check which has been cleared and credited to the account of the creditor
shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to
his account.

From the aforequoted provisions of law, it is clear that this petition must fail.

In the recent cases of Philippine Airlines, Inc. vs. Court of Appeals4 and Roman Catholic Bishop of Malolos, Inc. vs.
Intermediate Appellate Court,5 this Court held that —

A check, whether a manager's check or ordinary check, is not legal tender, and an offer of a check in
payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or
creditor.

The ruling in these two (2) cases merely applies the statutory provisions which lay down the rule that a check is not
legal tender and that a creditor may validly refuse payment by check, whether it be a manager's, cashier's or personal
check.

Petitioners erroneously rely on one of the dissenting opinions in the Philippine Airlines case6 to support their cause.
The dissenting opinion however does not in any way support the contention that a check is legal tender but, on the
contrary, states that "If the PAL checks in question had not been encashed by Sheriff Reyes, there would be no
payment by PAL and, consequently, no discharge or satisfaction of its judgment obligation." 7 Moreover, the
circumstances in the Philippine Airlines case are quite different from those in the case at bar for in that case the
checks issued by the judgment debtor were made payable to the sheriff, Emilio Z. Reyes, who encashed the checks
but failed to deliver the proceeds of said encashment to the judgment creditor.

In the more recent case of Fortunado vs. Court of Appeals,8 this Court stressed that, "We are not, by this decision,
sanctioning the use of a check for the payment of obligations over the objection of the creditor."

WHEREFORE, the petition is DENIED. The appealed decision is hereby AFFIRMED, with costs against the
petitioners.

SO ORDERED.

c. Negotiation vs. Assignment

SESBRENO VS. CA
GR 89252, May 24, 1993

On 9 February 1981, petitioner Raul Sesbreño made a money market placement in the amount of P300,000.00 with
the Philippine Underwriters Finance Corporation ("Philfinance"), Cebu Branch; the placement, with a term of thirty-
two (32) days, would mature on 13 March 1981, Philfinance, also on 9 February 1981, issued the following documents
to petitioner:

(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of one (1) Delta Motors
Corporation Promissory Note ("DMC PN") No. 2731 for a term of 32 days at 17.0% per annum;

(b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale of DMC PN No. 2731
to petitioner, with the notation that the said security was in custodianship of Pilipinas Bank, as per
Denominated Custodian Receipt ("DCR") No. 10805 dated 9 February 1981; and
12
 (c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of petitioner's investment),
with petitioner as payee, Philfinance as drawer, and Insular Bank of Asia and America as drawee, in
the total amount of P304,533.33.

On 13 March 1981, petitioner sought to encash the postdated checks issued by Philfinance. However, the checks
were dishonored for having been drawn against insufficient funds.

On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private respondent Pilipinas
Bank ("Pilipinas"). It reads as follows:

On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private respondent Pilipinas
Bank ("Pilipinas"). It reads as follows:

PILIPINAS BANK

Makati Stock Exchange Bldg.,

Ayala Avenue, Makati,

Metro Manila

February 9, 1981

———————

VALUE DATE

TO Raul Sesbreño

April 6, 1981

————————

MATURITY DATE

NO. 10805

DENOMINATED CUSTODIAN RECEIPT

This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE UNDERWRITES FINANCE
CORPORATION, we have in our custody the following securities to you [sic] the extent herein indicated.

SERIAL MAT. FACE ISSUED REGISTERED AMOUNT

NUMBER DATE VALUE BY HOLDER PAYEE

13
2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33

UNDERWRITERS

FINANCE CORP.

We further certify that these securities may be inspected by you or your duly authorized representative
at any time during regular banking hours.

Upon your written instructions we shall undertake physical delivery of the above securities fully
assigned to you should this Denominated Custodianship Receipt remain outstanding in your favor
thirty (30) days after its maturity.

On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas, Makati Branch, and
handed her a demand letter informing the bank that his placement with Philfinance in the amount reflected in the
DCR No. 10805 had remained unpaid and outstanding, and that he in effect was asking for the physical delivery of
the underlying promissory note. Petitioner then examined the original of the DMC PN No. 2731 and found: that the
security had been issued on 10 April 1980; that it would mature on 6 April 1981; that it had a face value of
P2,300,833.33, with the Philfinance as "payee" and private respondent Delta Motors Corporation ("Delta") as
"maker;" and that on face of the promissory note was stamped "NON NEGOTIABLE." Pilipinas did not deliver the
Note, nor any certificate of participation in respect thereof, to petitioner.

Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981,2 again asking private respondent
Pilipinas for physical delivery of the original of DMC PN No. 2731. Pilipinas allegedly referred all of petitioner's
demand letters to Philfinance for written instructions, as has been supposedly agreed upon in "Securities
Custodianship Agreement" between Pilipinas and Philfinance. Philfinance did not provide the appropriate
instructions; Pilipinas never released DMC PN No. 2731, nor any other instrument in respect thereof, to petitioner.

Petitioner also made a written demand on 14 July 19813 upon private respondent Delta for the partial satisfaction of
DMC PN No. 2731, explaining that Philfinance, as payee thereof, had assigned to him said Note to the extent of
P307,933.33. Delta, however, denied any liability to petitioner on the promissory note, and explained in turn that it
had previously agreed with Philfinance to offset its DMC PN No. 2731 (along with DMC PN No. 2730) against
Philfinance PN No. 143-A issued in favor of Delta.

In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the Securities and
exchange commission ("SEC") and the Central Bank. Pilipinas delivered to the SEC DMC PN No. 2731, which to
date apparently remains in the custody of the SEC.4

As petitioner had failed to collect his investment and interest thereon, he filed on 28 September 1982 an action for
damages with the Regional Trial Court ("RTC") of Cebu City, Branch 21, against private respondents Delta and
Pilipinas.5 The trial court, in a decision dated 5 August 1987, dismissed the complaint and counterclaims for lack of
merit and for lack of cause of action, with costs against petitioner.

Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision dated 21 March 1989,
the Court of Appeals denied the appeal and held:6

Be that as it may, from the evidence on record, if there is anyone that appears liable for the travails
of plaintiff-appellant, it is Philfinance. As correctly observed by the trial court:

This act of Philfinance in accepting the investment of plaintiff and charging it against
DMC PN No. 2731 when its entire face value was already obligated or earmarked for
set-off or compensation is difficult to comprehend and may have been motivated with
bad faith. Philfinance, therefore, is solely and legally obligated to return the
investment of plaintiff, together with its earnings, and to answer all the damages
plaintiff has suffered incident thereto. Unfortunately for plaintiff, Philfinance was not
impleaded as one of the defendants in this case at bar; hence, this Court is without
jurisdiction to pronounce judgement against it. (p. 11, Decision)

WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby
affirmed in toto. Cost against plaintiff-appellant.

Petitioner moved for reconsideration of the above Decision, without success.

Hence, this Petition for Review on Certiorari.

14
After consideration of the allegations contained and issues raised in the pleadings, the Court resolved to give due
course to the petition and required the parties to file their respective memoranda.7

Petitioner reiterates the assignment of errors he directed at the trial court decision, and contends that respondent
court of Appeals gravely erred: (i) in concluding that he cannot recover from private respondent Delta his assigned
portion of DMC PN No. 2731; (ii) in failing to hold private respondent Pilipinas solidarily liable on the DMC PN No.
2731 in view of the provisions stipulated in DCR No. 10805 issued in favor r of petitioner, and (iii) in refusing to pierce
the veil of corporate entity between Philfinance, and private respondents Delta and Pilipinas, considering that the
three (3) entities belong to the "Silverio Group of Companies" under the leadership of Mr. Ricardo Silverio, Sr.8

There are at least two (2) sets of relationships which we need to address: firstly, the relationship of petitioner vis-a-
vis Delta; secondly, the relationship of petitioner in respect of Pilipinas. Actually, of course, there is a third relationship
that is of critical importance: the relationship of petitioner and Philfinance. However, since Philfinance has not been
impleaded in this case, neither the trial court nor the Court of Appeals acquired jurisdiction over the person of
Philfinance. It is, consequently, not necessary for present purposes to deal with this third relationship, except to the
extent it necessarily impinges upon or intersects the first and second relationships.

I.

We consider first the relationship between petitioner and Delta.

The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect of the Delta promissory
note (DMC PN No. 2731) which Philfinance sold "without recourse" to petitioner, to the extent of P304,533.33. The
Court of Appeals said on this point:

Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 as the same is "non-
negotiable" as stamped on its face (Exhibit "6"), negotiation being defined as the transfer of an
instrument from one person to another so as to constitute the transferee the holder of the instrument
(Sec. 30, Negotiable Instruments Law). A person not a holder cannot sue on the instrument in his
own name and cannot demand or receive payment (Section 51, id.)9

Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note had been validly transferred,
in part to him by assignment and that as a result of such transfer, Delta as debtor-maker of the Note, was obligated
to pay petitioner the portion of that Note assigned to him by the payee Philfinance.

Delta, however, disputes petitioner's contention and argues:

(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise transferred by Philfinance
as manifested by the word "non-negotiable" stamp across the face of the Note10 and because maker
Delta and payee Philfinance intended that this Note would be offset against the outstanding obligation
of Philfinance represented by Philfinance PN No. 143-A issued to Delta as payee;

(2) that the assignment of DMC PN No. 2731 by Philfinance was without Delta's consent, if not against
its instructions; and

(3) assuming (arguendo only) that the partial assignment in favor of petitioner was valid, petitioner
took the Note subject to the defenses available to Delta, in particular, the offsetting of DMC PN No.
2731 against Philfinance PN No. 143-A.11

We consider Delta's arguments seriatim.

Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be distinguished from
the assignment or transfer of an instrument whether that be negotiable or non-negotiable. Only an instrument
qualifying as a negotiable instrument under the relevant statute may be negotiated either by indorsement thereof
coupled with delivery, or by delivery alone where the negotiable instrument is in bearer form. A negotiable instrument
may, however, instead of being negotiated, also be assigned or transferred. The legal consequences of negotiation
as distinguished from assignment of a negotiable instrument are, of course, different. A non-negotiable instrument
may, obviously, not be negotiated; but it may be assigned or transferred, absent an express prohibition against
assignment or transfer written in the face of the instrument:

The words "not negotiable," stamped on the face of the bill of lading, did not destroy its assignability,
but the sole effect was to exempt the bill from the statutory provisions relative thereto, and a bill,
though not negotiable, may be transferred by assignment; the assignee taking subject to the equities
between the original parties.12 (Emphasis added)

15
DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-transferable" or "non-
assignable." It contained no stipulation which prohibited Philfinance from assigning or transferring, in whole or in part,
that Note.

Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which should be quoted in
full:

April 10, 1980

Philippine Underwriters Finance Corp.

Benavidez St., Makati,

Metro Manila.

Attention: Mr. Alfredo O. Banaria

SVP-Treasurer

GENTLEMEN:

This refers to our outstanding placement of P4,601,666.67 as evidenced by your Promissory Note No. 143-A, dated
April 10, 1980, to mature on April 6, 1981.

As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and 2731 for P2,000,000.00 each, dated
April 10, 1980, to be offsetted [sic] against your PN No. 143-A upon co-terminal maturity.

Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.

Very Truly Yours,

(Sgd.)

Florencio B. Biagan

Senior Vice President13We find nothing in his "Letter of Agreement" which can be reasonably construed as a
prohibition upon Philfinance assigning or transferring all or part of DMC PN No. 2731, before the maturity thereof. It
is scarcely necessary to add that, even had this "Letter of Agreement" set forth an explicit prohibition of transfer upon
Philfinance, such a prohibition cannot be invoked against an assignee or transferee of the Note who parted with
valuable consideration in good faith and without notice of such prohibition. It is not disputed that petitioner was such
an assignee or transferee. Our conclusion on this point is reinforced by the fact that what Philfinance and Delta were
doing by their exchange of their promissory notes was this: Delta invested, by making a money market placement
with Philfinance, approximately P4,600,000.00 on 10 April 1980; but promptly, on the same day, borrowed back the
bulk of that placement, i.e., P4,000,000.00, by issuing its two (2) promissory notes: DMC PN No. 2730 and DMC PN
No. 2731, both also dated 10 April 1980. Thus, Philfinance was left with not P4,600,000.00 but only P600,000.00 in
cash and the two (2) Delta promissory notes.

Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been effected without
the consent of Delta, we note that such consent was not necessary for the validity and enforceability of the
assignment in favor of petitioner.14 Delta's argument that Philfinance's sale or assignment of part of its rights to DMC
PN No. 2731 constituted conventional subrogation, which required its (Delta's) consent, is quite mistaken.
Conventional subrogation, which in the first place is never lightly inferred,15 must be clearly established by the
unequivocal terms of the substituting obligation or by the evident incompatibility of the new and old obligations on
every point.16 Nothing of the sort is present in the instant case.

It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No. 2731 to Philfinance, an
entity engaged in the business of buying and selling debt instruments and other securities, and more generally, in
money market transactions. In Perez v. Court of Appeals,17 the Court, speaking through Mme. Justice Herrera, made
the following important statement:

There is another aspect to this case. What is involved here is a money market transaction. As defined
by Lawrence Smith "the money market is a market dealing in standardized short-term credit
instruments (involving large amounts) where lenders and borrowers do not deal directly with each
other but through a middle manor a dealer in the open market." It involves "commercial papers" which
are instruments "evidencing indebtness of any person or entity. . ., which are issued, endorsed, sold
or transferred or in any manner conveyed to another person or entity, with or without recourse". The
16
 fundamental function of the money market device in its operation is to match and bring together in a
most impersonal manner both the "fund users" and the "fund suppliers." The money market is an
"impersonal market", free from personal considerations. "The market mechanism is intended to
provide quick mobility of money and securities."

The impersonal character of the money market device overlooks the individuals or entities
concerned. The issuer of a commercial paper in the money market necessarily knows in advance
that it would be expenditiously transacted and transferred to any investor/lender without need of
notice to said issuer. In practice, no notification is given to the borrower or issuer of commercial paper
of the sale or transfer to the investor.

xxx xxx xxx

There is need to individuate a money market transaction, a relatively novel institution in the Philippine
commercial scene. It has been intended to facilitate the flow and acquisition of capital on an
impersonal basis. And as specifically required by Presidential Decree No. 678, the investing public
must be given adequate and effective protection in availing of the credit of a borrower in the
commercial paper market.18 (Citations omitted; emphasis supplied)

We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No. 2731 and
Philfinance PN No. 143-A. It is important to note that at the time Philfinance sold part of its rights under DMC PN No.
2731 to petitioner on 9 February 1981, no compensation had as yet taken place and indeed none could have taken
place. The essential requirements of compensation are listed in the Civil Code as follows:

Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;

(2) That both debts consists in a sum of money, or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated;

(3) That the two debts are due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor. (Emphasis supplied)

On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was explicitly recognized
by Delta in its 10 April 1980 "Letter of Agreement" with Philfinance, where Delta acknowledged that the relevant
promissory notes were "to be offsetted (sic) against [Philfinance] PN No. 143-A upon co-terminal maturity."

As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49) days before the "co-
terminal maturity" date, that is to say, before any compensation had taken place. Further, the assignment to petitioner
would have prevented compensation had taken place between Philfinance and Delta, to the extent of P304,533.33,
because upon execution of the assignment in favor of petitioner, Philfinance and Delta would have ceased to be
creditors and debtors of each other in their own right to the extent of the amount assigned by Philfinance to petitioner.
Thus, we conclude that the assignment effected by Philfinance in favor of petitioner was a valid one and that petitioner
accordingly became owner of DMC PN No. 2731 to the extent of the portion thereof assigned to him.

The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on 14 July
1981, 19 that is, after the maturity not only of the money market placement made by petitioner but also of both DMC
PN No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified Delta of his rights as assignee after
compensation had taken place by operation of law because the offsetting instruments had both reached maturity. It
is a firmly settled doctrine that the rights of an assignee are not any greater that the rights of the assignor, since the
assignee is merely substituted in the place of the assignor 20 and that the assignee acquires his rights subject to the
equities — i.e., the defenses — which the debtor could have set up against the original assignor before notice of the
assignment was given to the debtor. Article 1285 of the Civil Code provides that:

Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a
third person, cannot set up against the assignee the compensation which would pertain to him against
the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he
reserved his right to the compensation.

17
 If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may
set up the compensation of debts previous to the cession, but not of subsequent ones.

If the assignment is made without the knowledge of the debtor, he may set up the compensation of
all credits prior to the same and also later ones until he had knowledge of the assignment. (Emphasis
supplied)

Article 1626 of the same code states that: "the debtor who, before having knowledge of the assignment, pays his
creditor shall be released from the obligation." In Sison v. Yap-Tico,21 the Court explained that:

[n]o man is bound to remain a debtor; he may pay to him with whom he contacted to pay; and if he
pay before notice that his debt has been assigned, the law holds him exonerated, for the reason that
it is the duty of the person who has acquired a title by transfer to demand payment of the debt, to give
his debt or notice.22

At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July 1981, DMC PN No.
2731 had already been discharged by compensation. Since the assignor Philfinance could not have then compelled
payment anew by Delta of DMC PN No. 2731, petitioner, as assignee of Philfinance, is similarly disabled from
collecting from Delta the portion of the Note assigned to him.

It bears some emphasis that petitioner could have notified Delta of the assignment or sale was effected on 9 February
1981. He could have notified Delta as soon as his money market placement matured on 13 March 1981 without
payment thereof being made by Philfinance; at that time, compensation had yet to set in and discharge DMC PN No.
2731. Again petitioner could have notified Delta on 26 March 1981 when petitioner received from Philfinance the
Denominated Custodianship Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in favor of petitioner.
Petitioner could, in fine, have notified Delta at any time before the maturity date of DMC PN No. 2731. Because
petitioner failed to do so, and because the record is bare of any indication that Philfinance had itself notified Delta of
the assignment to petitioner, the Court is compelled to uphold the defense of compensation raised by private
respondent Delta. Of course, Philfinance remains liable to petitioner under the terms of the assignment made by
Philfinance to petitioner.

II.

We turn now to the relationship between petitioner and private respondent Pilipinas. Petitioner contends that Pilipinas
became solidarily liable with Philfinance and Delta when Pilipinas issued DCR No. 10805 with the following words:

Upon your written instruction, we [Pilipinas] shall undertake physical delivery of the above
securities fully assigned to you —.23

The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the part of Pilipinas to pay
petitioner the amount of P307,933.33 nor any assumption of liability in solidum with Philfinance and Delta under DMC
PN No. 2731. We read the DCR as a confirmation on the part of Pilipinas that:

(1) it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 of a certain face value,
to mature on 6 April 1981 and payable to the order of Philfinance;

(2) Pilipinas was, from and after said date of the assignment by Philfinance to petitioner (9 February
1981), holding that Note on behalf and for the benefit of petitioner, at least to the extent it had been
assigned to petitioner by payee Philfinance;24

(3) petitioner may inspect the Note either "personally or by authorized representative", at any time
during regular bank hours; and

(4) upon written instructions of petitioner, Pilipinas would physically deliver the DMC PN No. 2731 (or
a participation therein to the extent of P307,933.33) "should this Denominated Custodianship receipt
remain outstanding in [petitioner's] favor thirty (30) days after its maturity."

Thus, we find nothing written in printers ink on the DCR which could reasonably be read as converting Pilipinas into
an obligor under the terms of DMC PN No. 2731 assigned to petitioner, either upon maturity thereof or any other
time. We note that both in his complaint and in his testimony before the trial court, petitioner referred merely to the
obligation of private respondent Pilipinas to effect the physical delivery to him of DMC PN No. 2731. 25 Accordingly,
petitioner's theory that Pilipinas had assumed a solidary obligation to pay the amount represented by a portion of the
Note assigned to him by Philfinance, appears to be a new theory constructed only after the trial court had ruled
against him. The solidary liability that petitioner seeks to impute Pilipinas cannot, however, be lightly inferred. Under
article 1207 of the Civil Code, "there is a solidary liability only when the law or the nature of the obligation requires
solidarity," The record here exhibits no express assumption of solidary liability vis-a-vis petitioner, on the part of
Pilipinas. Petitioner has not pointed to us to any law which imposed such liability upon Pilipinas nor has petitioner
18
argued that the very nature of the custodianship assumed by private respondent Pilipinas necessarily implies solidary
liability under the securities, custody of which was taken by Pilipinas. Accordingly, we are unable to hold Pilipinas
solidarily liable with Philfinance and private respondent Delta under DMC PN No. 2731.

We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respect of petitioner under
the terms of the DCR. To the contrary, we find, after prolonged analysis and deliberation, that private respondent
Pilipinas had breached its undertaking under the DCR to petitioner Sesbreño.

We believe and so hold that a contract of deposit was constituted by the act of Philfinance in designating Pilipinas
as custodian or depositary bank. The depositor was initially Philfinance; the obligation of the depository was owed,
however, to petitioner Sesbreño as beneficiary of the custodianship or depository agreement. We do not consider
that this is a simple case of a stipulation pour autri. The custodianship or depositary agreement was established as
an integral part of the money market transaction entered into by petitioner with Philfinance. Petitioner bought a portion
of DMC PN No. 2731; Philfinance as assignor-vendor deposited that Note with Pilipinas in order that the thing sold
would be placed outside the control of the vendor. Indeed, the constituting of the depositary or custodianship
agreement was equivalent to constructive delivery of the Note (to the extent it had been sold or assigned to petitioner)
to petitioner. It will be seen that custodianship agreements are designed to facilitate transactions in the money market
by providing a basis for confidence on the part of the investors or placers that the instruments bought by them are
effectively taken out of the pocket, as it were, of the vendors and placed safely beyond their reach, that those
instruments will be there available to the placers of funds should they have need of them. The depositary in a contract
of deposit is obliged to return the security or the thing deposited upon demand of the depositor (or, in the presented
case, of the beneficiary) of the contract, even though a term for such return may have been established in the said
contract.26 Accordingly, any stipulation in the contract of deposit or custodianship that runs counter to the fundamental
purpose of that agreement or which was not brought to the notice of and accepted by the placer-beneficiary, cannot
be enforced as against such beneficiary-placer.

We believe that the position taken above is supported by considerations of public policy. If there is any party that
needs the equalizing protection of the law in money market transactions, it is the members of the general public
whom place their savings in such market for the purpose of generating interest revenues. 27 The custodian bank, if it
is not related either in terms of equity ownership or management control to the borrower of the funds, or the
commercial paper dealer, is normally a preferred or traditional banker of such borrower or dealer (here, Philfinance).
The custodian bank would have every incentive to protect the interest of its client the borrower or dealer as against
the placer of funds. The providers of such funds must be safeguarded from the impact of stipulations privately made
between the borrowers or dealers and the custodian banks, and disclosed to fund-providers only after trouble has
erupted.

In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security deposited with it when
petitioner first demanded physical delivery thereof on 2 April 1981. We must again note, in this connection, that on 2
April 1981, DMC PN No. 2731 had not yet matured and therefore, compensation or offsetting against Philfinance PN
No. 143-A had not yet taken place. Instead of complying with the demand of the petitioner, Pilipinas purported to
require and await the instructions of Philfinance, in obvious contravention of its undertaking under the DCR to effect
physical delivery of the Note upon receipt of "written instructions" from petitioner Sesbreño. The ostensible term
written into the DCR (i.e., "should this [DCR] remain outstanding in your favor thirty [30] days after its maturity") was
not a defense against petitioner's demand for physical surrender of the Note on at least three grounds: firstly, such
term was never brought to the attention of petitioner Sesbreño at the time the money market placement with
Philfinance was made; secondly, such term runs counter to the very purpose of the custodianship or depositary
agreement as an integral part of a money market transaction; and thirdly, it is inconsistent with the provisions of
Article 1988 of the Civil Code noted above. Indeed, in principle, petitioner became entitled to demand physical
delivery of the Note held by Pilipinas as soon as petitioner's money market placement matured on 13 March 1981
without payment from Philfinance.

We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages sustained by arising
out of its breach of duty. By failing to deliver the Note to the petitioner as depositor-beneficiary of the thing deposited,
Pilipinas effectively and unlawfully deprived petitioner of the Note deposited with it. Whether or not Pilipinas itself
benefitted from such conversion or unlawful deprivation inflicted upon petitioner, is of no moment for present
purposes. Prima facie, the damages suffered by petitioner consisted of P304,533.33, the portion of the DMC PN No.
2731 assigned to petitioner but lost by him by reason of discharge of the Note by compensation, plus legal interest
of six percent (6%) per annum containing from 14 March 1981.

The conclusion we have reached is, of course, without prejudice to such right of reimbursement as Pilipinas may
have vis-a-vis Philfinance.

III.

The third principal contention of petitioner — that Philfinance and private respondents Delta and Pilipinas should be
treated as one corporate entity — need not detain us for long.

19
In the first place, as already noted, jurisdiction over the person of Philfinance was never acquired either by the trial
court nor by the respondent Court of Appeals. Petitioner similarly did not seek to implead Philfinance in the Petition
before us.

Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been organized as
separate corporate entities. Petitioner asks us to pierce their separate corporate entities, but has been able only to
cite the presence of a common Director — Mr. Ricardo Silverio, Sr., sitting on the Board of Directors of all three (3)
companies. Petitioner has neither alleged nor proved that one or another of the three (3) concededly related
companies used the other two (2) as mere alter egos or that the corporate affairs of the other two (2) were
administered and managed for the benefit of one. There is simply not enough evidence of record to justify
disregarding the separate corporate personalities of delta and Pilipinas and to hold them liable for any assumed or
undetermined liability of Philfinance to petitioner.28

WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in C.A.-G.R. CV No. 15195
dated 21 march 1989 and 17 July 1989, respectively, are hereby MODIFIED and SET ASIDE, to the extent that such
Decision and Resolution had dismissed petitioner's complaint against Pilipinas Bank. Private respondent Pilipinas
bank is hereby ORDERED to indemnify petitioner for damages in the amount of P304,533.33, plus legal interest
thereon at the rate of six percent (6%) per annum counted from 2 April 1981. As so modified, the Decision and
Resolution of the Court of Appeals are hereby AFFIRMED. No pronouncement as to costs.

SO ORDERED.

f. Common Negotiable Instruments

1
The Philippine Bank of Commerce vs Aruego
G.R. Nos. L-25836-37 January 31, 1981
FERNANDEZ, J.:

The defendant, Jose M. Aruego, appealed to the Court of Appeals from the order of the Court of First Instance of
Manila, Branch XIII, in Civil Case No. 42066 denying his motion to set aside the order declaring him in default, 1 and
from the order of said court in the same case denying his motion to set aside the judgment rendered after he was
declared in default. 2 These two appeals of the defendant were docketed as CA-G.R. NO. 27734-R and CA-G.R. NO.
27940-R, respectively.

Upon motion of the defendant on July 25, 1960, 3 he was allowed by the Court of Appeals to file one consolidated
record on appeal of CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R. 4

In a resolution promulgated on March 1, 1966, the Court of Appeals, First Division, certified the consolidated appeal
to the Supreme Court on the ground that only questions of law are involved. 5

On December 1, 1959, the Philippine Bank of Commerce instituted against Jose M. Aruego Civil Case No. 42066 for
the recovery of the total sum of about P35,000.00 with daily interest thereon from November 17, 1959 until fully paid
and commission equivalent to 3/8% for every thirty (30) days or fraction thereof plus attorney's fees equivalent to
10% of the total amount due and costs. 6 The complaint filed by the Philippine Bank of Commerce contains twenty-
two (22) causes of action referring to twenty-two (22) transactions entered into by the said Bank and Aruego on
different dates covering the period from August 28, 1950 to March 14, 1951. 7 The sum sought to be recovered
represents the cost of the printing of "World Current Events," a periodical published by the defendant. To facilitate
the payment of the printing the defendant obtained a credit accommodation from the plaintiff. Thus, for every printing
of the "World Current Events," the printer, Encal Press and Photo Engraving, collected the cost of printing by drawing
a draft against the plaintiff, said draft being sent later to the defendant for acceptance. As an added security for the
payment of the amounts advanced to Encal Press and Photo-Engraving, the plaintiff bank also required defendant
Aruego to execute a trust receipt in favor of said bank wherein said defendant undertook to hold in trust for plaintiff
the periodicals and to sell the same with the promise to turn over to the plaintiff the proceeds of the sale of said
publication to answer for the payment of all obligations arising from the draft. 8

Aruego received a copy of the complaint together with the summons on December 2, 1959. 9 On December 14, 1959
defendant filed an urgent motion for extension of time to plead, and set the hearing on December 16, 1959. 10 At the
hearing, the court denied defendant's motion for extension. Whereupon, the defendant filed a motion to dismiss the
complaint on December 17, 1959 on the ground that the complaint states no cause of action because:

a) When the various bills of exchange were presented to the defendant as drawee for acceptance, the amounts
thereof had already been paid by the plaintiff to the drawer (Encal Press and Photo Engraving), without knowledge
or consent of the defendant drawee.

20
b) In the case of a bill of exchange, like those involved in the case at bar, the defendant drawee is an accommodating
party only for the drawer (Encal Press and Photo-Engraving) and win be liable in the event that the accommodating
party (drawer) fails to pay its obligation to the plaintiff. 11

The complaint was dismissed in an order dated December 22, 1959, copy of which was received by the defendant
on December 24, 1959. 12

On January 13, 1960, the plaintiff filed a motion for reconsideration. 13 On March 7, 1960, acting upon the motion for
reconsideration filed by the plaintiff, the trial court set aside its order dismissing the complaint and set the case for
hearing on March 15, 1960 at 8:00 in the morning. 14 A copy of the order setting aside the order of dismissal was
received by the defendant on March 11, 1960 at 5:00 o'clock in the afternoon according to the affidavit of the deputy
sheriff of Manila, Mamerto de la Cruz. On the following day, March 12, 1960, the defendant filed a motion to postpone
the trial of the case on the ground that there having been no answer as yet, the issues had not yet been joined. 15 On
the same date, the defendant filed his answer to the complaint interposing the following defenses: That he signed
the document upon which the plaintiff sues in his capacity as President of the Philippine Education Foundation; that
his liability is only secondary; and that he believed that he was signing only as an accommodation party. 16

On March 15, 1960, the plaintiff filed an ex parte motion to declare the defendant in default on the ground that the
defendant should have filed his answer on March 11, 1960. He contends that by filing his answer on March 12, 1960,
defendant was one day late. 17 On March 19, 1960 the trial court declared the defendant in default. 18 The defendant
learned of the order declaring him in default on March 21, 1960. On March 22, 1960 the defendant filed a motion to
set aside the order of default alleging that although the order of the court dated March 7, 1960 was received on March
11, 1960 at 5:00 in the afternoon, it could not have been reasonably expected of the defendant to file his answer on
the last day of the reglementary period, March 11, 1960, within office hours, especially because the order of the court
dated March 7, 1960 was brought to the attention of counsel only in the early hours of March 12, 1960. The defendant
also alleged that he has a good and substantial defense. Attached to the motion are the affidavits of deputy sheriff
Mamerto de la Cruz that he served the order of the court dated March 7, 1960 on March 11, 1960, at 5:00 o'clock in
the afternoon and the affidavit of the defendant Aruego that he has a good and substantial defense. 19 The trial court
denied the defendant's motion on March 25, 1960. 20 On May 6, 1960, the trial court rendered judgment sentencing
the defendant to pay to the plaintiff the sum of P35,444.35 representing the total amount of his obligation to the said
plaintiff under the twenty-two (22) causes of action alleged in the complaint as of November 15, 1957 and the sum
of P10,000.00 as attorney's fees. 21

On May 9, 1960 the defendant filed a notice of appeal from the order dated March 25, 1961 denying his motion to
set aside the order declaring him in default, an appeal bond in the amount of P60.00, and his record on appeal. The
plaintiff filed his opposition to the approval of defendant's record on appeal on May 13, 1960. The following day, May
14, 1960, the lower court dismissed defendant's appeal from the order dated March 25, 1960 denying his motion to
set aside the order of default. 22 On May 19, 1960, the defendant filed a motion for reconsideration of the trial court's
order dismissing his appeal. 23 The plaintiff, on May 20, 1960, opposed the defendant's motion for reconsideration of
the order dismissing appeal. 24 On May 21, 1960, the trial court reconsidered its previous order dismissing the appeal
and approved the defendant's record on appeal. 25 On May 30, 1960, the defendant received a copy of a notice from
the Clerk of Court dated May 26, 1960, informing the defendant that the record on appeal filed ed by the defendant
was forwarded to the Clerk of Court of Appeals. 26

On June 1, 1960 Aruego filed a motion to set aside the judgment rendered after he was declared in default reiterating
the same ground previously advanced by him in his motion for relief from the order of default. 27 Upon opposition of
the plaintiff filed on June 3, 1960, 28 the trial court denied the defendant's motion to set aside the judgment by default
in an order of June 11, 1960. 29 On June 20, 1960, the defendant filed his notice of appeal from the order of the court
denying his motion to set aside the judgment by default, his appeal bond, and his record on appeal. The defendant's
record on appeal was approved by the trial court on June 25, 1960. 30 Thus, the defendant had two appeals with the
Court of Appeals: (1) Appeal from the order of the lower court denying his motion to set aside the order of default
docketed as CA-G.R. NO. 27734-R; (2) Appeal from the order denying his motion to set aside the judgment by default
docketed as CA-G.R. NO. 27940-R.

In his brief, the defendant-appellant assigned the following errors:

THE LOWER COURT ERRED IN HOLDING THAT THE DEFENDANT WAS IN DEFAULT.

II

THE LOWER COURT ERRED IN ENTERTAINING THE MOTION TO DECLARE DEFENDANT IN

DEFAULT ALTHOUGH AT THE TIME THERE WAS ALREADY ON FILE AN ANSWER BY HIM
WITHOUT FIRST DISPOSING OF SAID ANSWER IN AN APPROPRIATE ACTION.

III
21
 THE LOWER COURT ERRED IN DENYING DEFENDANT'S PETITION FOR RELIEF OF ORDER
OF DEFAULT AND FROM JUDGMENT BY DEFAULT AGAINST DEFENDANT. 31

It has been held that to entitle a party to relief from a judgment taken against him through his mistake, inadvertence,
surprise or excusable neglect, he must show to the court that he has a meritorious defense. 32 In other words, in order
to set aside the order of default, the defendant must not only show that his failure to answer was due to fraud,
accident, mistake or excusable negligence but also that he has a meritorious defense.

The record discloses that Aruego received a copy of the complaint together with the summons on December 2, 1960;
that on December 17, 1960, the last day for filing his answer, Aruego filed a motion to dismiss; that on December 22,
1960 the lower court dismissed the complaint; that on January 23, 1960, the plaintiff filed a motion for reconsideration
and on March 7, 1960, acting upon the motion for reconsideration, the trial court issued an order setting aside the
order of dismissal; that a copy of the order was received by the defendant on March 11, 1960 at 5:00 o'clock in the
afternoon as shown in the affidavit of the deputy sheriff; and that on the following day, March 12, 1960, the defendant
filed his answer to the complaint.

The failure then of the defendant to file his answer on the last day for pleading is excusable. The order setting aside
the dismissal of the complaint was received at 5:00 o'clock in the afternoon. It was therefore impossible for him to
have filed his answer on that same day because the courts then held office only up to 5:00 o'clock in the afternoon.
Moreover, the defendant immediately filed his answer on the following day.

However, while the defendant successfully proved that his failure to answer was due to excusable negligence, he
has failed to show that he has a meritorious defense. The defendant does not have a good and substantial defense.

Defendant Aruego's defenses consist of the following:

a) The defendant signed the bills of exchange referred to in the plaintiff's complaint in a representative capacity, as
the then President of the Philippine Education Foundation Company, publisher of "World Current Events and
Decision Law Journal," printed by Encal Press and Photo-Engraving, drawer of the said bills of exchange in favor of
the plaintiff bank;

b) The defendant signed these bills of exchange not as principal obligor, but as accommodation or additional party
obligor, to add to the security of said plaintiff bank. The reason for this statement is that unlike real bills of exchange,
where payment of the face value is advanced to the drawer only upon acceptance of the same by the drawee, in the
case in question, payment for the supposed bills of exchange were made before acceptance; so that in effect,
although these documents are labelled bills of exchange, legally they are not bills of exchange but mere instruments
evidencing indebtedness of the drawee who received the face value thereof, with the defendant as only additional
security of the same. 33

The first defense of the defendant is that he signed the supposed bills of exchange as an agent of the Philippine
Education Foundation Company where he is president. Section 20 of the Negotiable Instruments Law provides that
"Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a
principal or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere
addition of words describing him as an agent or as filing a representative character, without disclosing his principal,
does not exempt him from personal liability."

An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he was signing as
a representative of the Philippine Education Foundation Company. 34 He merely signed as follows: "JOSE ARUEGO
(Acceptor) (SGD) JOSE ARGUEGO For failure to disclose his principal, Aruego is personally liable for the drafts he
accepted.

The defendant also contends that he signed the drafts only as an accommodation party and as such, should be made
liable only after a showing that the drawer is incapable of paying. This contention is also without merit.

An accommodation party is one who has signed the instrument as maker, drawer, indorser, without receiving value
therefor and for the purpose of lending his name to some other person. Such person is liable on the instrument to a
holder for value, notwithstanding such holder, at the time of the taking of the instrument knew him to be only an
accommodation party.35 In lending his name to the accommodated party, the accommodation party is in effect a
surety for the latter. He lends his name to enable the accommodated party to obtain credit or to raise money. He
receives no part of the consideration for the instrument but assumes liability to the other parties thereto because he
wants to accommodate another. In the instant case, the defendant signed as a drawee/acceptor. Under the
Negotiable Instrument Law, a drawee is primarily liable. Thus, if the defendant who is a lawyer, he should not have
signed as an acceptor/drawee. In doing so, he became primarily and personally liable for the drafts.

The defendant also contends that the drafts signed by him were not really bills of exchange but mere pieces of
evidence of indebtedness because payments were made before acceptance. This is also without merit. Under the
Negotiable Instruments Law, a bill of exchange is an unconditional order in writting addressed by one person to
22
another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed
or determinable future time a sum certain in money to order or to bearer. 36 As long as a commercial paper conforms
with the definition of a bill of exchange, that paper is considered a bill of exchange. The nature of acceptance is
important only in the determination of the kind of liabilities of the parties involved, but not in the determination of
whether a commercial paper is a bill of exchange or not.

It is evident then that the defendant's appeal can not prosper. To grant the defendant's prayer will result in a new trial
which will serve no purpose and will just waste the time of the courts as well as of the parties because the defense
is nil or ineffective. 37

WHEREFORE, the order appealed from in Civil Case No. 42066 of the Court of First Instance of Manila denying the
petition for relief from the judgment rendered in said case is hereby affirmed, without pronouncement as to costs.

SO ORDERED.

2
Moran vs. CA
GR 105836, 7 March 1994
Regalado (J)

Petitioner spouses George and Librada Moran are the owners of the Wack-Wack Petron gasoline station located at
Shaw Boulevard, corner Old Wack-Wack Road, Mandaluyong, Metro Manila. They regularly purchased bulk fuel and
other related products from Petrophil Corporation on cash on delivery (COD) basis. Orders for bulk fuel and other
related products were made by telephone and payments were effected by personal checks upon delivery.1

Petitioners maintained three joint accounts, namely one current account (No. 37-00066-7) and two savings accounts,
(Nos. 1037002387 and 1037001372) with the Shaw Boulevard branch of Citytrust Banking Corporation. As a special
privilege to the Morans, whom it considered as valued clients, the bank allowed them to maintain a zero balance in
their current account. Transfers from Saving Account No. 1037002387 to their current account could be made only
with their prior authorization, but they gave written authority to Citytrust to automatically transfer funds from their
Savings Account No. 1037001372 to their Current Account No. 37-00066-7 at any time whenever the funds in their
current account were insufficient to meet withdrawals from said current account. Such arrangement for automatic
transfer of funds was called a pre-authorized transfer (PAT) agreement.2

The PAT letter-agreement entered into by the parties on March 19, 1982 contained the following provisions:

xxx xxx xxx

1. The transfer may be effected on the day following the overdrawing of the current account, but the
check/s would be honored if the savings account has sufficient balance to cover the overdraft.

2. The regular charges on overdraft, and activity fees will be imposed by the Bank.

3. This is merely an accommodation on our part and we have the right, at all times and for any
reason whatsoever, to refuse to effect transfer of funds at our sole and absolute option and discretion,
reserving our right to terminate this arrangement at any time without written notice to you.

4. You hold CITYTRUST free and harmless for any and all omissions or oversight in executing this
automatic transfer of funds; . . .3

xxx xxx xxx

On December 12, 1983, petitioners, through Librada Moran, drew a check (Citytrust No. 041960) for P50,576.00
payable to Petrophil
Corporation.4 The next day, December 13, 1983, petitioners, again through Librada Moran, issued another check
(Citytrust No. 041962) in the amount of P56,090.00 in favor of the same corporation.5 The total sum of the two checks
was P106,666.00.

On December 14, 1983, Petrophil Corporation deposited the two aforementioned checks to its account with the
Pandacan branch of the Philippine National Bank (PNB), the collecting bank. In turn, PNB, Pandacan branch
presented them for clearing with the Philippine Clearing House Corporation in the afternoon of the same day. The
records show that on December 14, 1983, Current Account No. 37-00066-7 had a zero balance, while Savings
Account No. 1037001372 (covered by the PAT) had an available balance of
P26,104.306 and Savings Account No. 1037002387 had an available balance of P43,268.39.7

23
At about ten o'clock in the morning of the following day, December 15, 1983, petitioner George Moran went to the
bank, as was his regular practice, to personally oversee their daily transactions with the bank. He deposited in their
Savings Account No. 1037002387 the amounts of P10,874.58 and P6,754.25,8 and he likewise deposited in their
Savings Account No. 1037001372 the amounts of P5,900.00, P35,100.00 and 30.00.9 The amount of P40,000.00
was then transferred by him from Saving Account No. 1037002387 to their current account by means of a pro
forma withdrawal form (a debit memorandum), which was provided by the bank, authorizing the latter to make the
necessary transfer. At the same time, the amount of P66,666.00 was transferred from Savings Account No.
1037001372 to the same current account through the pre-authorized transfer (PAT) agreement. 10

Sometime on December 15 or 16, 1983 George Moran was informed by his wife Librada, that Petrophil refused to
deliver their orders on a credit basis because the two checks they had previously issued were dishonored upon
presentment for payment. Apparently, the bank dishonored the checks due to "insufficiency of funds." 11 The non-
delivery of gasoline forced petitioners to temporarily stop business operations, allegedly causing them to suffer loss
of earnings. In addition, Petrophil cancelled their credit accommodation, forcing them to pay for their purchases in
cash. 12 George Moran, furious and upset, demanded an explanation from Raul Diaz, the branch manager. Failing to
get a sufficient explanation, he talked to a certain Villareal, a bank officer, who allegedly told him that Amy Belen
Ragodo, the customer service officer, had committed a "grave error". 13

On December 16 or 17, 1983, Diaz went to the Moran residence to get the signatures of the petitioners on an
application for a manager's check so that the dishonored checks could be redeemed. Diaz then went to Petrophil to
personally present the checks in payment for the two dishonored checks. 14

In a chance meeting around May or June, 1984, George Moran learned from one Constancio Magno, credit manager
of Petrophil, that the latter received from Citytrust, through Diaz, a letter dated December 16, 1983, notifying them
that the two aforementioned checks were "inadvertently dishonored . . . due to operational error." Said letter was
received by Petrophil on January 4, 1984. 15

On July 24, 1984, or a little over six months after the incident, petitioners, through counsel, wrote Citytrust claiming
that the bank's dishonor of the checks caused them besmirched business and personal reputation, shame and
anxiety, hence they were contemplating the filing of the necessary legal actions unless the bank issued a certification
clearing their name and paid them P1,000,000.00 as moral damages. 16

The bank did not act favorably on their demands, hence petitioners filed a complaint for damages on September 8,
1984, with the Regional Trial Court, Branch 159 at Pasig, Metro Manila, which was docketed therein as Civil Case
No. 51549. In turn, Citytrust filed a counterclaim for damages, alleging that the case filed against it was unfounded
and unjust.

After trial, a decision dated October 9, 1989 was rendered by the trial court dismissing both the complaint and the
counterclaim. 17 On appeal, the Court of Appeals rendered judgment in CA-G.R. CV No. 25009 on October 9, 1989
affirming the decision of the trial court. 18

We start some basic and accepted rules, statutory and doctrinal. A check is a bill of exchange drawn on a bank
payable on demand. 19 Thus, a check is a written order addressed to a bank or persons carrying on the business of
banking, by a party having money in their hands, requesting them to pay on presentment, to a person named therein
or to bearer or order, a named sum of money. 20

Fixed savings and current deposits of money in banks and similar institutions shall be governed by the provisions
concerning simple loan. 21 In other words, the relationship between the bank and the depositor is that of a debtor and
creditor. 22 By virtue of the contract of deposit between the banker and its depositor, the banker agrees to pay checks
drawn by the depositor provided that said depositor has money in the hands of the bank. 23

Hence, where the bank possesses funds of a depositor, it is bound to honor his checks to the extent of the amount
of his deposits. The failure of a bank to pay the check of a merchant or a trader, when the deposit is sufficient, entitles
the drawer to substantial damages without any proof of actual
damages. 24

Conversely, a bank is not liable for its refusal to pay a check on account of insufficient funds, notwithstanding the fact
that a deposit may be made later in the day. 25 Before a bank depositor may maintain a suit to recover a specific
amount from his bank, he must first show that he had on deposit sufficient funds to meet his demand. 26

The present action for damages accordingly hinges on the resolution of the inquiry as to whether or not petitioners
had sufficient funds in their accounts when the bank dishonored the checks in question. In view of the factual findings
of the two lower courts the correctness of which are challenged by what appear to be plausible, arguments, we feel
that the same should properly be resolved by us. This would necessarily require us to inquire into both the savings
and current accounts of petitioners in relation to the PAT arrangement.

24
On December 14, 1983, when PNB, Pandacan branch, presented the checks for collection, the available balance for
Savings Account No. 1037001372 was P26,104.30 while Current Account No. 37-00066-7 expectedly had a zero
balance. On December 15, 1983, at approximately ten o'clock in the morning, petitioners, through George Moran,
learned that P66,666.00 from Saving Account No. 1037001372 was transferred to their current account. Another
P40,000.00 was transferred from Saving Accounts No. 1037002387 to the current account. Considering that the
transfers were by then sufficient to cover the two checks, it is asserted by petitioners that such fact should have
prevented the dishonor of the checks. It appears, however, that it was not so.

As explained by respondent court in its decision, Gerard E. Rionisto, head of the centralized clearing unit of Citytrust,
detailed on the witness stand the standard clearing procedure adopted by respondent bank and the Philippine
Clearing House Corporation, to wit:.

Q: Let me again re-phase the question. Most of (sic) these two checks issued by Mrs.
Librada Moran under the accounts of the plaintiffs with Citytrust Banking Corporation
were drawn dated December 12, 1983 and December 13, 1983(and) these two (2)
checks were made payable to Petrophil Corporation. On record, Petrophil Corporation
presented these two (2) checks for clearing with PNB Pandacan Branch on December
14, 1983. Now in accordance with the bank, what would happen with these checks
drawn with (sic) PNB on December 14, 1983?.

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

Considering the clearing process adopted, as explained in the aforequoted testimony, it is clear that the available
balance on December 14, 1983 was used by the bank in determining whether or not there was sufficient cash
deposited to fund the two checks, although what was stamped on the dorsal side of the two checks in question was
"DAIF/12-15-83," since December 15, 1983 was the actual date when the checks were processed. As earlier stated,
when petitioners' checks were dishonored due to insufficiency of funds, the available balance of Savings Account
No. 1037001372, which was the subject of the PAT agreement, was not enough to cover either of the two checks.
On December 14, 1983, when PNB, Pandacan branch presented the checks for collection, the available balance for
Savings Account No. 1037001372, to repeat, was only P26,104.30 while Current Account No. 37-0006-7 had no
available balance. It was only on December 15, 1983 at around ten o'clock in the morning that the necessary funds
were deposited, which unfortunately was too late to prevent the dishonor of the checks.

Petitioners argue that public respondent, by relying heavily on Rionisto's testimony, failed to consider the fact that
the witness himself admitted that he had no personal knowledge surrounding the dishonor of the two checks in
question. Thus, although he knew the standard clearing procedure, it does not necessarily mean that the same
procedure was adopted with regard to the two checks.

We do not agree. Section 3(q), Rule 131 of the Rules of Court provides a disputable presumption in law that the
ordinary course of business has been followed. In the absence of a contrary showing, it is presumed that the acts in
question were in conformity with the usual conduct of business. In the case at bar, petitioners failed to present
countervailing evidence to rebut the presumption that the checks involved underwent the same regular process for
clearing of checks followed by the bank since 1983.

Petitioner had no reason to complain, for they alone were at fault. A drawer must remember his responsibilities every
time he issues a check. He must personally keep track of his available balance in the bank and not rely on the bank
to notify him of the necessity to fund certain check she previously issued. A check, as distinguished from an ordinary
bill of exchange, is supposed to be drawn against a previous deposit of funds for it is ordinarily intended for
immediately payment. 28

Moreover, between the time of the issuance of said checks on December 12 and 13 and the time of their presentment
on December 14, petitioners had, at the very least, twenty-four hours to replenish their balance in the bank.

As previously noted, it was only during business hours in the morning of December 15, 1983, that P66,666.00 was
automatically transferred from Savings Account No. 1037001372 to Current Account No. 37-00066-7, and another
P40,000.00 was transferred from Savings Account No. 1037002387 to the same current by a debit memorandum.
Petitioners argue that if indeed the checks were dishonored in the early morning of December 15, 1983, the bank
would not have automatically transferred P66,666.00 to said current account. They theorize that the checks having
already been dishonored, there was no necessity to put into effect the pre-authorized transfer agreement.

25
That theory is incorrect. When the transfer from both savings accounts to the current account were made, they were
done in the hope that the checks may be retrieved, thus preventing their dishonor. Unfortunately, respondent bank
did not succeed in effectuating its good intentions. The transfers were made to preserve its relations with petitioners
whom it knew were valued clients, hence it wanted to prevent the dishonor of their checks, if the same was at all
possible. Although not admitting fault, it tried its best to make sure that the checks would not bounce.

Under similar circumstances, it was held in Whitman vs. First National Bank 29 that a bank performs its full duty where,
upon the receipt of a check drawn against an account in which there are insufficient funds to pay it in full, it endeavors
to induce the drawer to make good his account so that the check can be paid, and failing in this, it protests the check
on the following morning and notifies its correspondent bank by the telegraph of the protest. It cannot, therefore, be
held liable to the payee and holder of the check for not protesting it upon the day when it was received. In fact, the
court added that the bank did more that it was required to do by making an effort to induce the drawer to deposit
sufficient money to make the check good, and by notifying its correspondent of the dishonor of the check by telegram.

Petitioners maintain that at the time the checks were dishonored, they had already deposited sufficient funds to cover
said checks. To prove their point, petitioners quoted in their petition the following testimony of said witness Rionisto,
to wit:

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

A: Around 2:00 o'clock of December 15. We sent a clearing representative.

Q: And the checks will be processed in accordance with the balance available as of
December 14?

A: Yes, sir.

Q: And naturally you will place there "drawn against insufficient funds, December 14,
1983"?

A: Yes, sir.

Q: Are you sure about that?

A: Yes, sir . . . (tsn, September 9, 1988, p. 14) 30

Obviously witness Rionisto was merely confused as to the dates (December 14 and 15) because it did not jibe with
his previous testimony, wherein he categorically stated that "the checks will now be processed as the Citytrust
Computer at around 3:00 in the morning of December 14 (sic) but it will be processed for balance of Citytrust as of
December 14 because for one, we have not opened on December 15 at 3:00 o'clock. Under the clearing house rules,
we are supposed to process it on the date it was presented for
clearing." 31 Analyzing the procedure he had previously explained, and analyzing his testimony in its entirety and not
in truncated portions, it would logically and ineluctably appear that he actually meant December 15, and not
December 14.

In the early morning of every business day, prior to banking hours, the various branches of Citytrust would receive a
computer printout called the "rejected transactions" report from the head office. The report contains, among others,
a listing of "checks to be funded." When Citytrust, Shaw Boulevard branch, received said report in the early morning
of December 15, 1983, the two checks involved were included in the "checks to be funded." That report was used by
the bank as its basis in dishonoring the two checks in question. Petitioner contends that the bank erred when it did
so because on previous occasions, the report was merely used by the bank as a basis for determining whether or
not it was necessary to notify them of the need to deposit certain amounts in their accounts.

Amy Belen Rogado, a bank employee, testified that she would normally copy the details stated in the report and
transfer in on a "pink slip." These pink slips were then given to George Moran. In turn, George Moran testified that
he would deposit the necessary funds stated in the pink slips. As a matter of fact, so petitioner asseverated, not a
single check written on the notices was ever dishonored after he had funded said checks with the bank. Thus,
petitioner argues, the checks were not yet dishonored after the bank received the report in the early morning of
December 15, 1983.

Said argument does not persuade. If ever petitioners on previous occasions were given notices every time a check
was presented for clearing and payment and there were no adequate funds in their accounts, these were, at most,
mere accommodations on the part of respondent bank. It was not a requirement or a general banking practice, hence
non-compliance therewith could not lay the bank open to blame or rebuke. Legally, the bank had all the right to
26
dishonor the checks because there were no sufficient funds to speak of in the first place. If the demand is by check,
a drawer must have to his credit enough to cover the demand. If his credit with the bank is less than the amount on
the face of the check, the bank may lawfully refuse payment. 32

Pursuing this matter further, the bank could also not be faulted for not accepting either of the two checks. The first
check issued was in the amount of P50,576.00, while the second one was for P56,090.00. Savings Account No.
1307001372 then had a balance of only P26,104.30. This being the case, Citytrust could not be expected to accept
for payment either one of the two checks nor partially honor one check.

A bank is under no obligation to make part payment on a check, up to only the amount of the drawer's funds, where
the check is drawn for an amount larger than what the drawer has on deposit. Such a practice of paying checks in
part has never existed. Upon partial payment, the check holder could not be called upon to surrender the check, and
the bank would be without a voucher affording a certain means of showing the payment. The rule is based on
commercial convenience, and any rule that would work such manifest inconvenience should not be recognized. A
check is intended not only to transfer a right to the amount named in it, but to serve the further purpose of affording
evidence for the bank of the payment of such amount when the check is taken up. 33

On the other hand, assuming arguendo that Savings Account No. 1037002387, which is not covered by a pre-
arranged automatic transfer agreement, had enough amount deposited to cover both checks (which is not so in this
case), the bank still had no obligation to honor said checks as there was then no authority given to it to make the
transfer of funds. Where a depositor has two accounts with a bank, an open account and a savings account, and
draws a check upon the open account for more money than the account contains, the bank may rightfully refuse to
pay the check, and is under no duty to make up the deficiency from the savings account. 34

We are agree with respondent Court of Appeals in its assessment and interpretation of the nature of the letter of
Citytrust to Petrophil, dated December 16, 1983. As aptly and correctly stated by said court, ". . . the letter is not an
admission of liability as it was written merely to maintain the goodwill and continued patronage of plaintiff-appellants.
(This) cannot be characterized as baseless, considering the totality of the circumstances surrounding its writing." 35

In the present case, the actions taken by the bank after the incident clearly show that there was neither malice nor
bad faith, but rather a clear intent to mollify an obviously agitated client. Raul Diaz, the branch manager, even went
for this purpose to the Moran residence to facilitate their application for a manager's check. Later, he went to the
Petrophil Corporation to personally redeem the checks. Still later, the letter was sent by respondent bank to Petrophil
explaining that the dishonor of the checks was due to "operational error." However, we reiterate, it would be a mistake
to construe that letter as an admission of guilt on the part of the bank. It knew that it was confronted with a client who
obviously was not willing to admit any fault on his part, although the facts show otherwise. Thus, respondent bank
ran the risk of losing the business of an important and influential member of the financial community if it did not do
anything to assuage the feelings of petitioners.

It will be recalled that the credit standing of the Morans with Petrophil Corporation was involved, which fact, more
than anything, displeased them, to say the least. On demand of petitioners that their names be cleared, the bank
considered it more prudent to send the letter. It never realized that it would thereafter be used by petitioners as one
of the bases of their legal action. It will be noted that there was no reason for the bank to send the letter to Petrophil
Corporation since the latter was not a client nor was it demanding any explanation. Clearly, therefore, the letter was
merely intended to accommodate the request of the Morans and was part of the series of damage-control measures
taken by the bank to placate petitioners.

Respondent Court of Appeals perceptively observed that "all these somehow pacified plaintiffs-appellants (herein
petitioners) for they did not thereafter take immediate punitive action against the defendant-appellee (herein private
respondent). As pointed out by the court a quo, it took plaintiffs-appellants about six (6) months after the dishonor of
the checks to demand that defendant-appellee pay them P1,000,000.00 as damages. At that time, plaintiffs-
appellants had discovered the letter of Mr. Diaz attributing the dishonor of their checks to 'operational error'. The
attempt to unduly ride on the letter of Mr. Diaz speaks for itself." 36

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

WHEREFORE, finding no reversible error in the judgment appealed from, the same is hereby AFFIRMED, with costs
against petitioners.

SO ORDERED.

3
27
 Caltex (Philippines) Inc. vs. CA
GR 97753, 10 August 1992
Regalado (J)

This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by respondent court
on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with modifications, the earlier decision of the Regional Trial
Court of Manila, Branch XLII, 2 which dismissed the complaint filed therein by herein petitioner against respondent
bank.

The undisputed background of this case, as found by the court a quo and adopted by respondent court, appears of
record:

1. On various dates, defendant, a commercial banking institution, through its Sucat Branch issued
280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz who deposited with herein
defendant the aggregate amount of P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and
Statement of Issues, Original Records, p. 207; Defendant's Exhibits 1 to 280);

CTD CTD
Dates Serial Nos. Quantity Amount

22 Feb. 82 90101 to 90120 20 P80,000

26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
——— ————
Total 280 P1,120,000
===== ========

2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in connection with
his purchased of fuel products from the latter (Original Record, p. 208).

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

4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required
Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit of loss, 280 replacement
CTDs were issued in favor of said depositor (Defendant's Exhibits 282-561).

5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in the
amount of Eight Hundred Seventy Five Thousand Pesos (P875,000.00). On the same date, said
depositor executed a notarized Deed of Assignment of Time Deposit (Exhibit 562) which stated,
among others, that he (de la Cruz) surrenders to defendant bank "full control of the indicated time
deposits from and after date" of the assignment and further authorizes said bank to pre-terminate,
set-off and "apply the said time deposits to the payment of whatever amount or amounts may be due"
on the loan upon its maturity (TSN, February 9, 1987, pp. 60-62).

6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc., went to
the defendant bank's Sucat branch and presented for verification the CTDs declared lost by Angel
dela Cruz alleging that the same were delivered to herein plaintiff "as security for purchases made
with Caltex Philippines, Inc." by said depositor (TSN, February 9, 1987, pp. 54-68).

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

8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the former "a copy of
the document evidencing the guarantee agreement with Mr. Angel dela Cruz" as well as "the details

28
 of Mr. Angel dela Cruz" obligation against which plaintiff proposed to apply the time deposits
(Defendant's Exhibit 564).

9. No copy of the requested documents was furnished herein defendant.

10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of the value of
the CTDs in a letter dated February 7, 1983 (Defendant's Exhibit 566).

11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell due and on
August 5, 1983, the latter set-off and applied the time deposits in question to the payment of the
matured loan (TSN, February 9, 1987, pp. 130-131).

12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant bank be
ordered to pay it the aggregate value of the certificates of time deposit of P1,120,000.00 plus accrued
interest and compounded interest therein at 16% per annum, moral and exemplary damages as well
as attorney's fees.

After trial, the court a quo rendered its decision dismissing the instant complaint. 3

On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint, hence this petition
wherein petitioner faults respondent court in ruling (1) that the subject certificates of deposit are non-negotiable
despite being clearly negotiable instruments; (2) that petitioner did not become a holder in due course of the said
certificates of deposit; and (3) in disregarding the pertinent provisions of the Code of Commerce relating to lost
instruments payable to bearer. 4

The instant petition is bereft of merit.

A sample text of the certificates of time deposit is reproduced below to provide a better understanding of the issues
involved in this recourse.

SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%

Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS:
FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00
CTS Pesos, Philippine Currency, repayable to said depositor 731 days. after date,
upon presentation and surrender of this certificate, with interest at the rate of 16% per
cent per annum.

(Sgd. Illegible) (Sgd. Illegible)

—————————— ———————————

AUTHORIZED SIGNATURES 5

Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as follows:

. . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued, it is important
to note that after the word "BEARER" stamped on the space provided supposedly for the name of
the depositor, the words "has deposited" a certain amount follows. The document further provides
that the amount deposited shall be "repayable to said depositor" on the period indicated. Therefore,
the text of the instrument(s) themselves manifest with clarity that they are payable, not to whoever
purports to be the "bearer" but only to the specified person indicated therein, the depositor. In effect,
the appellee bank acknowledges its depositor Angel dela Cruz as the person who made the deposit
and further engages itself to pay said depositor the amount indicated thereon at the stipulated date. 6

We disagree with these findings and conclusions, and hereby hold that the CTDs in question are negotiable
instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the requisites
for an instrument to become negotiable, viz:
29
 (a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein
with reasonable certainty.

The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone of contention
is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's Branch Manager
way back in 1982, testified in open court that the depositor reffered to in the CTDs is no other than Mr. Angel de la
Cruz.

xxx xxx xxx

Atty. Calida:

q In other words Mr. Witness, you are saying that per books of the bank, the depositor
referred (sic) in these certificates states that it was Angel dela Cruz?

witness:

a Yes, your Honor, and we have the record to show that Angel dela Cruz was the one
who cause (sic) the amount.

Atty. Calida:

q And no other person or entity or company, Mr. Witness?

witness:

a None, your Honor. 7

xxx xxx xxx

Atty. Calida:

q Mr. Witness, who is the depositor identified in all of these certificates of time deposit
insofar as the bank is concerned?

witness:

a Angel dela Cruz is the depositor. 8

xxx xxx xxx

On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from the
writing, that is, from the face of the instrument itself.9 In the construction of a bill or note, the intention of the parties
is to control, if it can be legally ascertained. 10 While the writing may be read in the light of surrounding circumstances
in order to more perfectly understand the intent and meaning of the parties, yet as they have constituted the writing
to be the only outward and visible expression of their meaning, no other words are to be added to it or substituted in
its stead. The duty of the court in such case is to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the meaning of the words they have used. What the
parties meant must be determined by what they said. 11

Contrary to what respondent court held, the CTDs are negotiable instruments. The documents provide that the
amounts deposited shall be repayable to the depositor. And who, according to the document, is the depositor? It is
the "bearer." The documents do not say that the depositor is Angel de la Cruz and that the amounts deposited are
repayable specifically to him. Rather, the amounts are to be repayable to the bearer of the documents or, for that
matter, whosoever may be the bearer at the time of presentment.

30
If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could have with facility
so expressed that fact in clear and categorical terms in the documents, instead of having the word "BEARER"
stamped on the space provided for the name of the depositor in each CTD. On the wordings of the documents,
therefore, the amounts deposited are repayable to whoever may be the bearer thereof. Thus, petitioner's aforesaid
witness merely declared that Angel de la Cruz is the depositor "insofar as the bank is concerned," but obviously other
parties not privy to the transaction between them would not be in a position to know that the depositor is not the
bearer stated in the CTDs. Hence, the situation would require any party dealing with the CTDs to go behind the plain
import of what is written thereon to unravel the agreement of the parties thereto through facts aliunde. This need for
resort to extrinsic evidence is what is sought to be avoided by the Negotiable Instruments Law and calls for the
application of the elementary rule that the interpretation of obscure words or stipulations in a contract shall not favor
the party who caused the obscurity. 12

The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the negative. The
records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for reasons of its own, delivered
the CTDs amounting to P1,120,000.00 to petitioner without informing respondent bank thereof at any time.
Unfortunately for petitioner, although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose
and agreement between it and De la Cruz, as ultimately ascertained, requires both delivery and indorsement. For,
although petitioner seeks to deflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz'
purchases of its fuel products. Any doubt as to whether the CTDs were delivered as payment for the fuel products or
as a security has been dissipated and resolved in favor of the latter by petitioner's own authorized and responsible
representative himself.

In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex Credit Manager,
wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of
fuel products" (Emphasis ours.) 13 This admission is conclusive upon petitioner, its protestations notwithstanding.
Under the doctrine of estoppel, an admission or representation is rendered conclusive upon the person making it,
and cannot be denied or disproved as against the person relying thereon. 14 A party may not go back on his own acts
and representations to the prejudice of the other party who relied upon them. 15 In the law of evidence, whenever a
party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular
thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or omission,
be permitted to falsify it. 16

If it were true that the CTDs were delivered as payment and not as security, petitioner's credit manager could have
easily said so, instead of using the words "to guarantee" in the letter aforequoted. Besides, when respondent bank,
as defendant in the court below, moved for a bill of particularity therein 17 praying, among others, that petitioner, as
plaintiff, be required to aver with sufficient definiteness or particularity (a) the due date or dates of payment of the
alleged indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt showing that the CTDs
were delivered to it by De la Cruz as payment of the latter's alleged indebtedness to it, plaintiff corporation opposed
the motion. 18 Had it produced the receipt prayed for, it could have proved, if such truly was the fact, that the CTDs
were delivered as payment and not as security. Having opposed the motion, petitioner now labors under the
presumption that evidence willfully suppressed would be adverse if produced. 19

Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs. Philippine National
Bank, et al. 20 is apropos:

. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom:

The character of the transaction between the parties is to be determined by their

intention, regardless of what language was used or what the form of the transfer was.
If it was intended to secure the payment of money, it must be construed as a pledge;
but if there was some other intention, it is not a pledge. However, even though a
transfer, if regarded by itself, appears to have been absolute, its object and character
might still be qualified and explained by contemporaneous writing declaring it to have
been a deposit of the property as collateral security. It has been said that a transfer
of property by the debtor to a creditor, even if sufficient on its face to make an absolute
conveyance, should be treated as a pledge if the debt continues in inexistence and is
not discharged by the transfer, and that accordingly the use of the terms ordinarily
importing conveyance of absolute ownership will not be given that effect in such a
transaction if they are also commonly used in pledges and mortgages and therefore
do not unqualifiedly indicate a transfer of absolute ownership, in the absence of clear
and unambiguous language or other circumstances excluding an intent to pledge.

Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable Instruments Law,
an instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the
transferee the holder thereof, 21 and a holder may be the payee or indorsee of a bill or note, who is in possession of
it, or the bearer thereof. 22 In the present case, however, there was no negotiation in the sense of a transfer of the
legal title to the CTDs in favor of petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs
would have sufficed. Here, the delivery thereof only as security for the purchases of Angel de la Cruz (and we even
31
disregard the fact that the amount involved was not disclosed) could at the most constitute petitioner only as a holder
for value by reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of
the instrument since, necessarily, the terms thereof and the subsequent disposition of such security, in the event of
non-payment of the principal obligation, must be contractually provided for.

The pertinent law on this point is that where the holder has a lien on the instrument arising from contract, he is
deemed a holder for value to the extent of his lien. 23 As such holder of collateral security, he would be a pledgee but
the requirements therefor and the effects thereof, not being provided for by the Negotiable Instruments Law, shall be
governed by the Civil Code provisions on pledge of incorporeal rights, 24 which inceptively provide:

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The
instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be
indorsed.

Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and
the date of the pledge do not appear in a public instrument.

Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of respondent court
quoted at the start of this opinion show that petitioner failed to produce any document evidencing any contract of
pledge or guarantee agreement between it and Angel de la Cruz. 25 Consequently, the mere delivery of the CTDs did
not legally vest in petitioner any right effective against and binding upon respondent bank. The requirement under
Article 2096 aforementioned is not a mere rule of adjective law prescribing the mode whereby proof may be made of
the date of a pledge contract, but a rule of substantive law prescribing a condition without which the execution of a
pledge contract cannot affect third persons adversely. 26

On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank was embodied
in a public instrument. 27 With regard to this other mode of transfer, the Civil Code specifically declares:

Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons,
unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in
case the assignment involves real property.

Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as purchaser,
assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent of its lien nor the execution
of any public instrument which could affect or bind private respondent. Necessarily, therefore, as between petitioner
and respondent bank, the latter has definitely the better right over the CTDs in question.

Finally, petitioner faults respondent court for refusing to delve into the question of whether or not private respondent
observed the requirements of the law in the case of lost negotiable instruments and the issuance of replacement
certificates therefor, on the ground that petitioner failed to raised that issue in the lower court. 28

On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private respondent was
not included in the stipulation of the parties and in the statement of issues submitted by them to the trial court. 29 The
issues agreed upon by them for resolution in this case are:

1. Whether or not the CTDs as worded are negotiable instruments.

2. Whether or not defendant could legally apply the amount covered by the CTDs against the
depositor's loan by virtue of the assignment (Annex "C").

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

4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the maturity date
provided therein.

5. Whether or not plaintiff is entitled to the proceeds of the CTDs.

6. Whether or not the parties can recover damages, attorney's fees and litigation expenses from each
other.

As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the foregoing
enumeration does not include the issue of negligence on the part of respondent bank. An issue raised for the first
time on appeal and not raised timely in the proceedings in the lower court is barred by estoppel. 30 Questions raised
on appeal must be within the issues framed by the parties and, consequently, issues not raised in the trial court
cannot be raised for the first time on appeal. 31

32
Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are properly raised.
Thus, to obviate the element of surprise, parties are expected to disclose at a pre-trial conference all issues of law
and fact which they intend to raise at the trial, except such as may involve privileged or impeaching matters. The
determination of issues at a pre-trial conference bars the consideration of other questions on appeal. 32

To accept petitioner's suggestion that respondent bank's supposed negligence may be considered encompassed by
the issues on its right to preterminate and receive the proceeds of the CTDs would be tantamount to saying that
petitioner could raise on appeal any issue. We agree with private respondent that the broad ultimate issue of
petitioner's entitlement to the proceeds of the questioned certificates can be premised on a multitude of other legal
reasons and causes of action, of which respondent bank's supposed negligence is only one. Hence, petitioner's
submission, if accepted, would render a pre-trial delimitation of issues a useless exercise. 33

Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner still cannot have
the odds in its favor. A close scrutiny of the provisions of the Code of Commerce laying down the rules to be followed
in case of lost instruments payable to bearer, which it invokes, will reveal that said provisions, even assuming their
applicability to the CTDs in the case at bar, are merely permissive and not mandatory. The very first article cited by
petitioner speaks for itself.

Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the judge or
court of competent jurisdiction, asking that the principal, interest or dividends due or about to become
due, be not paid a third person, as well as in order to prevent the ownership of the instrument that a
duplicate be issued him. (Emphasis ours.)

xxx xxx xxx

The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part of the
"dispossessed owner" to apply to the judge or court of competent jurisdiction for the issuance of a duplicate of the
lost instrument. Where the provision reads "may," this word shows that it is not mandatory but discretional. 34 The
word "may" is usually permissive, not mandatory. 35 It is an auxiliary verb indicating liberty, opportunity, permission
and possibility. 36

Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of Commerce, on which
petitioner seeks to anchor respondent bank's supposed negligence, merely established, on the one hand, a right of
recourse in favor of a dispossessed owner or holder of a bearer instrument so that he may obtain a duplicate of the
same, and, on the other, an option in favor of the party liable thereon who, for some valid ground, may elect to refuse
to issue a replacement of the instrument. Significantly, none of the provisions cited by petitioner categorically restricts
or prohibits the issuance a duplicate or replacement instrument sans compliance with the procedure outlined therein,
and none establishes a mandatory precedent requirement therefor.

WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed decision is hereby
AFFIRMED.

SO ORDERED.

4
Philippine Education Co. vs. Soriano
GR L-22405, 30 June 1971
Dizon (J)

An appeal from a decision of the Court of First Instance of Manila dismissing the complaint filed by the Philippine
Education Co., Inc. against Mauricio A. Soriano, Enrico Palomar and Rafael Contreras.

On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post Office ten (10) money orders of
P200.00 each payable to E.P. Montinola withaddress at Lucena, Quezon. After the postal teller had made out money
ordersnumbered 124685, 124687-124695, Montinola offered to pay for them with a private checks were not generally
accepted in payment of money orders, the teller advised him to see the Chief of the Money Order Division, but instead
of doing so, Montinola managed to leave building with his own check and the ten(10) money orders without the
knowledge of the teller.

On the same date, April 18, 1958, upon discovery of the disappearance of the unpaid money orders, an urgent
message was sent to all postmasters, and the following day notice was likewise served upon all banks, instructing
them not to pay anyone of the money orders aforesaid if presented for payment. The Bank of America received a
copy of said notice three days later.

33
On April 23, 1958 one of the above-mentioned money orders numbered 124688 was received by appellant as part
of its sales receipts. The following day it deposited the same with the Bank of America, and one day thereafter the
latter cleared it with the Bureau of Posts and received from the latter its face value of P200.00.

On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order Division of the Manila Post Office,
acting for and in behalf of his co-appellee, Postmaster Enrico Palomar, notified the Bank of America that money order
No. 124688 attached to his letter had been found to have been irregularly issued and that, in view thereof, the amount
it represented had been deducted from the bank's clearing account. For its part, on August 2 of the same year, the
Bank of America debited appellant's account with the same amount and gave it advice thereof by means of a debit
memo.

On October 12, 1961 appellant requested the Postmaster General to reconsider the action taken by his office
deducting the sum of P200.00 from the clearing account of the Bank of America, but his request was denied. So was
appellant's subsequent request that the matter be referred to the Secretary of Justice for advice. Thereafter, appellant
elevated the matter to the Secretary of Public Works and Communications, but the latter sustained the actions taken
by the postal officers.

In connection with the events set forth above, Montinola was charged with theft in the Court of First Instance of Manila
(Criminal Case No. 43866) but after trial he was acquitted on the ground of reasonable doubt.

On January 8, 1962 appellant filed an action against appellees in the Municipal Court of Manila praying for judgment
as follows:

WHEREFORE, plaintiff prays that after hearing defendants be ordered:

(a) To countermand the notice given to the Bank of America on September 27, 1961, deducting from
the said Bank's clearing account the sum of P200.00 represented by postal money order No. 124688,
or in the alternative indemnify the plaintiff in the same amount with interest at 8-½% per annum from
September 27, 1961, which is the rate of interest being paid by plaintiff on its overdraft account;

(b) To pay to the plaintiff out of their own personal funds, jointly and severally, actual and moral
damages in the amount of P1,000.00 or in such amount as will be proved and/or determined by this
Honorable Court: exemplary damages in the amount of P1,000.00, attorney's fees of P1,000.00, and
the costs of action.

Plaintiff also prays for such other and further relief as may be deemed just and equitable.

On November 17, 1962, after the parties had submitted the stipulation of facts reproduced at pages 12 to 15 of the
Record on Appeal, the above-named court rendered judgment as follows:

WHEREFORE, judgment is hereby rendered, ordering the defendants to countermand the notice
given to the Bank of America on September 27, 1961, deducting from said Bank's clearing account
the sum of P200.00 representing the amount of postal money order No. 124688, or in the alternative,
to indemnify the plaintiff in the said sum of P200.00 with interest thereon at the rate of 8-½% per
annum from September 27, 1961 until fully paid; without any pronouncement as to cost and attorney's
fees.

The case was appealed to the Court of First Instance of Manila where, after the parties had resubmitted the same
stipulation of facts, the appealed decision dismissing the complaint, with costs, was rendered.

The first, second and fifth assignments of error discussed in appellant's brief are related to the other and will therefore
be discussed jointly. They raise this main issue: that the postal money order in question is a negotiable instrument;
that its nature as such is not in anyway affected by the letter dated October 26, 1948 signed by the Director of Posts
and addressed to all banks with a clearing account with the Post Office, and that money orders, once issued, create
a contractual relationship of debtor and creditor, respectively, between the government, on the one hand, and the
remitters payees or endorses, on the other.

It is not disputed that our postal statutes were patterned after statutes in force in the United States. For this reason,
ours are generally construed in accordance with the construction given in the United States to their own postal
statutes, in the absence of any special reason justifying a departure from this policy or practice. The weight of
authority in the United States is that postal money orders are not negotiable instruments (Bolognesi vs. U.S. 189
Fed. 395; U.S. vs. Stock Drawers National Bank, 30 Fed. 912), the reason behind this rule being that, in establishing
and operating a postal money order system, the government is not engaging in commercial transactions but merely
exercises a governmental power for the public benefit.

It is to be noted in this connection that some of the restrictions imposed upon money orders by postal laws and
regulations are inconsistent with the character of negotiable instruments. For instance, such laws and regulations
34
usually provide for not more than one endorsement; payment of money orders may be withheld under a variety of
circumstances (49 C.J. 1153).

Of particular application to the postal money order in question are the conditions laid down in the letter of the Director
of Posts of October 26, 1948 (Exhibit 3) to the Bank of America for the redemption of postal money orders received
by it from its depositors. Among others, the condition is imposed that "in cases of adverse claim, the money order or
money orders involved will be returned to you (the bank) and the, corresponding amount will have to be refunded to
the Postmaster, Manila, who reserves the right to deduct the value thereof from any amount due you if such step is
deemed necessary." The conditions thus imposed in order to enable the bank to continue enjoying the facilities
theretofore enjoyed by its depositors, were accepted by the Bank of America. The latter is therefore bound by them.
That it is so is clearly referred from the fact that, upon receiving advice that the amount represented by the money
order in question had been deducted from its clearing account with the Manila Post Office, it did not file any protest
against such action.

Moreover, not being a party to the understanding existing between the postal officers, on the one hand, and the Bank
of America, on the other, appellant has no right to assail the terms and conditions thereof on the ground that the letter
setting forth the terms and conditions aforesaid is void because it was not issued by a Department Head in
accordance with Sec. 79 (B) of the Revised Administrative Code. In reality, however, said legal provision does not
apply to the letter in question because it does not provide for a department regulation but merely sets down certain
conditions upon the privilege granted to the Bank of Amrica to accept and pay postal money orders presented for
payment at the Manila Post Office. Such being the case, it is clear that the Director of Posts had ample authority to
issue it pursuant to Sec. 1190 of the Revised Administrative Code.

In view of the foregoing, We do not find it necessary to resolve the issues raised in the third and fourth assignments
of error.

WHEREFORE, the appealed decision being in accordance with law, the same is hereby affirmed with costs.

h. Rules on interpretation of instruments

i.
Sapiera vs CA
G.R. No. 128927 September 14, 1999
Bellosillo, J.

REMEDIOS NOTA SAPIERA appeals to us through this petition for review the Decision of the Court of
Appeals 1 which acquitted her of the crime of estafa but held her liable nonetheless for the value of the checks she indorsed
in favor of private respondent Ramon Sua. 1âw phi 1.nêt

On several occasions petitioner Remedios Nota Sapiera, a sari-sari store owner, purchased from Monrico Mart
certain grocery items, mostly cigarettes, and paid for them with checks issued by one Arturo de Guzman: (a) PCIB
Check No. 157059 dated 26 February 1987 for P140,000.00; (b) PCIB Check No. 157073 dated 26 February 1987
for P28,000.00; (c) PCIB Check No. 157057 dated 27 February 1987 for P42,150.00; and, d) Metrobank Check No.
DAG-045104758 PA dated 2 March 1987 for P125,000.00. These checks were signed at the back by petitioner.
When presented for payment the checks were dishonored because the drawer's account was already closed. Private
respondent Ramon Sua informed Arturo de Guzman and petitioner about the dishonor but both failed to pay the
value of the checks. Hence, four (4) charges of estafa were filed against petitioner with the Regional Trial Court of
Dagupan City, docketed as Crim. Cases Nos. D-8728, D-8729, D-8730 and D-8731. Arturo de Guzman was charged
with two (2) counts of violation of B.P. Blg. 22, docketed as Crim. Cases Nos. D-8733 and D-8734. These cases
against petitioner and de Guzman were consolidated and tried jointly.

On 27 December 1989 the court a quo 2 acquitted petitioner of all the charges of estafa but did not rule on whether she
could be held civilly liable for the checks she indorsed to private respondent. The trial court found Arturo de Guzman guilty
of Violation of B.P. Blg. 22 on two (2) counts and sentenced him to suffer imprisonment of six (6) months and one (1) day
in each of the cases, and to pay private respondent P167,150.00 as civil indemnity.

Private respondent filed a notice of appeal with the trial court with regard to the civil aspect but the court refused to
give due course to the appeal on the ground that the acquittal of petitioner was absolute. Private respondent then
filed a petition for mandamus with the Court of Appeals, docketed as CA-GR SP No. 24626, praying that the court a
quo be ordered to give due course to the appeal on the civil aspect of the decision. The Court of Appeals granted
the petition and ruled that private respondent could appeal with respect to the civil aspect the judgment of acquittal
by the trial court.

On 22 January 1996, the Court of Appeals in CA-GR CV No. 36376 rendered the assailed Decision insofar as it
sustained the appeal of private respondent on the civil aspect and ordering petitioner to pay private respondent
35
P335,000.00 representing the aggregate face value of the four (4) checks indorsed by petitioner plus legal interest
from the notice of dishonor.

Petitioner filed a motion for reconsideration of the Decision. On 19 March 1997 the Court of Appeals issued a
Resolution noting the admission of both parties that private respondent had already collected the amount of
P125,000.00 from Arturo de Guzman with regard to his civil liability in Crim. Cases Nos. 8733 and 8734. The appellate
court noted that private respondent was the same offended party in the criminal cases against petitioner and against
de Guzman. Criminal Cases Nos. 8733 and 8734 against De Guzman, and Crim. Cases Nos. 8730 and 8729 against
petitioner, involved the same checks, to wit: PCIB Checks Nos. 157057 for P42,150.00 and Metrobank Check No.
DAG-045104758 PA for P125,000.00.

Thus, the Court of Appeals ruled that private respondent could not recover twice on the same checks. Since he had
collected P125,000.00 as civil indemnity in Crim. Cases Nos. 8733 and 8734, this amount should be deducted from
the sum total of the civil indemnity due him arising from the estafa cases against petitioner. The appellate court then
corrected its previous award, which was erroneously placed, at P335,000,00, to P335,150,00 as the sum total of the
amounts of the four (4) checks involved. Deducting the amount of P125,000.00 already collected by private
respondent, petitioner was adjudged to pay P210,150.00 as civil liability to private respondent. Hence, this petition
alleging that respondent Court of Appeals erred in holding petitioner civilly liable to private respondent because her
acquittal by the trial court from charges of estafa in Crim. Cases Nos. D-8728, D-8729, D-8730 and D-8731 was
absolute, the trial court having declared in its decision that the fact from which the civil liability might have arisen did
not exist.

We cannot sustain petitioner. The issue is whether respondent Court of Appeals committed reversible error in
requiring petitioner to pay civil indemnity to private respondent after the trial court had acquitted of her of the criminal
charges. Section 2, par. (b), of Rule 111 of the Rules of Court, as amended, specifically provides: "Extinction of the
penal action does not carry with it extinction of the civil, unless the extinction proceed from a declaration in a final
judgment that the fact from which the civil might arise did not exist."

The judgment of acquittal extinguishes the liability of the accused for damages only when it includes a declaration
that the fact from which the civil liability might arise did not exist. Thus, the civil liability is not extinguished by acquittal
where: (a) the acquittal is based on reasonable doubt; (b) where the court expressly declares that the liability of the
accused is not criminal but only civil in nature; and, (c) where the civil liability is not derived from or based on the
criminal act of which the accused is acquitted. 3 Thus, under Art. 29 of the Civil Code —

When the accused in a criminal prosecution is acquitted on the ground that his guilt has not been
proved beyond reasonable doubt, a civil action for damages for the same act or omission may be
instituted. Such action requires only a preponderance of evidence. Upon motion of the defendant, the
court may require the plaintiff to file a bond to answer for damages in case the complaint should be
found to be malicious.

In a criminal case where the judgment of acquittal is based upon reasonable doubt, the court shall so
declare. In the absence of any declaration to that effect, it may be inferred from the text of the decision
whether or not acquittal is due to that ground.

An examination of the decision in the criminal cases reveals these findings of the trial court —

Evidence for the prosecution tends to show that on various occasions, Remedios Nota Sapiera
purchased from Monrico Mart grocery items (mostly cigarettes) which purchases were paid with
checks issued by Arturo de Guzman: that those purchases and payments with checks were as
follows:

(a) Sales Invoice No. 20104 dated February 26, 1987 in the amount of P28,000.00,
that said items purchased were paid with PCIBank Check No. 157073 dated February
26, 1987;

(b) Sales Invoice No. 20108 dated February 26, 1987 in the amount of P140,000.00;
that said items purchased were paid with PCIBank No. 157059 dated February 26,
1987;

(c) Sales Invoice No. 20120 dated February 27, 1987 in the amount of P42,150.00;
that said items were paid with PCIBank Check No. 157057 dated February 27, 1987;

(d) Sales Invoice No. 20148 and 20149 both dated March 2, 1987 in the amount of
P120,103.75; said items were paid with Metrobank Check No. 045104758 dated
March 2, 1987 in the amount of P125,000.00.

36
 That all these checks were deposited with the Consolidated Bank and Trust Company, Dagupan
Branch, for collection from the drawee bank;

That when presented for payment by the collecting bank to the drawee bank, said checks were
dishonored due to account closed, as evidenced by check return slips; . . . . .

From the evidence, the Court finds that accused Remedios Nota Sapiera is the owner of a sari-sari
store inside the public market; that she sells can(ned) goods, candies and assorted grocery items;
that she knows accused Arturo De Guzman, a customer since February 1987; that de Guzman
purchases from her grocery items including cigarettes; that she knows Ramon Sua; that she has
business dealings with him for 5 years; that her purchase orders were in clean sheets of paper; that
she never pays in check; that Ramon Sua asked her to sign subject checks as identification of the
signature of Arturo de Guzman; that she pays in cash; sometimes delayed by several days; that she
signed the four (4) checks on the reverse side; that she did not know the subject invoices; that de
Guzman made the purchases and he issued the checks; that the goods were delivered to de Guzman;
that she was not informed of dishonored checks; and that counsel for Ramon Sua informed de
Guzman and told him to pay . . . .

In the case of accused Remedios Nota Sapiera, the prosecution failed to prove conspiracy.

Based on the above findings of the trial court, the exoneration of petitioner of the charges of estafa was based on
the failure of the prosecution to present sufficient evidence showing conspiracy between her and the other accused
Arturo de Guzman in defrauding private respondent. However, by her own testimony, petitioner admitted having
signed the four (4) checks in question on the reverse side. The evidence of the prosecution shows that petitioner
purchased goods from the grocery store of private respondent as shown by the sales invoices issued by private
respondent; that these purchases were paid with the four (4) subject checks issued by de Guzman; that petitioner
signed the same checks on the reverse side; and when presented for payment, the checks were dishonored by the
drawee bank due to the closure of the drawer's account; and, petitioner was informed of the dishonor. 1âwphi 1.nêt

We affirm the findings of the Court of Appeals that despite the conflicting versions of the parties, it is undisputed that
the four (4) checks issued by de Guzman were signed by petitioner at the back without any indication as to how she
should be bound thereby and, therefore, she is deemed to be an indorser thereof. The Negotiable Instruments Law
clearly provides —

Sec. 17. Construction where instrument is ambiguous. — Where the language of the instrument is
ambiguous, or there are admissions therein, the following rules of construction apply: . . . . (f) Where
a signature is so placed upon the instrument that it is not clear in what capacity the person making
the same intended to sign, he is deemed an indorser. . . .

Sec. 63. When person deemed indorser. — A person placing his signature upon all instrument
otherwise than as maker, drawer or acceptor, is deemed to be an indorser unless he clearly indicates
by appropriate words his intention to be bound in some other capacity.

Sec. 66. Liability of general indorser. — Every indorser who indorses without qualification, warrants
to all subsequent holders in due course: (a) The matters and things mentioned in subdivisions (a),
(b) and (c) of the next preceding section; and (b) That the instrument is, at the time of the indorsement,
valid and subsisting;

And, in addition, he engages that, on due presentment, it shall be accepted or paid or both, as the
case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on
dishonor be duly taken, he will pay the amount thereof to the holder or to any subsequent indorser
who may be compelled to pay it.

The dismissal of the criminal cases against petitioner did not erase her civil liability since the dismissal was due to
insufficiency of evidence and not from a declaration from the court that the fact from which the civil action might arise
did not exist. 4 An accused acquitted of estafa may be nevertheless be held civilly liable where the facts established by
the evidence so warrant. The accused should be adjudged liable for the unpaid value of the checks signed by her in favor
of the complainant. 5

The rationale behind the award of civil indemnity despite a judgment of acquittal when evidence is sufficient to sustain the
award was explained by the Code Commission in connection with Art. 29 of the Civil Code, to wit:

The old rule that the acquittal of the accused in a criminal case also releases him from civil liability is
one of the most serious flaws in the Philippine legal system. It has given rise to numberless instances
of miscarriage of justice, where the acquittal was due to a reasonable doubt in the mind of the court
as to the guilt of the accused. The reasoning followed is that inasmuch as the civil responsibility is
derived from the criminal offense, when the latter is not proved, civil liability cannot be demanded.
37
 This is one of those cases where confused thinking leads to unfortunate and deplorable
consequences. Such reasoning fails to draw a clear line of demarcation between criminal liability and
civil responsibility, and to determine the logical result of the distinction. The two liabilities are separate
and distinct from each other. One affects the social order and the other private rights. One is for
punishment or correction of the offender while the other is for reparation of damages suffered by file
aggrieved party . . . . It is just and proper that for the purposes of imprisonment of or fine upon the
accused, the offense should be proved beyond reasonable doubt. But the purpose of indemnifying
the complaining party, why should the offense also be proved beyond reasonable doubt? Is not the
invasion or violation of every private right to be proved only by preponderance of evidence? Is the
right of the aggrieved person any less private because the wrongful acts is also punishable by the
criminal law? 6

Finally, with regard to the computation of the civil liability of petitioner, the finding of the Court of Appeals that petitioner is
civilly liable for the aggregate value of the unpaid four (4) checks subject of the criminal cases in the sum of P335,150.00,
less the amount of P125.000.00 already collected by private respondent pending appeal, resulting in the amount of
P210,150.00 still due private respondent, is a factual matter which is binding and conclusive upon this Court.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals dated 22 January 1996 as amended
by its Resolution dated 19 March 1997 ordering petitioner Remedios Nota Sapiera to pay the private respondent
Ramon Sua the remaining amount of P210,150.00 as civil liability, is AFFIRMED. Costs against petitioners. 1âw phi1.nêt

SO ORDERED.

ii.
PNB VS CONCEPCION MINING
G.R. No. L-16968 July 31, 1962
LABRADOR, J.:

Appeal from a judgment or decision of the Court of First Instance of Manila, Hon. Gustavo Victoriano, presiding,
sentencing defendants Concepcion Mining Company and Jose Sarte to pay jointly and severally to the plaintiff the
amount of P7,197.26 with interest up to September 29, 1959, plus a daily interest of P1.3698 thereafter up to the
time the amount is fully paid, plus 10% of the amount as attorney's fees, and costs of this suit.

The present action was instituted by the plaintiff to recover from the defendants the face of a promissory note the
pertinent part of which reads as follows:

Manila, March 12, 1954

NINETY DAYS after date, for value received, I promise to pay to the order of the Philippine National Bank . . . .

In case it is necessary to collect this note by or through an attorney-at-law, the makers and indorsers shall pay ten
percent (10%) of the amount due on the note as attorney's fees, which in no case shall be less than P100.00 exclusive
of all costs and fees allowed by law as stipulated in the contract of real estate mortgage. Demand and Dishonor
Waived. Holder may accept partial payment reserving his right of recourse again each and all indorsers.

(Purpose — mining industry)

CONCEPCION MINING COMPANY, INC.,
By:
(Sgd.) VICENTE LEGARDA
President
(Sgd.) VICENTE LEGARDA
(Sgd.) JOSE S SARTE

"Please issue check to —

Mr. Jose S. Sarte"

Upon the filing of the complaint the defendants presented their answer in which they allege that the co-maker the
promissory note Don Vicente L. Legarda died on February 24, 1946 and his estate is in the process of judicial
determination in Special Proceedings No. 29060 of the Court of First Instance of Manila. On the basis of this allegation
it is prayed, as a special defense, that the estate of said deceased Vicente L. Legarda be included as party-defendant.
The court in its decision ruled that the inclusion of said defendant is unnecessary and immaterial, in accordance with
the provisions of Article 1216 of the Deny Civil Code and section 17 (g) of the Negotiable Instruments Law.

38
A motion to reconsider this decision was denied and thereupon defendants presented a petition for relief, asking that
the effects of the judgment be suspended for the reason that the deceased Vicente L. Legarda should have been
included as a party-defendant and his liability should be determined in pursuance of the provisions of the promissory
note. This motion for relief was also denied, hence defendant appealed to this Court.

Section 17 (g) of the Negotiable Instruments Law provides as follows:

SEC. 17. Construction where instrument is ambiguous. — Where the language of the instrument is
ambiguous or there are omissions therein, the following rules of construction apply:

xxx xxx xxx

(g) Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are
deemed to be jointly and severally liable thereon.

And Article 1216 of the Civil Code of the Philippines also provides as follows:

ART. 1216. The creditor may proceed against any one of the solidary debtors or some of them
simultaneously. The demand made against one of them shall not be an obstacle to those which may
subsequently be directed against the others so long as the debt has not been fully collected.

In view of the above quoted provisions, and as the promissory note was executed jointly and severally by the same
parties, namely, Concepcion Mining Company, Inc. and Vicente L. Legarda and Jose S. Sarte, the payee of the
promissory note had the right to hold any one or any two of the signers of the promissory note responsible for the
payment of the amount of the note. This judgment of the lower court should be affirmed.

Our attention has been attracted to the discrepancies in the printed record on appeal. We note, first, that the names
of the defendants, who are evidently the Concepcion Mining Co., Inc. and Jose S. Sarte, do not appear in the printed
record on appeal. The title of the complaint set forth in the record on appeal does not contain the name of Jose Sarte,
when it should, as two defendants are named in the complaint and the only defense of the defendants is the non-
inclusion of the deceased Vicente L. Legarda as a defendant in the action. We also note that the copy of the
promissory note which is set forth in the record on appeal does not contain the name of the third maker Jose S.
Sarte. Fortunately, the brief of appellee on page 4 sets forth said name of Jose S. Sarte as one of the co-maker of
the promissory note. Evidently, there is an attempt to mislead the court into believing that Jose S. Sarte is no one of
the co-makers. The attorney for the defendants Atty. Jose S. Sarte himself and he should be held primarily
responsible for the correctness of the record on appeal. We, therefore, order the said Atty. Jose S. Sarte to explain
why in his record on appeal his own name as one of the defendants does not appear and neither does his name
appear as one of the co-signers of the promissory note in question. So ordered.

II. FOREIGN BILL

BPI vs Commissioner of Internal Revenue

G.R. No. 137002 July 27, 2006

This is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Court, as amended, seeking to set
aside a Decision1 of the Court of Appeals dated 14 August 2004 ordering the petitioner to pay respondent
Commissioner of Internal Revenue (CIR) deficiency documentary stamp tax of P690,030 for the year 1986, inclusive
of surcharge and compromise penalty, plus 20% annual interest until fully paid. The Court of Appeals in its assailed
Decision affirmed the Decision2 of the Court of Tax Appeals (CTA) dated 31 May 1994.

From 28 February 1986 to 8 October 1986, petitioner Bank of the Philippine Islands (BPI) sold to the Central Bank
of the Philippines (now Bangko Sentral ng Pilipinas) U.S. dollars for P1,608,541,900.00. BPI instructed, by cable, its
correspondent bank in New York to transfer U.S. dollars deposited in BPI's account therein to the Federal Reserve
Bank in New York for credit to the Central Bank's account therein. Thereafter, the Federal Reserve Bank sent to the
Central Bank confirmation that such funds had been credited to its account and the Central Bank promptly transferred
to the petitioner's account in the Philippines the corresponding amount in Philippine pesos.3

During the period starting 11 June 1985 until 9 March 1987, the Central Bank enjoyed tax exemption privileges
pursuant to Resolution No. 35-85 dated 3 May 1985 of the Fiscal Incentive Review Board. However, in 1985,
Presidential Decree No. 1994 -- An Act Further Amending Certain Provisions of the National Internal Revenue Code
was enacted. This law amended Section 222 (now 173) of the National Internal Revenue Code (NIRC), by adding
the foregoing:

[W]henever one party to the taxable document enjoys exemption from the tax herein imposed, the other party
thereto who is not exempt shall be the one directly liable for the tax.
39
In 1988, respondent CIR ordered an investigation to be made on BPI's sale of foreign currency. As a result thereof,
the CIR issued a pre-assessment notice informing BPI that in accordance with Section 195 (now Section 182)4 of the
NIRC, BPI was liable for documentary stamp tax at the rate of P0.30 per P200.00 on all foreign exchange sold to the
Central Bank. Total tax liability was assessed at P3,016,316.06, which consists of a documentary stamp tax liability
of P2,412,812.85, a 25% surcharge of P603,203.21, and a compromise penalty of P300.00.5

BPI disputed the findings contained in the pre-assessment notice. Nevertheless, the CIR issued Assessment No.
FAS-5-86-88-003022, dated 30 September 1988, which BPI received on 11 October 1988. BPI formally protested
the assessment, but the protest was denied. On 10 July 1990, BPI received the final notice and demand for payment
of its 1986 assessment for deficiency documentary stamp tax in the amount of P3,016,316.06. Consequently, a
petition for review was filed with the CTA on 9 August 1990.6

On 31 May 1994, the CTA rendered the Decision holding BPI liable for documentary stamp tax in connection with
the sale of foreign exchange to the Central Bank from the period 29 July 1986 to 8 October 1986 only, thus
substantially reducing the CIR's original assessment. The dispositive portion of the said Decision reads:

WHEREFORE, premises considered, petitioner is hereby ordered to pay respondent Commissioner of

Internal Revenue, the amount of P690,030 inclusive of surcharge and compromise penalty, plus 20% annual
interest until fully paid pursuant to Section 249 (cc) (sic) (3) of the Tax Code.7

The CTA ruled that BPI's instructions to its correspondent bank in the U.S. to pay to the Federal Reserve Bank in
New York, for the account of the Central Bank, a sum of money falls squarely within the scope of Section 51 of The
Revised Documentary Stamp Tax Regulations (Regulations No. 26), dated 26 March 1924, the implementing rules
to the earlier provisions on documentary stamp tax, which provides that: 8

What may be regarded as telegraphic transfer. — a local bank cables to a certain bank in a foreign country
with which bank said local bank has a credit, and directs that foreign bank to pay to another bank or person
in the same locality a certain sum of money, the document for and in respect such transaction will be regarded
as a telegraphic transfer, taxable under the provisions of Section 1449(i) of the Administrative Code.

Nevertheless, the CTA also noted that although Presidential Decree No. 1994, the law which passes the liability on
to the non-exempt party, was published in the Official Gazette issue of 2 December 1985, the same was released to
the public only on 18 June 1986, as certified by the National Printing Office. Therefore, Presidential Decree No. 1994
took effect only in July 1986 or 15 days after the issue of Official Gazette where the law was actually published, that
is, circulated to the public. As a result of the delay, BPI's transactions prior to the effectivity of Presidential Decree
No. 1994 were not subject to documentary stamp tax. Hence, the CTA reduced the assessment from P3,016,316.06
to P690,030.00, plus 20% annual interest until fully paid pursuant to Section 249(c) of the NIRC.9

Both parties filed their respective Motions for Reconsideration, which the CTA denied in a Resolution dated 26
September 1994. BPI filed a Petition for Review with the Court of Appeals on 11 November 1994. On 14 August
1998, the Court of Appeals affirmed the Decision of the CTA. The Court of Appeals ruled that the documentary stamp
tax imposed under Section 195 (now Section 182) is not limited only to foreign bills of exchange and letters of credit
but also includes the orders made by telegraph or by any other means for the payment of money made by any person
drawn in but payable out of the Philippines. The Court of Appeals also maintained that telegraphic transfers, such as
the one BPI sent to its correspondent bank in the U.S., are proper subjects for the imposition of documentary stamp
tax under Section 195 (now Section 182) and Section 51 of Revenue Regulation No. 26. The Court of Appeals
likewise affirmed the CTA's Decision imposing a 20% delinquency on the reduced assessment, in accordance with
Section 24(c)(3) of the NIRC and the case of Philippine Refining Company v. Court of Appeals.10

Petitioner filed a Partial Motion for Reconsideration on 9 September 1998, which the Court of Appeals denied on 29
December 1998.11

Hence this petition, wherein the petitioner raised the following issues:

WHETHER OR NOT, THE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING THAT SALES OF
FOREIGN EXCHANGE (SPOT CASH), AS DISTINGUISHED FROM SALES OF FOREIGN BILLS OF
EXCHANGE, ARE SUBJECT TO DOCUMENTARY STAMP TAX UNDER SECTION 182 OF THE TAX
CODE

II

WHETHER OR NOT, THE COURT OF APPEALS GRIEVOUSLY ERRED IN AFFIRMING THE IMPOSITION
OF A DELINQUENCY INTEREST OF 20% ON THE REVISED DEFICIENCY STAMP ASSESSMENT
DESPITE A REDUCTION THEREOF BY THE COUR T OF TAX APPEALS WHICH ERRED IN ITS
ORIGINAL ASSESSMENT.12
40
The first issue raised by the petitioner is whether BPI is liable for documentary stamp taxes in connection with its
sale of foreign exchange to the Central Bank in 1986 under Section 195 (now Section 182) of the NIRC, quoted
hereunder:

Sec. 182. Stamp tax on foreign bills of exchange and letters of credit. On all foreign bills of exchange and
letters of credit (including orders, by telegraph or otherwise, for the payment of money issued by express or
steamship companies or by any person or persons) drawn in but payable out of the Philippines in a set of
three or more according to the custom of merchants and bankers, there shall be collected a documentary
stamp tax of thirty centavos on each two hundred pesos, or fractional part thereof, of the face value of such
bill of exchange or letter of credit, or the Philippine equivalent of such face value, if expressed in foreign
country.

To determine what is being taxed under this section, a discussion on the nature of the acts covered by Section 195
(now Section 182) of the NIRC is indispensable. This section imposes a documentary stamp tax on (1) foreign bills
of exchange, (2) letters of credit, and (3) orders, by telegraph or otherwise, for the payment of money issued by
express or steamship companies or by any person or persons. This enumeration is further limited by the qualification
that they should be drawn in the Philippines and payable outside of the Philippines.

A definition of a "bill of exchange" is provided by Section 39 of Regulations No. 26, the rules governing documentary
taxes promulgated by the Bureau of Internal Revenue (BIR) in 1924:

Sec. 39. Definition of "bill of exchange". The term bill of exchange denotes checks, drafts, and all other kinds
of orders for the payment of money, payable at sight, or on demand or after a specific period after sight or
from a stated date.

Section 126 of The Negotiable Instruments Law (Act No. 2031) reiterates that it is an "order for the payment of
money" and specifies the particular requisites that make it negotiable.

Sec. 126. Bill of exchange defined. – A bill of exchange is an unconditional order in writing addressed by one
person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on
demand or at fixed or determinable future time a sum certain in money to order or to bearer.

Section 129 of the same law classifies bills of exchange as inland and foreign, the distinction is laid down by where
the bills are drawn and paid. Thus, a "foreign bill of exchange" may be drawn outside the Philippines, payable outside
the Philippines, or both drawn and payable outside of the Philippines.

Sec. 129. Inland and foreign bills of exchange. -- An inland bill of exchange is a bill which is, or on its face
purports to be, both drawn and payable within the Philippines. Any other bill is a foreign bill. x x x

The Code of Commerce loosely defines a "letter of credit" and provides for its essential conditions, thus:

Art. 567. Letters of credit are those issued by one merchant to another or for the purpose of attending to a
commercial transaction.

Art 568. The essential conditions of letters of credit shall be:

1. To be issued in favor of a definite person and not to order.

2. To be limited to a fixed and specified amount, or to one or more undetermined amounts, but within
a maximum the limits of which has to be stated exactly.

A more explicit definition of a letter of credit can be found in the commentaries:

A letter of credit is one whereby one person requests some other person to advance money or give credit to
a third person, and promises that he will repay the same to the person making the advancement, or accept
the bills drawn upon himself for the like amount.13

A bill of exchange and a letter of credit may differ as to their negotiability, and as to who owns the funds used for the
payment at the time payment is made. However, in both bills of exchange and letters of credit, a person orders
another to pay money to a third person.

The phrase "orders, by telegraph or otherwise, for the payment of money" used in reference to documentary stamp
taxes may be found in an earlier documentary tax provision, Section 1449(i) of the Administrative Code of 1917,
which was substantially reproduced in Section 195 (now Section 182) of the NIRC. Regulations No. 26, which
provided the rules and guidelines for the documentary stamp tax imposed under the Administrative Code of 1917,
contains an explanation for the phrase "orders, by telegraph or otherwise, for the payment of money":
41
 What may be regarded as telegraphic transfer. — a local bank cables to a certain bank in a foreign country
with which bank said local bank has a credit, and directs that foreign bank to pay to another bank or person
in the same locality a certain sum of money, the document for and in respect such transaction will be regarded
as a telegraphic transfer, taxable under the provisions of Section 1449(i) of the Administrative Code.

In this case, BPI ordered its correspondent bank in the U.S. to pay the Federal Reserve Bank in New York a sum of
money, which is to be credited to the account of the Central Bank. These are the same acts described under Section
51 of Regulations No. 26, interpreting the documentary stamp tax provision in the Administrative Code of 1917, which
is substantially identical to Section 195 (now Section 182) of the NIRC. These acts performed by BPI incidental to its
sale of foreign exchange to the Central Bank are included among those taxed under Section 195 (now Section 182)
of the NIRC.

BPI alleges that the assailed decision must be reversed since the sale between BPI and the Central Bank of foreign
exchange, as distinguished from foreign bills of exchange, is not subject to the documentary stamp taxes prescribed
in Section 195 (now Section 182) of the NIRC. This argument leaves much to be desired. In this case, it is not the
sale of foreign exchange per se that is being taxed under Section 195 of the NIRC. This section refers to a
documentary stamp tax, which is an excise upon the facilities used in the transaction of the business separate and
apart from the business itself.14 It is not a tax upon the business itself which is so transacted, but it is a duty upon the
facilities made use of and actually employed in the transaction of the business, and separate and apart from the
business itself.15

Section 195 (now Section 182) of the NIRC covers foreign bills of exchange, letters of credit, and orders of payment
for money, drawn in Philippines, but payable outside the Philippines. From this enumeration, two common elements
need to be present: (1) drawing the instrument or ordering a drawee, within the Philippines; and (2) ordering that
drawee to pay another person a specified amount of money outside the Philippines. What is being taxed is the facility
that allows a party to draw the draft or make the order to pay within the Philippines and have the payment made in
another country.

A perusal of the facts contained in the record in this case shows that BPI, while in the Philippines, ordered its
correspondent bank by cable to make a payment, and that payment is to be made to the Federal Reserve Bank in
New York. Thus, BPI made use of the aforementioned facility. As a result, BPI need not have sent a representative
to New York, nor did the Federal Reserve Bank have to go to the Philippines to collect the funds which were to be
credited to the Central Bank's account with them. The transaction was made at the shortest time possible and at the
greatest convenience to the parties. The tax was laid upon this privilege or facility used by the parties in their
transactions, transactions which they may effect through our courts, and which are regulated and protected by our
government.

BPI further alleges that since the funds transferred to the Federal Reserve Bank were taken from BPI's account with
the correspondent bank, this is not the transaction contemplated under Section 51 of Regulations No. 26. BPI argues
that Section 51 of Regulations No. 26, in using the phrase "with which local bank has credit," involves transactions
wherein the drawee bank pays with its own funds and excludes from the coverage of the law situations wherein the
funds paid out by the correspondent bank are owned by the drawer. In the case of Republic of the Philippines v.
Philippine National Bank,16 the Court equated "credit" with the term "deposits," and identified the depositor as the
creditor and the bank as the debtor.

And as correctly stated by the trial court, the term "credit" in its usual meaning is a sum credited on the books
of a company to a person who appears to be entitled to it. It presupposes a creditor-debtor relationship, and
may be said to imply ability, by reason of property or estates, to make a promised payment. It is the correlative
to debt or indebtedness, and that which is due to any person, as distinguished from that which he owes. The
same is true with the term "deposits" in banks where the relationship created between the depositor and the
bank is that of creditor and debtor.

By this definition of "credit," BPI's deposit account with its correspondent bank is much the same as the "credit"
referred to in Section 51 of Regulations No. 26. Thus, the fact that the funds transferred to the Central Bank's account
with the Federal Reserve Bank are from BPI's deposit account with the correspondent bank can only underline that
the present case is the same situation described under Section 51 of Regulations No. 26.

Moreover, the fact that the funds belong to BPI and were not advanced by the correspondent bank will not remove
the transaction from the coverage of Section 195 (now Section 182) of the NIRC. There are transactions covered by
this section wherein funds belonging to the drawer are used for payment. A bill of exchange, when drawn in the
Philippines but payable in another country, would surely be covered by this section. And in the case of a bill of
exchange, the funds may belong to the drawer and need not be advanced by the drawee, as in the case of a check
or a draft. In the description of a draft provided hereunder, the drawee is in possession of funds belonging to the
drawer of the bill:

A draft is a form of a bill of exchange used mainly in transactions between persons physically remote from
each other. It is an order made by one person, say the buyer of goods, addressed to a person having in his

42
 possession funds of such buyer ordering the addressee to pay the purchase price to the seller of the goods.
Where the order is made by one bank to another, it is referred to as a bank draft.17

BPI argues that the foreign exchange sold was deposited and transferred within the U.S. and is therefore outside
Philippine territory. This argument is unsubstantial. The documentary stamp tax is not imposed on the sale of foreign
exchange, rather it is an excise tax on the privilege or facility which the parties used in their transaction. In the case
of Allied Thread Co., Inc. v. City Mayor of Manila,18 the Court explained the scope encompassed by the power to levy
an excise tax:

The tax imposition here is upon the performance of an act, enjoyment of a privilege, or the engaging in an
occupation, and hence is in the nature of an excise tax.

The power to levy an excise upon the performance of an act or the engaging in an occupation does not
depend upon the domicile of the person subject to the excise, nor upon the physical location of the property
and in connection with the act or occupation taxed, but depends upon the place in which the act is
performed or occupation engaged in (Emphasis supplied).

In this case, the act of BPI instructing the correspondent bank to transfer the funds to the Federal Reserve Bank was
performed in the Philippines. Therefore, the excise tax may be levied by the Philippine government. Section 195
(now Section 182) of the NIRC would be rendered invalid if the fact that the payment was made outside of the country
can be used as a basis for nonpayment of the tax.

The second issue is whether the delinquency interest of 20% per annum, as provided under Section 249(c)(3) of the
NIRC, is applicable in this case.

In the case of Philippine Refining Company v. Court of Appeals,19 this Court categorically ruled that even if an
assessment was later reduced by the courts, a delinquency interest should still be imposed from the time demand
was made by the CIR.

As correctly pointed out by the Solicitor General, the deficiency tax assessment in this case, which was the
subject of the demand letter of respondent Commissioner dated April 11, 1989, should have been paid within
thirty (30) days from receipt thereof. By reason of petitioner's default thereon, the delinquency penalties of
25% surcharge and interest of 20% accrued from April 11, 1989. The fact that petitioner appealed the
assessment to the CTA and that the same was modified does not relieve petitioner of the penalties incident
to delinquency. The reduced amount of P237,381.25 is but a part of the original assessment
of P1,892,584.00.

This doctrine is consistent with the earlier decisions of this Court justifying the imposition of additional charges and
interests incident to delinquency by explaining that the nature of additional charges is compensatory and not a
penalty.

The above legal provision makes no distinctions nor does it establish exceptions. It directs the collection of
the surcharge and interest at the stated rate upon any sum or sums due and unpaid after the dates prescribed
in subsections (b), (c), and (d) of the Act for the payment of the amounts due. The provision therefore is
mandatory in case of delinquency. This is justified because the intention of the law is precisely to discourage
delay in the payment of taxes due to the State and, in this sense, the surcharge and interest charged are not
penal but compensatory in nature – they are compensation to the State for the delay in payment, or for the
concomitant use of the funds by the taxpayer beyond the date he is supposed to have paid them to the
State.20

The same principle was used in Ross v. U.S.21 when the U.S. Supreme Court ruled that it was only equitable for the
government to collect interest from a taxpayer who, by the government's error, received a refund which was not due
him.

Even though [the] taxpayer here did not request the refund made to him, and the situation is entirely due to
an error on the part of the government, taxpayer and not the government has had the use of the money
during the period involved and it is not unjustly penalizing taxpayer to require him to pay compensation for
this use of money.

Based on established doctrine, these charges incident to delinquency are compensatory in nature and are imposed
for the taxpayers' use of the funds at the time when the State should have control of said funds. Collecting such
charges is mandatory. Therefore, the Decision of the Court of Appeals imposing a 20% delinquency interest over the
assessment reduced by the CTA was justified and in accordance with Section 249(c)(3) of the NIRC.

WHEREFORE, premises considered, this Court DENIES this petition and AFFIRMS the Decision of the Court of
Appeals in CA-G.R. SP No. 57362 dated 14 August 1998, ordering that petitioner Bank of the Philippine Islands to
pay Respondent Commissioner of Internal Revenue the deficiency documentary stamp tax in the amount
43
of P690,030.00 inclusive of surcharge and compromise penalty, plus 20% annual interest from 7 June 1990 until fully
paid. Costs against the petitioner.

SO ORDERED.

III.
CHECK
i.
ARCEO JR. vs. PEOPLE

This petition for review on certiorari assails the April 28, 1999 decision 1 and March 27, 2000 resolution2 of the Court
of Appeals in CA-G.R. CR No. 19601 affirming the trial court’s judgment finding petitioner Pacifico B. Arceo, Jr. liable
for violation of Batas Pambansa Blg. (BP) 22, otherwise known as the "Bouncing Checks Law."

The facts of the case as found by the trial court and adopted by the Court of Appeals follow.

On March 14, 1991, [petitioner], obtained a loan from private complainant Josefino Cenizal [] in the amount
of P100,000.00. Several weeks thereafter, [petitioner] obtained an additional loan of P50,000.00 from
[Cenizal]. [Petitioner] then issued in favor of Cenizal, Bank of the Philippine Islands [(BPI)] Check No. 163255,
postdated August 4, 1991, for P150,000.00, at Cenizal’s house located at 70 Panay Avenue, Quezon City.
When August 4, 1991 came, [Cenizal] did not deposit the check immediately because [petitioner] promised
[] that he would replace the check with cash. Such promise was made verbally seven (7) times. When his
patience ran out, [Cenizal] brought the check to the bank for encashment. The head office of the Bank of the
Philippine Islands through a letter dated December 5, 1991, informed [Cenizal] that the check bounced
because of insufficient funds.

Thereafter, [Cenizal] went to the house of [petitioner] to inform him of the dishonor of the check but [Cenizal]
found out that [petitioner] had left the place. So, [Cenizal] referred the matter to a lawyer who wrote a letter
giving [petitioner] three days from receipt thereof to pay the amount of the check. [Petitioner] still failed to
make good the amount of the check. As a consequence, [Cenizal] executed on January 20, 1992 before the
office of the City Prosecutor of Quezon City his affidavit and submitted documents in support of his complaint
for [e]stafa and [v]iolation of [BP 22] against [petitioner]. After due investigation, this case for [v]iolation of [BP
22] was filed against [petitioner] on March 27, 1992. The check in question and the return slip were however
lost by [Cenizal] as a result of a fire that occurred near his residence on September 16, 1992. [Cenizal]
executed an Affidavit of Loss regarding the loss of the check in question and the return slip.3

After trial, petitioner was found guilty as charged. Aggrieved, he appealed to the Court of Appeals. However, on April
28, 1999, the appellate court affirmed the trial court’s decision in toto. Petitioner sought reconsideration but it was
denied. Hence, this petition.

Petitioner claims that the trial and appellate courts erred in convicting him despite the failure of the prosecution to
present the dishonored check during the trial. He also contends that he should not be held liable for the dishonor of
the check because it was presented beyond the 90-day period provided under the law. Petitioner further questions
his conviction since the notice requirement was not complied with and he was given only three days to pay, not five
banking days as required by law. Finally, petitioner asserts that he had already paid his obligation to Cenizal.

Petitioner’s contentions have no merit.

Significance of the 90-day Period

For Presentment of the Check

Petitioner asserts that there was no violation of BP 22 because the check was presented to the drawee bank only on
December 5, 1991 or 120 days from the date thereof (August 4, 1991). He argues that this was beyond the 90-day
period provided under the law in connection with the presentment of the check. We disagree.

Section 1 of BP 22 provides:

SECTION 1. Checks without sufficient funds Any person who makes or draws and issues any check to apply
on account or for value, knowing at the time of issue that he does not have sufficient funds in or credit with
the drawee bank for the payment of such check in full upon its presentment, which check is subsequently
dishonored by the drawee bank for insufficiency of funds or credit or would have been dishonored for the
same reason had not the drawer, without any valid reason, ordered the bank to stop payment, shall be
punished by imprisonment of not less than thirty days but not more than one (1) year or by a fine of not less

44
 than but not more than double the amount of the check which fine shall in no case exceed Two Hundred
Thousand Pesos, or both such fine and imprisonment at the discretion of the court.

The same penalty shall be imposed upon any person who, having sufficient funds in or credit with the drawee
bank when he makes or draws and issues a check, shall fail to keep sufficient funds or to maintain a credit
to cover the full amount of the check if presented within a period of ninety (90) days from the date appearing
thereon, for which reason it is dishonored by the drawee bank.

Where the check is drawn by a corporation, company or entity, the person or persons who actually signed
the check in behalf of such drawer shall be liable under this Act.

In Wong v. Court of Appeals,4 the Court ruled that the 90-day period provided in the law is not an element of the
offense. Neither does it discharge petitioner from his duty to maintain sufficient funds in the account within a
reasonable time from the date indicated in the check. According to current banking practice, the reasonable period
within which to present a check to the drawee bank is six months. Thereafter, the check becomes stale and the
drawer is discharged from liability thereon to the extent of the loss caused by the delay.

Thus, Cenizal’s presentment of the check to the drawee bank 120 days (four months) after its issue was still within
the allowable period. Petitioner was freed neither from the obligation to keep sufficient funds in his account nor from
liability resulting from the dishonor of the check.

Applicability of the
Best Evidence Rule

Petitioner’s insistence on the presentation of the check in evidence as a condition sine qua non for conviction under
BP 22 is wrong. Petitioner anchors his argument on Rule 130, Section 3, of the Rules of Court, otherwise known as
the best evidence rule. However, the rule applies only where the content of the document is the subject of the inquiry.
Where the issue is the execution or existence of the document or the circumstances surrounding its execution, the
best evidence rule does not apply and testimonial evidence is admissible.5

The gravamen of the offense is the act of drawing and issuing a worthless check.6 Hence, the subject of the inquiry
is the fact of issuance or execution of the check, not its content.

Here, the due execution and existence of the check were sufficiently established. Cenizal testified that he presented
the originals of the check, the return slip and other pertinent documents before the Office of the City Prosecutor of
Quezon City when he executed his complaint-affidavit during the preliminary investigation. The City Prosecutor found
a prima facie case against petitioner for violation of BP 22 and filed the corresponding information based on the
documents. Although the check and the return slip were among the documents lost by Cenizal in a fire that occurred
near his residence on September 16, 1992, he was nevertheless able to adequately establish the due execution,
existence and loss of the check and the return slip in an affidavit of loss as well as in his testimony during the trial of
the case.

Moreover, petitioner himself admited that he issued the check. He never denied that the check was presented for
payment to the drawee bank and was dishonored for having been drawn against insufficient funds.

Presence of the
Elements of the Offense

Based on the allegations in the information,7 petitioner was charged for violating the first paragraph of BP 22. The
elements of the offense are:

1. the making, drawing and issuance of any check to apply to account or for value;

2. knowledge of the maker, drawer, or issuer that at the time of issue he does not have sufficient funds in or
credit with the drawee bank for the payment of the check in full upon its presentment; and

3. subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit, or dishonor of
the check for the same reason had not the drawer, without any valid cause, ordered the bank to stop
payment.8

All these elements are present in this case.

Both the trial and appellate courts found that petitioner issued BPI check no. 163255 postdated August 4, 1991 in
the amount of P150,000 in consideration of a loan which he obtained from Cenizal. When the check was deposited,
it was dishonored by the drawee bank for having been drawn against insufficient funds. There was sufficient evidence
on record that petitioner knew of the insufficiency of his funds in the drawee bank at the time of the issuance of the

45
check. In fact, this was why, on maturity date, he requested the payee not to encash it with the promise that he would
replace it with cash. He made this request and assurance seven times but repeatedly failed to make good on his
promises despite the repeated accommodation granted him by the payee, Cenizal.

Notice of Dishonor to Petitioner

And Payment of the Obligation

The trial court found that, contrary to petitioner’s claim, Cenizal’s counsel had informed petitioner in writing of the
check’s dishonor and demanded payment of the value of the check. Despite receipt of the notice of dishonor and
demand for payment, petitioner still failed to pay the amount of the check.

Petitioner cannot claim that he was deprived of the period of five banking days from receipt of notice of dishonor
within which to pay the amount of the check.9 While petitioner may have been given only three days to pay the value
of the check, the trial court found that the amount due thereon remained unpaid even after five banking days from
his receipt of the notice of dishonor. This negated his claim that he had already paid Cenizal and should therefore be
relieved of any liability.

Moreover, petitioner’s claim of payment was nothing more than a mere allegation. He presented no proof to support
it. If indeed there was payment, petitioner should have redeemed or taken the check back in the ordinary course of
business.10 Instead, the check remained in the possession of the payee who demanded the satisfaction of petitioner’s
obligation when the check became due as well as when the check was dishonored by the drawee bank.

These findings (due notice to petitioner and nonpayment of the obligation) were confirmed by the appellate court.
This Court has no reason to rule otherwise. Well-settled is the rule that the factual findings of the trial court, when
affirmed by the appellate court, are not to be disturbed.11

WHEREFORE, the petition is hereby DENIED. The April 28, 1999 decision and March 27, 2000 resolution of the
Court of Appeals in CA-G.R. CR No. 19601 are AFFIRMED.

Costs against petitioner.

SO ORDERED.

ii.
Villanueva vs Nite
GR No. 148211 July 25, 2006
CORONA, J.:

In this petition for review on certiorari under Rule 45, petitioner submits that the Court of Appeals (CA) erred
in annulling and setting aside the Regional Trial Court (RTC) decision on the ground of extrinsic fraud.

The facts follow.1

Respondent allegedly took out a loan of P409,000 from petitioner. To secure the loan, respondent issued petitioner
an Asian Bank Corporation (ABC) check (Check No. AYA 020195) in the amount of P325,500 dated February 8,
1994. The date was later changed to June 8, 1994 with the consent and concurrence of petitioner.

The check was, however, dishonored due to a material alteration when petitioner deposited the check on due date.
On August 24, 1994, respondent, through her representative Emily P. Abojada, remitted P235,000 to petitioner as
partial payment of the loan. The balance of P174, 000 was due on or before December 8, 1994.

On August 24, 1994, however, petitioner filed an action for a sum of money and damages (Civil Case No. Q-94-
21495) against ABC for the full amount of the dishonored check. And in a decision dated May 23, 1997, the RTC of
Quezon City, Branch 101 ruled in his favor.2 When respondent went to ABC Salcedo Village Branch on June 30,
1997 to withdraw money from her account, she was unable to do so because the trial court had ordered ABC to pay
petitioner the value of respondent’s ABC check.

On August 25, 1997, ABC remitted to the sheriff a manager’s check amounting to P325,500 drawn on respondent’s
account. The check was duly received by petitioner on the same date.

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

46
 WHEREFORE, premises considered, the petition is GRANTED and the Decision dated May 23, 1997 of the
public respondent is hereby ANNULLED and SET ASIDE for extrinsic fraud.

[Petitioner] Villanueva is hereby ordered to pay [Nite] —

1) the sum of [P146,500] as actual damages plus interest at 12% per annum from August 25, 1997 until full
payment;

2) the sum of [P75,000] as moral damages;

3) the sum of [P50,000] as exemplary damages; and

4) the sum of [P50,000] as attorney’s fees and cost of suit.

SO ORDERED.4

Thus, this petition. We find for respondent.

Annulment of judgment is a remedy in law independent of the case where the judgment sought to be annulled is
promulgated. It can be filed by one who was not a party to the case in which the assailed judgment was
rendered. Section 1 of Rule 47 provides:

Section 1. Coverage. – This Rule shall govern the annulment by the Court of Appeals of judgments or final
orders and resolutions in civil actions of Regional Trial Courts for which the ordinary remedies of new trial,
appeal, petition for relief or other appropriate remedies are no longer available through no fault of the
petitioner.

Respondent may avail of the remedy of annulment of judgment under Rule 47. The ordinary remedies of new trial,
appeal and petition for relief were not available to her for the simple reason that she was not made a party to the suit
against ABC. Thus, she was neither able to participate in the original proceedings nor resort to the other remedies
because the case was filed when she was abroad.

Annulment of judgment may be based only on extrinsic fraud and lack of jurisdiction.5 Extrinsic or collateral fraud
pertains to such fraud which prevents the aggrieved party from having a trial or presenting his case to the court, or
is used to procure the judgment without fair submission of the controversy.6 This refers to acts intended to keep the
unsuccessful party away from the courts as when there is a false promise of compromise or when one is kept in
ignorance of the suit.7

We uphold the appellate court’s finding of extrinsic fraud:

Barely 6 days after receipt of the partial payment of P235,000.00 and agreeing that the balance of
P174,000.00 shall be paid on or before December 8, 1994, [Sincere] filed his complaint against [ABC] for the
full amount of the dishonored check in the sum of P320,500.00 without impleading petitioner. The apparent
haste by which [Sincere] filed his complaint and his failure to implead [Marlyn] clearly shows his intent to
prevent [Marlyn] from opposing his action.

[A]t the time news about [Marlyn] having left the country was widespread, appearing even in print media as
early as May 1994, [Marlyn] paid [Sincere] the amount of P235,000.00 as partial payment on [August 18,
1994], through a representative.

Notwithstanding the foregoing, SIX (6) days later or on [August 24, 1994, Sincere] instituted an action for
collection with damages for the whole amount of the issued check.

[Sincere] does not deny knowledge of such payment neither of the fact that he concurred in settling the
balance of P174,000.00 on December 8, 1994.

[His] actuation and pronouncement shows not only bad faith on his part but also of his fraudulent intention to
completely exclude [Marlyn] from the proceedings in the court a quo. By doing what he did he prevented the
[trial court] from fully appreciating the particulars of the case.8

In any event, the RTC decision may be annulled for lack of jurisdiction over the person of respondent. The pertinent
provisions of the Negotiable Instruments Law are enlightening:

SEC. 185. Check, defined. – A check is a bill of exchange drawn on a bank payable on demand. Except as
herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand
apply to a check.9 (emphasis ours)
47
 SEC. 189. When check operates as an assignment. – A check of itself does not operate as an assignment
of any part of the funds to the credit of the drawer with the bank, and the bank is not liable to the holder,
unless and until it accepts or certifies the check. (emphasis ours)

If a bank refuses to pay a check (notwithstanding the sufficiency of funds), the payee-holder cannot, in view of the
cited sections, sue the bank. The payee should instead sue the drawer who might in turn sue the bank. Section 189
is sound law based on logic and established legal principles: no privity of contract exists between the drawee-bank
and the payee. Indeed, in this case, there was no such privity of contract between ABC and petitioner.

Petitioner should not have sued ABC. Contracts take effect only between the parties, their assigns and heirs, except
in cases where the rights and obligations arising from the contract are not transmissible by their nature, or by
stipulation or by provision of law.10 None of the foregoing exceptions to the relativity of contracts applies in this case.

The contract of loan was between petitioner and respondent. No collection suit could prosper without respondent
who was an indispensable party. Rule 3, Sec. 7 of the Rules of Court states:

Sec. 7. Compulsory joinder of indispensable parties. – Parties in interest without whom no final
determination can be had of an action shall be joined either as plaintiffs or defendants. (emphasis ours)

An indispensable party is one whose interest in the controversy is such that a final decree will necessarily affect his
rights. The court cannot proceed without his presence.11 If an indispensable party is not impleaded, any judgment is
ineffective.12 On this, Aracelona v. Court of Appeals13 declared:

Rule 3, Section 7 of the Rules of Court defines indispensable parties as parties-in-interest without whom
there can be no final determination of an action. As such, they must be joined either as plaintiffs or as
defendants. The general rule with reference to the making of parties in a civil action requires, of course, the
joinder of all necessary parties where possible, and the joinder of all indispensable parties under any and all
conditions, their presence being sine qua non for the exercise of judicial power. It is precisely "when an
indispensable party is not before the court (that) the action should be dismissed." The absence of an
indispensable party renders all subsequent actions of the court null and void for want of authority to act, not
only as to the absent parties but even as to those present.

WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals in CA-G.R. SP No. 44971
is AFFIRMED in toto.

Costs against petitioner.

SO ORDERED.

iii.
International Corporate Bank, Inc. v. CA
G. R. No. 129910 [501 SCRA 20] September 5, 2006
Carpio, J.:

Before the Court is a petition for review1 assailing the 9 August 1994 Amended Decision2 and the 16 July 1997
Resolution3 of the Court of Appeals in CA-G.R. CV No. 25209.

The Antecedent Facts

The case originated from an action for collection of sum of money filed on 16 March 1982 by the International
Corporate Bank, Inc.4 ("petitioner") against the Philippine National Bank ("respondent"). The case was raffled to the
then Court of First Instance (CFI) of Manila, Branch 6. The complaint was amended on 19 March 1982. The case
was eventually re-raffled to the Regional Trial Court of Manila, Branch 52 ("trial court").

The Ministry of Education and Culture issued 15 checks5 drawn against respondent which petitioner accepted for
deposit on various dates. The checks are as follows:

Check Number Date Payee Amount

7-3694621-4 7-20-81 Trade Factors, Inc. P 97,500.00
7-3694609-6 7-27-81 Romero D. Palmares 98,500.50
7-3666224-4 8-03-81 Trade Factors, Inc. 99,800.00
7-3528348-4 8-07-81 Trade Factors, Inc. 98,600.00
7-3666225-5 8-10-81 Antonio Lisan 98,900.00
48
 7-3688945-6 8-10-81 Antonio Lisan 97,700.00
7-4535674-1 8-21-81 Golden City Trading 95,300.00
7-4535675-2 8-21-81 Red Arrow Trading 96,400.00
7-4535699-5 8-24-81 Antonio Lisan 94,200.00
7-4535700-6 8-24-81 Antonio Lisan 95,100.00
7-4697902-2 9-18-81 Ace Enterprises, Inc. 96,000.00
7-4697925-6 9-18-81 Golden City Trading 93,030.00
7-4697011-6 10-02-81 Wintrade Marketing 90,960.00
7-4697909-4 10-02-81 ABC Trading, Inc. 99,300.00
7-4697922-3 10-05-81 Golden Enterprises 96,630.00

The checks were deposited on the following dates for the following accounts:

Check Number Date Deposited Account Deposited

7-3694621-4 7-23-81 CA 0060 02360 3
7-3694609-6 7-28-81 CA 0060 02360 3
7-3666224-4 8-4-81 CA 0060 02360 3
7-3528348-4 8-11-81 CA 0060 02360 3
7-3666225-5 8-11-81 SA 0061 32331 7
7-3688945-6 8-17-81 CA 0060 30982 5
7-4535674-1 8-26-81 CA 0060 02360 3
7-4535675-2 8-27-81 CA 0060 02360 3
7-4535699-5 8-31-81 CA 0060 30982 5
7-4535700-6 8-24-81 SA 0061 32331 7
7-4697902-2 9-23-81 CA 0060 02360 3
7-4697925-6 9-23-81 CA 0060 30982 5
7-4697011-6 10-7-81 CA 0060 02360 3
7-4697909-4 10-7-81 CA 0060 30982 56

After 24 hours from submission of the checks to respondent for clearing, petitioner paid the value of the checks and
allowed the withdrawals of the deposits. However, on 14 October 1981, respondent returned all the checks to
petitioner without clearing them on the ground that they were materially altered. Thus, petitioner instituted an action
for collection of sums of money against respondent to recover the value of the checks.

The Ruling of the Trial Court

The trial court ruled that respondent is expected to use reasonable business practices in accepting and paying the
checks presented to it. Thus, respondent cannot be faulted for the delay in clearing the checks considering the
ingenuity in which the alterations were effected. The trial court observed that there was no attempt from petitioner to
verify the status of the checks before petitioner paid the value of the checks or allowed withdrawal of the deposits.
According to the trial court, petitioner, as collecting bank, could have inquired by telephone from respondent, as
drawee bank, about the status of the checks before paying their value. Since the immediate cause of petitioner’s loss
was the lack of caution of its personnel, the trial court held that petitioner is not entitled to recover the value of the
checks from respondent.

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

WHEREFORE, judgment is hereby rendered dismissing both the complaint and the counterclaim. Costs shall,
however be assessed against the plaintiff.

SO ORDERED.7

Petitioner appealed the trial court’s Decision before the Court of Appeals.

The Ruling of the Court of Appeals

In its 10 October 1991 Decision,8 the Court of Appeals reversed the trial court’s Decision. Applying Section 4(c) of
Central Bank Circular No. 580, series of 1977,9 the Court of Appeals held that checks that have been materially
altered shall be returned within 24 hours after discovery of the alteration. However, the Court of Appeals ruled that
even if the drawee bank returns a check with material alterations after discovery of the alteration, the return would
not relieve the drawee bank from any liability for its failure to return the checks within the 24-hour clearing period.
The Court of Appeals explained:

49
 Does this mean that, as long as the drawee bank returns a check with material alteration within 24 hour[s]
after discovery of such alteration, such return would have the effect of relieving the bank of any liability
whatsoever despite its failure to return the check within the 24- hour clearing house rule?

We do not think so.

Obviously, such bank cannot be held liable for its failure to return the check in question not later than the next
regular clearing. However, this Court is of the opinion and so holds that it could still be held liable if it fails to
exercise due diligence in verifying the alterations made. In other words, such bank would still be expected,
nay required, to make the proper verification before the 24-hour regular clearing period lapses, or in cases
where such lapses may be deemed inevitable, that the required verification should be made within a
reasonable time.

The implication of the rule that a check shall be returned within the 24-hour clearing period is that if the
collecting bank paid the check before the end of the aforesaid 24-hour clearing period, it would be responsible
therefor such that if the said check is dishonored and returned within the 24-hour clearing period, the drawee
bank cannot be held liable. Would such an implication apply in the case of materially altered checks returned
within 24 hours after discovery? This Court finds nothing in the letter of the above-cited C.B. Circular that
would justify a negative answer. Nonetheless, the drawee bank could still be held liable in certain instances.
Even if the return of the check/s in question is done within 24 hours after discovery, if it can be shown that
the drawee bank had been patently negligent in the performance of its verification function, this Court finds
no reason why the said bank should be relieved of liability.

Although banking practice has it that the presumption of clearance is conclusive when it comes to the
application of the 24-hour clearing period, the same principle may not be applied to the 24-hour period vis-a-
vis material alterations in the sense that the drawee bank which returns materially altered checks within 24
hours after discovery would be conclusively relieved of any liability thereon. This is because there could well
be various intervening events or factors that could affect the rights and obligations of the parties in cases
such as the instant one including patent negligence on the part of the drawee bank resulting in an
unreasonable delay in detecting the alterations. While it is true that the pertinent proviso in C.B. Circular No.
580 allows the drawee bank to return the altered check within the period "provided by law for filing a legal
action", this does not mean that this would entitle or allow the drawee bank to be grossly negligent and,
inspite thereof, avail itself of the maximum period allowed by the above-cited Circular. The discovery must
be made within a reasonable time taking into consideration the facts and circumstances of the case. In other
words, the aforementioned C.B. Circular does not provide the drawee bank the license to be grossly negligent
on the one hand nor does it preclude the collecting bank from raising available defenses even if the check is
properly returned within the 24-hour period after discovery of the material alteration.10

The Court of Appeals rejected the trial court’s opinion that petitioner could have verified the status of the checks by
telephone call since such imposition is not required under Central Bank rules. The dispositive portion of the 10
October 1991 Decision reads:

PREMISES CONSIDERED, the decision appealed from is hereby REVERSED and the defendant-appellee
Philippine National Bank is declared liable for the value of the fifteen checks specified and enumerated in the
decision of the trial court (page 3) in the amount of P1,447,920.00

SO ORDERED.11

Respondent filed a motion for reconsideration of the 10 October 1991 Decision. In its 9 August 1994 Amended
Decision, the Court of Appeals reversed itself and affirmed the Decision of the trial court dismissing the complaint.

In reversing itself, the Court of Appeals held that its 10 October 1991 Decision failed to appreciate that the rule on
the return of altered checks within 24 hours from the discovery of the alteration had been duly passed by the Central
Bank and accepted by the members of the banking system. Until the rule is repealed or amended, the rule has to be
applied.

Petitioner moved for the reconsideration of the Amended Decision. In its 16 July 1997 Resolution, the Court of
Appeals denied the motion for lack of merit.

Hence, the recourse to this Court.

The Issues

Petitioner raises the following issues in its Memorandum:

1. Whether the checks were materially altered;

50
 2. Whether respondent was negligent in failing to recognize within a reasonable period the altered checks
and in not returning the checks within the period; and

3. Whether the motion for reconsideration filed by respondent was out of time thus making the 10 October
1991 Decision final and executory.12

The Ruling of This Court

Filing of the Petition under both Rules 45 and 65

Respondent asserts that the petition should be dismissed outright since petitioner availed of a wrong mode of appeal.
Respondent cites Ybañez v. Court of Appeals13 where the Court ruled that "a petition cannot be subsumed
simultaneously under Rule 45 and Rule 65 of the Rules of Court, and neither may petitioners delegate upon the court
the task of determining under which rule the petition should fall."

The remedies of appeal and certiorari are mutually exclusive and not alternative or successive.14 However, this Court
may set aside technicality for justifiable reasons. The petition before the Court is clearly meritorious. Further, the
petition was filed on time both under Rules 45 and 65.15 Hence, in accordance with the liberal spirit which pervades
the Rules of Court and in the interest of justice,16 we will treat the petition as having been filed under Rule 45.

Alteration of Serial Number Not Material

The alterations in the checks were made on their serial numbers.

Sections 124 and 125 of Act No. 2031, otherwise known as the Negotiable Instruments Law, provide:

SEC. 124. Alteration of instrument; effect of. ― Where a negotiable instrument is materially altered without
the assent of all parties liable thereon, it is avoided, except as against a party who has himself made,
authorized, or assented to the alteration and subsequent indorsers.

But when an instrument has been materially altered and is in the hands of a holder in due course, not a party
to the alteration, he may enforce payment thereof according to its original tenor.

SEC. 125. What constitutes a material alteration. ― Any alteration which changes:

(a) The date;

(b) The sum payable, either for principal or interest;

(c) The time or place of payment;

(d) The number or the relations of the parties;

(e) The medium or currency in which payment is to be made;

or which adds a place of payment where no place of payment is specified, or any other change or addition
which alters the effect of the instrument in any respect, is a material alteration.

The question on whether an alteration of the serial number of a check is a material alteration under the Negotiable
Instruments Law is already a settled matter. In Philippine National Bank v. Court of Appeals, this Court ruled that the
alteration on the serial number of a check is not a material alteration. Thus:

An alteration is said to be material if it alters the effect of the instrument. It means an unauthorized change in
an instrument that purports to modify in any respect the obligation of a party or an unauthorized addition of
words or numbers or other change to an incomplete instrument relating to the obligation of a party. In other
words, a material alteration is one which changes the items which are required to be stated under Section 1
of the Negotiable Instrument[s] Law.

Section 1 of the Negotiable Instruments Law provides:

Section 1. ― Form of negotiable instruments. An instrument to be negotiable must conform to the following
requirements:

(a) It must be in writing and signed by the maker or drawer;

51
 (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.

xxxx

The case at the bench is unique in the sense that what was altered is the serial number of the check in
question, an item which, it can readily be observed, is not an essential requisite for negotiability under Section
1 of the Negotiable Instruments Law. The aforementioned alteration did not change the relations between
the parties. The name of the drawer and the drawee were not altered. The intended payee was the same.
The sum of money due to the payee remained the same. x x x

xxxx

The check’s serial number is not the sole indication of its origin. As succinctly found by the Court of Appeals,
the name of the government agency which issued the subject check was prominently printed therein. The
check’s issuer was therefore sufficiently identified, rendering the referral to the serial number redundant and
inconsequential. x x x

xxxx

Petitioner, thus cannot refuse to accept the check in question on the ground that the serial number was
altered, the same being an immaterial or innocent one.17

Likewise, in the present case the alterations of the serial numbers do not constitute material alterations on the checks.

Incidentally, we agree with the petitioner’s observation that the check in the PNB case appears to belong to the same
batch of checks as in the present case. The check in the PNB case was also issued by the Ministry of Education and
Culture. It was also drawn against PNB, respondent in this case. The serial number of the check in the PNB case is
7-3666-223-3 and it was issued on 7 August 1981.

Timeliness of Filing of Respondent’s Motion for Reconsideration

Respondent filed its motion for reconsideration of the 10 October 1991 Decision on 6 November 1991. Respondent’s
motion for reconsideration states that it received a copy of the 10 October 1991 Decision on 22 October 1991.18 Thus,
it appears that the motion for reconsideration was filed on time. However, the Registry Return Receipt shows that
counsel for respondent or his agent received a copy of the 10 October 1991 Decision on 16 October 1991, 19 not on
22 October 1991 as respondent claimed. Hence, the Court of Appeals is correct when it noted that the motion for
reconsideration was filed late. Despite its late filing, the Court of Appeals resolved to admit the motion for
reconsideration "in the interest of substantial justice."20

There are instances when rules of procedure are relaxed in the interest of justice. However, in this case, respondent
did not proffer any explanation for the late filing of the motion for reconsideration. Instead, there was a deliberate
attempt to deceive the Court of Appeals by claiming that the copy of the 10 October 1991 Decision was received on
22 October 1991 instead of on 16 October 1991. We find no justification for the posture taken by the Court of Appeals
in admitting the motion for reconsideration. Thus, the late filing of the motion for reconsideration rendered the 10
October 1991 Decision final and executory.

The 24-Hour Clearing Time

The Court will not rule on the proper application of Central Bank Circular No. 580 in this case. Since there were no
material alterations on the checks, respondent as drawee bank has no right to dishonor them and return them to
petitioner, the collecting bank.21 Thus, respondent is liable to petitioner for the value of the checks, with legal interest
from the time of filing of the complaint on 16 March 1982 until full payment.22 Further, considering that respondent’s
motion for reconsideration was filed late, the 10 October 1991 Decision, which held respondent liable for the value
of the checks amounting to P1,447,920, had become final and executory.
52
WHEREFORE, we SET ASIDE the 9 August 1994 Amended Decision and the 16 July 1997 Resolution of the Court
of Appeals. We rule that respondent Philippine National Bank is liable to petitioner International Corporate Bank, Inc.
for the value of the checks amounting to P1,447,920, with legal interest from 16 March 1982 until full payment. Costs
against respondent.

SO ORDERED.

iv.
EQUITABLE PCI BANK vs. ONG
G.R. No. 156207 September 15, 2006
CHICO-NAZARIO, J.:

On 29 November 1991, Warliza Sarande deposited in her account at Philippine Commercial International (PCI) Bank
Magsaysay Avenue, Santa Ana District, Davao City Branch, under Account No. 8502-00347-6, a PCI Bank General
Santos City Branch, TCBT1 Check No. 0249188 in the amount of P225,000.00. Upon inquiry by Serande at PCI Bank
on 5 December 1991 on whether TCBT Check No. 0249188 had been cleared, she received an affirmative answer.
Relying on this assurance, she issued two checks drawn against the proceeds of TCBT Check No. 0249188. One of
these was PCI Bank Check No. 073661 dated 5 December 1991 for P132,000.00 which Sarande issued to
respondent Rowena Ong Owing to a business transaction. On the same day, Ong presented to PCI Bank Magsaysay
Avenue Branch said Check No. 073661, and instead of encashing it, requested PCI Bank to convert the proceeds
thereof into a manager's check, which the PCI Bank obliged. Whereupon, Ong was issued PCI Bank Manager's
Check No. 10983 dated 5 December 1991 for the sum of P132,000.00, the value of Check No. 073661.

The next day, 6 December 1991, Ong deposited PCI Bank Manager's Check No. 10983 in her account with Equitable
Banking Corporation Davao City Branch. On 9 December 1991, she received a check return-slip informing her that
PCI Bank had stopped the payment of the said check on the ground of irregular issuance. Despite several demands
made by her to PCI Bank for the payment of the amount in PCI Bank Manager's Check No. 10983, the same was
met with refusal; thus, Ong was constrained to file a Complaint for sum of money, damages and attorney's fees
against PCI Bank.2

From PCI Bank's version, TCBT-General Santos City Check No. 0249188 was returned on 5 December 1991 at 5:00
pm on the ground that the account against which it was drawn was already closed. According to PCI Bank, it
immediately gave notice to Sarande and Ong about the return of Check No. 0249188 and requested Ong to return
PCI Bank Manager's Check No. 10983 inasmuch as the return of Check No. 0249188 on the ground that the account
from which it was drawn had already been closed resulted in a failure or want of consideration for the issuance of
PCI Bank Manager's Check No. 10983.3

After the pre-trial conference, Ong filed a motion for summary judgment.4 Though they were duly furnished with a
copy of the motion for summary judgment, PCI Bank and its counsel failed to appear at the scheduled
hearing.5 Neither did they file any written comment or opposition thereto. The trial court thereafter ordered Ong to
formally offer her exhibits in writing, furnishing copies of the same to PCI Bank which was directed to file its comment
or objection.6

Ong complied with the Order of the trial court, but PCI Bank failed to file any comment or objection within the period
given to it despite receipt of the same order.7 The trial court then granted the motion for summary judgment and in
its Order dated 2 March 1995, it held:

IN THE LIGHT OF THE FOREGOING, the motion for summary judgment is GRANTED, ordering defendant
Philippine Commercial International Bank to pay the plaintiff the amount of ONE HUNDRED THIRTY-TWO
THOUSAND PESOS (P132,000.00) equivalent to the amount of PCIB Manager's Check No. 10983.

Set the reception of the plaintiff's evidence with respect to the damages claimed in the complaint.8

PCI Bank filed a Motion for Reconsideration which the trial court denied in its Order dated 11 April 1996. 9 After the
reception of Ong's evidence in support of her claim for damages, the trial court rendered its Decision 10 dated 3 May
1999 wherein it ruled:

IN LIGHT OF THE FOREGOIN CONSIDERATION, and as plaintiff has preponderantly established by

competent evidence her claims in the Complaint, judgment in hereby rendered for the plaintiff against the
defendant-bank ordering the latter:

1. To pay the plaintiff the sum of FIFTY THOUSAND PESOS (P50,000.00) in the concept of moral
damages;

53
 2. To pay the plaintiff the sum of TWENTY THOUSAND PESOS (P20,000.00) as exemplary
damages;

3. To pay the plaintiff the sum of THREE THOUSAND FIVE HUNDRED PESOS (P3,500.00)
representing actual expenses;

4. To pay the plaintiff the sum of TWENTY THOUSAND PESOS (P20,000.00) as and for attorney's
fee's; and

5. To pay the costs.11

From this decision, PCI Bank sought recourse before the Court of Appeals. In a Decision 12 dated 29 October 2002,
the appellate court denied the appeal of PCI Bank and affirmed the orders and decision of the trial court.

Unperturbed, PCI Bank then filed the present petition for review before this Court and raised the following issues:

1. WHETHER OR NOT THE COURT OF APPEALS COMMITTED A GRAVE AND REVERSIBLE ERROR
WHEN IT SUSTAINED THE LOWER COURT'S ORDER DATED 2 MARCH 1999 GRANTING
RESPONDENT'S MOTION FOR SUMMARY JUDGMENT NOTWITHSTANDING THE GLARING FACT
THAT THERE ARE GENUINE, MATERIAL AND FACTUAL ISSUES WHICH REQUIRE THE
PRESENTATION OF EVIDENCE.

2. WHETHER OR NOT THE COURT OF APPEALS WAS IN ERROR WHEN IT SUSTAINED THE LOWER
COURT'S DECISION DATED 3 MAY 1999 GRANTING THE RELIEFS PRAYED FOR IN RESPONDENT
ONG'S COMPLAINT INSPITE OF THE FACT THAT RESPONDENT ONG WOULD BE "UNJUSTLY
ENRICHED" AT THE EXPENSE OF PETITIONER BANK, IF PETITIONER BANK WOULD BE REQUIRED
TO PAY AN UNFUNDED CHECK.

3. WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE ERRORS WHEN IT

AFFIRMED THE COURT A QUO'S DECISIION DATED 3 MAY 1999 AWARDING DAMAGES TO
RESPONDENT ONG AND HOLDING THAT RESPONDENT ONG HAD PREPONDERANTLY
ESTABLISHED BY COMPETENT EVIDENCE HER CLAIMS IN THE COMPLAINT INSPITE OF THE FACT
THAT THE EVIDENCE ON RECORD DOES NOT JUSTIFY THE AWARD OF DAMAGES.

4. WHETHER OR NOT THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR WHEN IT

AFFIRMED THE LOWER COURT'S FACTUAL FINDING IN ITS DECISION DATED 3 MAY 1999 HOLDING
RESPONDENT ONG A "HOLDER IN DUE COURSE" INSPITE OF THE FACT THAT THE REQUISITE OF
"GOOD FAITH" AND FOR VALUE IS LACKING AND DESPITE THE ABSENCE OF A PROPER TRIAL TO
DETERMINE SUCH FACTUAL ISSUE.

5. WHETHER OR NOT THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR WHEN IT

UPHELD THE LOWER COURT'S DECISION DATED 3 MAY 1999 DENYING PETITIONER EPCI BANK'S
COUNTERCLAIM INSPITE OF THE FACT THAT IT WAS SHOWN THAT RESPONDENT ONG'S
COMPLAINT LACKS MERIT.13

We affirm the Decision of the trial court and the Court of Appeals.

The provision on summary judgment is found in Section 1, Rule 35 of the 1997 Rules of Court:

SECTION 1. Summary judgment for claimant. – A party seeking to recover upon a claim, counterclaim, or
cross-claim or to obtain a declaratory relief may, at any time after the pleading in answer thereto has been
served, move with supporting affidavits, depositions or admissions for a summary judgment in his favor upon
all or any part thereof.

Thus, it has been held that a summary judgment is proper where, upon a motion filed after the issues had been
joined and on the basis of the pleadings and papers filed, the court finds that there is no genuine issue as to any
material fact to except as to the amount of damages. A genuine issue has been defined as an issue of fact which
calls for the presentation of evidence, as distinguished from an issue which is sham, fictitious, contrived and patently
unsubstantial so as not to constitute a genuine issue for trial.14

A court may grant summary judgment to settle expeditiously a case if, on motion of either party, there appears from
the pleadings, depositions, admissions, and affidavits that no important issues of fact are involved, except the amount
of damages.15 Rule 35, Section 3, of the Rules of Court provides two requisites for summary judgment to be proper:
(1) there must be no genuine issue as to any material fact, except for the amount of damages; and (2) the party
presenting the motion for summary judgment must be entitled to a judgment as a matter of law.16

54
Certainly, when the facts as pleaded appear uncontested or undisputed, then there's no real or genuine issue or
question as to the facts, and summary judgment is called for.17

By admitting it committed an error, clearing the check of Sarande and issuing in favor of Ong not just any check but
a manager's check for that matter, PCI Bank's liability is fixed. Under the circumstances, we find that summary
judgment was proper and a hearing would serve no purpose. That summary judgment is appropriate was incisively
expounded by the trial court when it made the following observation:

[D]efendant-bank had certified plaintiff's PCIB Check No. 073661 and since certification is equivalent to
acceptance, defendant-bank as drawee bank is bound on the instrument upon certification and it is immaterial
to such liability in favor of the plaintiff who is a holder in due course whether the drawer (Warliza Sarande)
had funds or not with the defendant-bank (Security vs. State Bank, 154 N.W. 282) or the drawer was indebted
to the bank for more than the amount of the check (Nat. Bank vs. Schmelz, Nat. Bank, 116 S.E. 880) as the
certifying bank as all the liabilities under Sec. 62 of the Negotiable Instruments Law which refers to liability of
acceptor (Title Guarantee vs. Emadee Realty Corp., 240 N.Y. 36).

It may be true that plaintiff's PCIB Check No. 073661 for P132,000.00 which was paid to her by Warliza
Sarande was actually not funded but since plaintiff became a holder in due course, defendant-bank cannot
interpose a defense of want or lack of consideration because that defense is equitable or personal and cannot
prosper against a holder in due course pursuant to Section 28 of the Negotiable Instruments Law. Therefore,
when the aforementioned check was endorsed and presented by the plaintiff and certified to and accepted
by defendant-bank in the purchase of PCIB Manager's Check No. 1983 in the amount of P132,000.00, there
was a valid consideration.18

The property of summary judgment was further explained by this Court when it pronounced that:

The theory of summary judgment is that although an answer may on its face appear to tender issues –
requiring trial – yet if it is demonstrated by affidavits, depositions, or admissions that those issues are not
genuine, but sham or fictitious, the Court is unjustified in dispensing with the trial and rendering summary
judgment for plaintiff. The court is expected to act chiefly on the basis of the affidavits, depositions,
admissions submitted by the movant, and those of the other party in opposition thereto. The hearing
contemplated (with 10-day notice) is for the purpose of determining whether the issues are genuine or not,
not to receive evidence on the issues set up in the pleadings. A hearing is not thus de riguer. The matter may
be resolved, and usually is, on the basis of affidavits, depositions, admissions. This is not to say that a hearing
may be regarded as a superfluity. It is not, and the Court has plenary discretion to determine the necessity
therefore.19

The second and fourth issues are inter-related and so they shall be resolved together. The second issue has
reference to PCI Bank's claim of unjust enrichment on the part of Ong if it would be compelled to make good the
manager's check it had issued. As asserted by PCI Bank under the fourth issue, Ong is not a holder in due course
because the manager's check was drawn against a closed account; therefore, the same was issued without
consideration.

On the matter of unjust enrichment, the fundamental doctrine of unjust enrichment is the transfer of value without just
cause or consideration. The elements of this doctrine are: enrichment on the part of the defendant; impoverishment
on the part of the plaintiff; and lack of cause. The main objective is to prevent one to enrich himself at the expense
of another.20 It is based on the equitable postulate that it is unjust for a person to retain benefit without paying for
it.21 It is well to stress that the check of Sarande had been cleared by the PCI Bank for which reason the former
issued the check to Ong. A check which has been cleared and credited to the account of the creditor shall be
equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account.22

Having cleared the check earlier, PCI Bank, therefore, became liable to Ong and it cannot allege want or failure of
consideration between it and Sarande. Under settled jurisprudence, Ong is a stranger as regards the transaction
between PCI Bank and Sarande.23

PCI Bank next insists that since there was no consideration for the issuance of the manager's check, ergo, Ong is
not a holder in due course. This claim is equally without basis. Pertinent provisions of the Negotiable Instruments
Law are hereunder quoted:

SECTION 52. What constitutes a holder in due course. – A holder in due course is a holder who has taken
the instrument under the following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice it had been previously
dishonored, if such was the fact;

55
 (c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in
the title of the person negotiating it.

The same law provides further:

Sec. 24. Presumption of consideration. – Every negotiable instrument is deemed prima facie to have been
issued for a valuable consideration; and every person whose signature appears thereon to have become a
party thereto for value.

Sec. 26. What constitutes holder for value. – Where value has at any time been given for the instrument, the
holder is deemed a holder for value in respect to all parties who become such prior to that time.

Sec. 28. Effect of want of consideration. – Absence or failure of consideration is a matter of defense as
against any person not a holder in due course; and partial failure of consideration is a defense pro tanto,
whether the failure is an ascertained and liquidated amount or otherwise.

Easily discernible is that what Ong obtained from PCI Bank was not just any ordinary check but a manager's check.
A manager's check is an order of the bank to pay, drawn upon itself, committing in effect its total resources, integrity
and honor behind its issuance. By its peculiar character and general use in commerce, a manager's check is regarded
substantially to be as good as the money it represents.24

A manager's check stands on the same footing as a certified check.25 The effect of certification is found in Section
187, Negotiable Instruments Law.

Sec. 187. Certification of check; effect of. – Where a check is certified by the bank on which it is drawn, the
certification is equivalent to an acceptance.26

The effect of issuing a manager's check was incontrovertibly elucidated when we declared that:

A manager's check is one drawn by the bank's manager upon the bank itself. It is similar to a cashier's check
both as to effect and use. A cashier's check is a check of the bank's cashier on his own or another check. In
effect, it is a bill of exchange drawn by the cashier of a bank upon the bank itself, and accepted in advance
by the act of its issuance. It is really the bank's own check and may be treated as a promissory note with the
bank as a maker. The check becomes the primary obligation of the bank which issues it and constitutes its
written promise to pay upon demand. The mere issuance of it is considered an acceptance thereof. x x x.27

In the case of New Pacific Timber & Supply Co., Inc. v. Seneris28:

[S]ince the said check had been certified by the drawee bank, by the certification, the funds represented by
the check are transferred from the credit of the maker to that of the payee or holder, and for all intents and
purposes, the latter becomes the depositor of the drawee bank, with rights and duties of one in such situation.
Where a check is certified by the bank on which it is drawn, the certification is equivalent to acceptance. Said
certification "implies that the check is drawn upon sufficient funds in the hands of the drawee, that they have
been set apart for its satisfaction, and that they shall be so applied whenever the check is presented for
payment. It is an understanding that the check is good then, and shall continue good, and this agreement is
as binding on the bank as its notes circulation, a certificate of deposit payable to the order of depositor, or
any other obligation it can assume. The object of certifying a check, as regards both parties, is to enable the
holder to use it as money." When the holder procures the check to be certified, "the check operates as an
assignment of a part of the funds to the creditors." Hence, the exception to the rule enunciated under Section
63 of the Central Bank Act to the effect "that a check which has been cleared and credited to the account of
the creditor shall be equivalent to a delivery to the creditor in cash in an amount equal to the amount credited
to his account" shall apply in this case x x x.

By accepting PCI Bank Check No. 073661 issued by Sarande to Ong and issuing in turn a manager's check in
exchange thereof, PCI Bank assumed the liabilities of an acceptor under Section 62 of the Negotiable Instruments
Law which states:

Sec. 62. Liability of acceptor. – The acceptor by accepting the instruments engages that he will pay it
according to the tenor of his acceptance; and admits –

(a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the
instrument; and

(b) The existence of the payee and his then capacity to indorse.

56
With the above jurisprudential basis, the issues on Ong being not a holder in due course and failure or want of
consideration for PCI Bank's issuance of the manager's check is out of sync.

Section 2, of Republic Act No. 8791, The General Banking Law of 2000 decrees:

SEC. 2. Declaration of Policy. – The State recognizes the vital role of banks in providing an environment
conducive to the sustained development of the national economy and the fiduciary nature of banking that
requires high standards of integrity and performance. In furtherance thereof, the State shall promote and
maintain a stable and efficient banking and financial system that is globally competitive, dynamic and
responsive to the demands of a developing economy.

In Associated Bank v. Tan,29 it was reiterated:

"x x x the degree of diligence required of banks is more than that of a good father of a family where the
fiduciary nature of their relationship with their depositors is concerned." Indeed, the banking business is
vested with the trust and confidence of the public; hence the "appropriate standard of diligence must be very
high, if not the highest degree of diligence."

Measured against these standards, the next question that needs to be addressed is: Did PCI Bank exercise the
requisite degree of diligence required of it? From all indications, it did not. PCI Bank distinctly made the following
uncontested admission:

1. On 29 November 1991, one Warliza Sarande deposited to her savings account with PCI Bank's Magsaysay
Avenue Branch, TCBT-General Santos Branch Check No. 0249188 for P225,000.00. Said check, however,
was inadvertently sent by PCI Bank through local clearing when it should have been sent through
inter-regional clearing since the check was drawn at TCBT-General Santos City.

2. On 5 December 1991, Warliza Sarande inquired whether TCBT Check No. 0249188 had been cleared.
Not having received any advice from the drawee bank within the regular clearing period for the return of
locally cleared checks, and unaware then of the error of not having sent the check through inter-regional
clearing, PCI Bank advised her that Check No. 024188 is treated as cleared. x x x. 30 (Emphasis
supplied.)

From the foregoing, it is palpable and readily apparent that PCI Bank failed to exercise the highest degree of
care31 required of it under the law.

In the case of Philippine National Bank v. Court of Appeals,32 we declared:

The banking system has become an indispensable institution in the modern world and plays a vital role in the
economic life of every civilized society. Whether as mere passive entities for the safe-keeping and saving of
money or as active instruments of business and commerce, banks have attained an ubiquitous presence
among the people, who have come to regard them with respect and even gratitude and, most of all,
confidence.

Having settled the other issues, we now resolve the question on the award of moral and exemplary damages by the
trial court to the respondent.

Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded
feelings, moral shock, social humiliation, and similar injury. Though incapable of pecuniary computation, moral
damages may be recovered if they are the proximate result of the defendant's wrongful act or omission. 33 The
requisites for an award of moral damages are well-defined, thus, firstly, evidence of besmirched reputation or
physical, mental or psychological suffering sustained by the claimant; secondly, a culpable act or omission factually
established; thirdly, proof that the wrongful act or omission of the defendant is the proximate cause of the damages
sustained by the claimant; and fourthly, that the case is predicated on any of the instances expressed or envisioned
by Article 221934 and Article 222035 of the Civil Code. All these elements are present in the instant case.36

In the first place, by refusing to make good the manager's check it has issued, Ong suffered embarrassment and
humiliation arising from the dishonor of the said check.37 Secondly, the culpable act of PCI Bank in having cleared
the check of Serande and issuing the manager's check to Ong is undeniable. Thirdly, the proximate cause of the loss
is attributable to PCI Bank. Proximate cause is defined as that cause which, in natural and continuous sequence,
unbroken by any efficient intervening cause, produces the injury, and without which the result would not have
occurred.38 In this case, the proximate cause of the loss is the act of PCI Bank in having cleared the check of Sarande
and its failure to exercise that degree of diligence required of it under the law which resulted in the loss to Ong.

On exemplary damages, Article 2229 of the Civil Code states:

57
 Art. 2229. Exemplary or corrective damages are imposed, by way of example or correction for the public
good, in addition to the moral, temperate, liquidated or compensatory damages.

The law allows the grant of exemplary damages to set an example for the public good. The banking system has
become an indispensable institution in the modern world and plays a vital role in the economic life of every civilized
society. Whether as mere passive entities for the safe-keeping and saving of money or as active instruments of
business and commerce, banks have attained an ubiquitous presence among the people, who have come to regard
them with respect and even gratitude and most of all, confidence. For this reason, banks should guard against injury
attributable to negligence or bad faith on its part.39 Without a doubt, it has been repeatedly emphasized that since
the banking business is impressed with public interest, of paramount importance thereto is the trust and confidence
of the public in general. Consequently, the highest degree of diligence is expected, and high standards of integrity
and performance are even required of it.40 Having failed in this respect, the award of exemplary damages is
warranted.

Article 2216 of the Civil Code provides:

ART. 2216. No proof of pecuniary loss is necessary in order that moral, nominal, temperate, liquidated or
exemplary damages may be adjudicated. The assessment of such damages, except liquidated ones, is left
to the discretion of the court, according to the circumstances of each case.

Based on the above provision, the determination of the amount to be awarded (except liquidated damages) is left to
the sound discretion of the court according to the circumstances of each case.41 In the case before us, we find that
the award of moral damages in the amount of P50,000.00 and exemplary damages in the amount of P20,000.00 is
reasonable and justified.

With the above disquisition, there is no necessity of further discussing the last issue on the PCI Bank's counterclaim
based on the supposed lack of merit of Ong's complaint.

WHEREFORE, premises considered, the Petition is DENIED and the Decision of the Court of Appeals dated 29
October 2002 in CA-G.R. CV No. 65000 affirming the Decision dated 3 may 1999, of the Regional Trial Court of
Davao City, Branch 14, in Civil Case No. 21458-92, are AFFIRMED.

SO ORDERED.

v
THE INTERNATIONAL CORPORATE BANK
(now UNION BANK OF THE PHILIPPINES) vs. SPS. GUECO.
G.R. No. 141968 February 12, 2001
KAPUNAN, J.:

The respondent Gueco Spouses obtained a loan from petitioner International Corporate Bank (now Union Bank of
the Philippines) to purchase a car - a Nissan Sentra 1600 4DR, 1989 Model. In consideration thereof, the Spouses
executed promissory notes which were payable in monthly installments and chattel mortgage over the car to serve
as security for the notes.
1âwphi1.nêt

The Spouses defaulted in payment of installments. Consequently, the Bank filed on August 7, 1995 a civil action
docketed as Civil Case No. 658-95 for "Sum of Money with Prayer for a Writ of Replevin"1 before the Metropolitan
Trial Court of Pasay City, Branch 45.2 On August 25, 1995, Dr. Francis Gueco was served summons and was fetched
by the sheriff and representative of the bank for a meeting in the bank premises. Desi Tomas, the Bank's Assistant
Vice President demanded payment of the amount of P184,000.00 which represents the unpaid balance for the car
loan. After some negotiations and computation, the amount was lowered to P154,000.00, However, as a result of the
non-payment of the reduced amount on that date, the car was detained inside the bank's compound.

On August 28, 1995, Dr. Gueco went to the bank and talked with its Administrative Support, Auto Loans/Credit Card
Collection Head, Jefferson Rivera. The negotiations resulted in the further reduction of the outstanding loan to
P150,000.00.

On August 29, 1995, Dr. Gueco delivered a manager's check in amount of P150,000.00 but the car was not released
because of his refusal to sign the Joint Motion to Dismiss. It is the contention of the Gueco spouses and their counsel
that Dr. Gueco need not sign the motion for joint dismissal considering that they had not yet filed their Answer.
Petitioner, however, insisted that the joint motion to dismiss is standard operating procedure in their bank to effect a
compromise and to preclude future filing of claims, counterclaims or suits for damages.

58
After several demand letters and meetings with bank representatives, the respondents Gueco spouses initiated a
civil action for damages before the Metropolitan Trial Court of Quezon City, Branch 33. The Metropolitan Trial Court
dismissed the complaint for lack of merit.3

On appeal to the Regional Trial Court, Branch 227 of Quezon City, the decision of the Metropolitan Trial Court was
reversed. In its decision, the RTC held that there was a meeting of the minds between the parties as to the reduction
of the amount of indebtedness and the release of the car but said agreement did not include the signing of the joint
motion to dismiss as a condition sine qua non for the effectivity of the compromise. The court further ordered the
bank:

1. to return immediately the subject car to the appellants in good working condition; Appellee may deposit
the Manager's check - the proceeds of which have long been under the control of the issuing bank in favor
of the appellee since its issuance, whereas the funds have long been paid by appellants to .secure said
Manager's Check, over which appellants have no control;

2. to pay the appellants the sum of P50,000.00 as moral damages; P25,000.00 as exemplary damages, and
P25,000.00 as attorney's fees, and

3. to pay the cost of suit.

In other respect, the decision of the Metropolitan Trial Court Branch 33 is hereby AFFIRMED.4

The case was elevated to the Court of Appeals, which on February 17, 2000, issued the assailed decision, the
decretal portion of which reads:

WHEREFORE, premises considered, the petition for review on certiorari is hereby DENIED and the Decision
of the Regional Trial Court of Quezon City, Branch 227, in Civil Case No. Q-97-31176, for lack of any
reversible error, is AFFIRMED in toto. Costs against petitioner.

SO ORDERED.5

The Court of Appeals essentially relied on the respect accorded to the finality of the findings of facts by the lower
court and on the latter's finding of the existence of fraud which constitutes the basis for the award of damages.

The petitioner comes to this Court by way of petition for review on certiorari under Rule 45 of the Rules of Court,
raising the following assigned errors:

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO AGREEMENT WITH RESPECT
TO THE EXECUTION OF THE JOINT MOTION TO DISMISS AS A CONDITION FOR THE COMPROMISE
AGREEMENT.

II

THE COURT OF APPEALS ERRED IN GRANTING MORAL AND EXEMPLARY DAMAGES AND
ATTORNEY'S FEES IN FAVOR OF THE RESPONDENTS.

III

THE COURT OF APPEALS ERRED IN HOLDING THAT THE PETITIONER RETURN THE SUBJECT CAR
TO THE RESPONDENTS, WITHOUT MAKING ANY PROVISION FOR THE ISSUANCE OF THE NEW
MANAGER'S/CASHIER'S CHECK BY THE RESPONDENTS IN FAVOR OF THE PETITIONER IN LIEU OF
THE ORIGINAL CASHIER'S CHECK THAT ALREADY BECAME STALE.6

As to the first issue, we find for the respondents. The issue as to what constitutes the terms of the oral compromise
or any subsequent novation is a question of fact that was resolved by the Regional Trial Court and the Court of
Appeals in favor of respondents. It is well settled that the findings of fact of the lower court, especially when affirmed
by the Court of Appeals, are binding upon this Court.7 While there are exceptions to this rule,8 the present case does
not fall under anyone of them, the petitioner's claim to the contrary, notwithstanding.

Being an affirmative allegation, petitioner has the burden of evidence to prove his claim that the oral compromise
entered into by the parties on August 28, 1995 included the stipulation that the parties would jointly file a motion to
dismiss. This petitioner failed to do. Notably, even the Metropolitan Trial Court, while ruling in favor of the petitioner
and thereby dismissing the complaint, did not make a factual finding that the compromise agreement included the
condition of the signing of a joint motion to dismiss.
59
The Court of Appeals made the factual findings in this wise:

In support of its claim, petitioner presented the testimony of Mr. Jefferson Rivera who related that respondent
Dr. Gueco was aware that the signing of the draft of the Joint Motion to Dismiss was one of the conditions
set by the bank for the acceptance of the reduced amount of indebtedness and the release of the car. (TSN,
October 23, 1996, pp. 17-21, Rollo, pp. 18, 5). Respondents, however, maintained that no such condition
was ever discussed during their meeting of August 28, 1995 (Rollo, p. 32).

The trial court, whose factual findings are entitled to respect since it has the 'opportunity to directly observe
the witnesses and to determine by their demeanor on the stand the probative value of their testimonies'
(People vs. Yadao, et al. 216 SCRA 1, 7 [1992]), failed to make a categorical finding on the issue. In
dismissing the claim of damages of the respondents, it merely observed that respondents are not entitled to
indemnity since it was their unjustified reluctance to sign of the Joint Motion to Dismiss that delayed the
release of the car. The trial court opined, thus:

'As regards the third issue, plaintiffs' claim for damages is unavailing. First, the plaintiffs could have
avoided the renting of another car and could have avoided this litigation had he signed the Joint
Motion to Dismiss. While it is true that herein defendant can unilaterally dismiss the case for collection
of sum of money with replevin, it is equally true that there is nothing wrong for the plaintiff to affix his
signature in the Joint Motion to Dismiss, for after all, the dismissal of the case against him is for his
own good and benefit. In fact, the signing of the Joint Motion to Dismiss gives the plaintiff three (3)
advantages. First, he will recover his car. Second, he will pay his obligation to the bank on its reduced
amount of P150,000.00 instead of its original claim of P184,985.09. And third, the case against him
will be dismissed. Plaintiffs, likewise, are not entitled to the award of moral damages and exemplary
damages as there is no showing that the defendant bank acted fraudulently or in bad faith.' (Rollo, p.
15)

The Court has noted, however, that the trial court, in its findings of facts, clearly indicated that the agreement
of the parties on August 28, 1995 was merely for the lowering of the price, hence -

'xxx On August 28, 1995, bank representative Jefferson Rivera and plaintiff entered into an oral
compromise agreement, whereby the original claim of the bank of P184,985.09 was reduced to
P150,000.00 and that upon payment of which, plaintiff was informed that the subject motor vehicle
would be released to him.' (Rollo, p. 12)

The lower court, on the other hand, expressly made a finding that petitioner failed to include the aforesaid
signing of the Joint Motion to Dismiss as part of the agreement. In dismissing petitioner's claim, the lower
court declared, thus:

'If it is true, as the appellees allege, that the signing of the joint motion was a condition sine qua
non for the reduction of the appellants' obligation, it is only reasonable and logical to assume that the
joint motion should have been shown to Dr. Gueco in the August 28, 1995 meeting. Why Dr. Gueco
was not given a copy of the joint motion that day of August 28, 1995, for his family or legal counsel
to see to be brought signed, together with the P150,000.00 in manager's check form to be submitted
on the following day on August 29, 1995? (sic) [I]s a question whereby the answer up to now eludes
this Court's comprehension. The appellees would like this Court to believe that Dr Gueco was
informed by Mr. Rivera Rivera of the bank requirement of signing the joint motion on August 28, 1995
but he did not bother to show a copy thereof to his family or legal counsel that day August 28, 1995.
This part of the theory of appellee is too complicated for any simple oral agreement. The idea of a
Joint Motion to Dismiss being signed as a condition to the pushing through a deal surfaced only on
August 29, 1995.

'This Court is not convinced by the appellees' posturing. Such claim rests on too slender a frame,
being inconsistent with human experience. Considering the effect of the signing of the Joint Motion
to Dismiss on the appellants' substantive right, it is more in accord with human experience to expect
Dr. Gueco, upon being shown the Joint Motion to Dismiss, to refuse to pay the Manager's Check and
for the bank to refuse to accept the manager's check. The only logical explanation for this inaction is
that Dr. Gueco was not shown the Joint Motion to Dismiss in the meeting of August 28, 1995,
bolstering his claim that its signing was never put into consideration in reaching a compromise.' xxx.9

We see no reason to reverse.

Anent the issue of award of damages, we find the claim of petitioner meritorious. In finding the petitioner liable for
damages, both .the Regional Trial Court and the Court of Appeals ruled that there was fraud on the part of the
petitioner. The CA thus declared:

60
 The lower court's finding of fraud which became the basis of the award of damages was likewise sufficiently
proven. Fraud under Article 1170 of the Civil Code of the Philippines, as amended is the 'deliberate and
intentional evasion of the normal fulfillment of obligation' When petitioner refused to release the car despite
respondent's tender of payment in the form of a manager's check, the former intentionally evaded its
obligation and thereby became liable for moral and exemplary damages, as well as attorney's fees.10

We disagree.

Fraud has been defined as the deliberate intention to cause damage or prejudice. It is the voluntary execution of a
wrongful act, or a willful omission, knowing and intending the effects which naturally and necessarily arise from such
act or omission; the fraud referred to in Article 1170 of the Civil Code is the deliberate and intentional evasion of the
normal fulfillment of obligation.11 We fail to see how the act of the petitioner bank in requiring the respondent to sign
the joint motion to dismiss could constitute as fraud. True, petitioner may have been remiss in informing Dr. Gueco
that the signing of a joint motion to dismiss is a standard operating procedure of petitioner bank. However, this can
not in anyway have prejudiced Dr. Gueco. The motion to dismiss was in fact also for the benefit of Dr. Gueco, as the
case filed by petitioner against it before the lower court would be dismissed with prejudice. The whole point of the
parties entering into the compromise agreement was in order that Dr. Gueco would pay his outstanding account and
in return petitioner would return the car and drop the case for money and replevin before the Metropolitan Trial Court.
The joint motion to dismiss was but a natural consequence of the compromise agreement and simply stated that Dr.
Gueco had fully settled his obligation, hence, the dismissal of the case. Petitioner's act of requiring Dr. Gueco to sign
the joint motion to dismiss can not be said to be a deliberate attempt on the part of petitioner to renege on the
compromise agreement of the parties. It should, likewise, be noted that in cases of breach of contract, moral damages
may only be awarded when the breach was attended by fraud or bad faith.12 The law presumes good faith. Dr. Gueco
failed to present an iota of evidence to overcome this presumption. In fact, the act of petitioner bank in lowering the
debt of Dr. Gueco from P184,000.00 to P150,000.00 is indicative of its good faith and sincere desire to settle the
case. If respondent did suffer any damage, as a result of the withholding of his car by petitioner, he has only himself
to blame. Necessarily, the claim for exemplary damages must fait. In no way, may the conduct of petitioner be
characterized as "wanton, fraudulent, reckless, oppressive or malevolent."13

We, likewise, find for the petitioner with respect to the third assigned error. In the meeting of August 29, 1995,
respondent Dr. Gueco delivered a manager's check representing the reduced amount of P150,000.00. Said check
was given to Mr. Rivera, a representative of respondent bank. However, since Dr. Gueco refused to sign the joint
motion to dismiss, he was made to execute a statement to the effect that he was withholding the payment of the
check.14 Subsequently, in a letter addressed to Ms. Desi Tomas, vice president of the bank, dated September 4,
1995, Dr. Gueco instructed the bank to disregard the 'hold order" letter and demanded the immediate release of his
car,15 to which the former replied that the condition of signing the joint motion to dismiss must be satisfied and that
they had kept the check which could be claimed by Dr. Gueco anytime.16 While there is controversy as to whether
the document evidencing the order to hold payment of the check was formally offered as evidence by petitioners,17 it
appears from the pleadings that said check has not been encashed.

The decision of the Regional Trial Court, which was affirmed in toto by the Court of Appeals, orders the petitioner:

1. to return immediately the subject car to the appellants in good working condition. Appellee may deposit
the Manager's Check - the proceeds of which have long been under the control of the issuing bank in favor
of the appellee since its issuance, whereas the funds have long been paid by appellants to secure said
Manager's Check over which appellants have no control.18

Respondents would make us hold that petitioner should return the car or its value and that the latter, because of its
own negligence, should suffer the loss occasioned by the fact that the check had become stale. 19 It is their position
that delivery of the manager's check produced the effect of payment20 and, thus, petitioner was negligent in opting
not to deposit or use said check. Rudimentary sense of justice and fair play would not countenance respondents'
position.

A stale check is one which has not been presented for payment within a reasonable time after its issue. It is valueless
and, therefore, should not be paid. Under the negotiable instruments law, an instrument not payable on demand must
be presented for payment on the day it falls due. When the instrument is payable on demand, presentment must be
made within a reasonable time after its issue. In the case of a bill of exchange, presentment is sufficient if made
within a reasonable time after the last negotiation thereof.21

A check must be presented for payment within a reasonable time after its issue,22 and in determining what is a
"reasonable time," regard is to be had to the nature of the instrument, the usage of trade or business with respect to
such instruments, and the facts of the particular case.23 The test is whether the payee employed such diligence as a
prudent man exercises in his own affairs.24 This is because the nature and theory behind the use of a check points
to its immediate use and payability. In a case, a check payable on demand which was long overdue by about two
and a half (2-1/2) years was considered a stale check.25 Failure of a payee to encash a check for more than ten (10)
years undoubtedly resulted in the check becoming stale.26 Thus, even a delay of one (1) week27 or two (2)
days,28 under the specific circumstances of the cited cases constituted unreasonable time as a matter of law.

61
In the case at bar, however, the check involved is not an ordinary bill of exchange but a manager's check. A manager's
check is one drawn by the bank's manager upon the bank itself. It is similar to a cashier's check both as to effect and
use. A cashier's check is a check of the bank's cashier on his own or another check. In effect, it is a bill of exchange
drawn by the cashier of a bank upon the bank itself, and accepted in advance by the act of its issuance.29 It is really
the bank's own check and may be treated as a promissory note with the bank as a maker.30 The check becomes the
primary obligation of the bank which issues it and constitutes its written promise to pay upon demand. The mere
issuance of it is considered an acceptance thereof. If treated as promissory note, the drawer would be the maker and
in which case the holder need not prove presentment for payment or present the bill to the drawee for acceptance.31

Even assuming that presentment is needed, failure to present for payment within a reasonable time will result to the
discharge of the drawer only to the extent of the loss caused by the delay.32 Failure to present on time, thus, does
not totally wipe out all liability. In fact, the legal situation amounts to an acknowledgment of liability in the sum stated
in the check. In this case, the Gueco spouses have not alleged, much less shown that they or the bank which issued
the manager's check has suffered damage or loss caused by the delay or non-presentment. Definitely, the original
obligation to pay certainly has not been erased.

It has been held that, if the check had become stale, it becomes imperative that the circumstances that caused its
non-presentment be determined.33 In the case at bar, there is no doubt that the petitioner bank held on the check and
refused to encash the same because of the controversy surrounding the signing of the joint motion to dismiss. We
see no bad faith or negligence in this position taken by the Bank. 1âw phi 1.nêt

WHEREFORE, premises considered, the petition for review is given due course. The decision of the Court of Appeals
affirming the decision of the Regional Trial Court is SET ASIDE. Respondents are further ordered to pay the original
obligation amounting to P150,000.00 to the petitioner upon surrender or cancellation of the manager's check in the
latter's possession, afterwhich, petitioner is to return the subject motor vehicle in good working condition.

SO ORDERED.

vi.
GABIONZA and TAN vs.
COURT OF APPEALS, ROXAS and NOLASCO
G.R. No. 161057 September 12, 2008
TINGA, J.:

On 21 August 2000, petitioners Betty Go Gabionza (Gabionza) and Isabelita Tan (Tan) filed their
respective Complaints-affidavit1 charging private respondents Luke Roxas (Roxas) and Evelyn
Nolasco (Nolasco) with several criminal acts. Roxas was the president of ASB Holdings, Inc. (ASBHI)
while Nolasco was the senior vice president and treasurer of the same corporation.

According to petitioners, ASBHI was incorporated in 1996 with its declared primary purpose to invest
in any and all real and personal properties of every kind or otherwise acquire the stocks, bonds, and
other securities or evidence of indebtedness of any other corporation, and to hold or own, use, sell,
deal in, dispose of, and turn to account any such stocks. 2 ASBHI was organized with an authorized
capital stock of P500,000.00, a fact reflected in the corporation’s articles of incorporation, copies of
which were appended as annexes to the complaint.3

Both petitioners had previously placed monetary investment with the Bank of Southeast Asia (BSA).
They alleged that between 1996 and 1997, they were convinced by the officers of ASBHI to lend or
deposit money with the corporation. They and other investors were urged to lend, invest or deposit
money with ASBHI, and in return they would receive checks from ASBHI for the amount so lent,
invested or deposited. At first, they were issued receipts reflecting the name "ASB Realty
Development" which they were told was the same entity as BSA or was connected therewith, but
beginning in March 1998, the receipts were issued in the name of ASBHI. They claimed that they were
told that ASBHI was exactly the same institution that they had previously dealt with. 4

ASBHI would issue two (2) postdated checks to its lenders, one representing the principal amount and
the other covering the interest thereon. The checks were drawn against DBS Bank and would mature
in 30 to 45 days. On the maturity of the checks, the individual lenders would renew the loans, either
collecting only the interest earnings or rolling over the same with the principal amounts. 5

In the first quarter of 2000, DBS Bank started to refuse to pay for the checks purportedly by virtue of
"stop payment" orders from ASBHI. In May of 2000, ASBHI filed a petition for rehabilitation and
62
receivership with the Securities and Exchange Commission (SEC), and it was able to obtain an order
enjoining it from paying its outstanding liabilities.6 This series of events led to the filing of the complaints
by petitioners, together with Christine Chua, Elizabeth Chan, Ando Sy and Antonio Villareal, against
ASBHI.7 The complaints were for estafa under Article 315(2)(a) and (2)(d) of the Revised Penal Code,
estafa under Presidential Decree No. 1689, violation of the Revised Securities Act and violation of the
General Banking Act.

A special task force, the Task Force on Financial Fraud (Task Force), was created by the Department
of Justice (DOJ) to investigate the several complaints that were lodged in relation to ASBHI. 8 The Task
Force, dismissed the complaint on 19 October 2000, and the dismissal was concurred in by the
assistant chief state prosecutor and approved by the chief state prosecutor. 9 Petitioners filed a motion
for reconsideration but this was denied in February 2001.10 With respect to the charges of estafa under
Article 315(2) of the Revised Penal Code and of violation of the Revised Securities Act (which form
the crux of the issues before this Court), the Task Force concluded that the subject transactions were
loans which gave rise only to civil liability; that petitioners were satisfied with the arrangement from
1996 to 2000; that petitioners never directly dealt with Nolasco and Roxas; and that a check was not
a security as contemplated by the Revised Securities Act.

Petitioners then filed a joint petition for review with the Secretary of Justice. On 15 October 2001, then
Secretary Hernando Perez issued a resolution which partially reversed the Task Force and instead
directed the filing of five (5) Informations for estafa under Article 315(2)(a) of the Revised Penal Code
on the complaints of Chan and petitioners Gabionza and Tan, and an Information for violation of
Section 4 in relation to Section 56 of the Revised Securities Act. 11 Motions for reconsideration to this
Resolution were denied by the Department of Justice in a Resolution dated 3 July 2002. 12

Even as the Informations were filed before the Regional Trial Court of Makati City, private respondents
assailed the DOJ Resolution by way of a certiorari petition with the Court of Appeals. In its assailed
Decision13 dated 18 July 2003, the Court of Appeals reversed the DOJ and ordered the dismissal of
the criminal cases. The dismissal was sustained by the appellate court when it denied petitioners’
motion for reconsideration in a Resolution dated 28 November 2003. 14 Hence this petition filed by
Gabionza and Tan.

The Court of Appeals deviated from the general rule that accords respect to the discretion of the DOJ
in the determination of probable cause. This Court consistently adheres to its policy of non-interference
in the conduct of preliminary investigations, and to leave to the investigating prosecutor sufficient
latitude of discretion in the determination of what constitutes sufficient evidence to establish probable
cause for the filing of an information against a supposed offender.15

At the outset, it is critical to set forth the key factual findings of the DOJ which led to the conclusion
that probable cause existed against the respondents. The DOJ Resolution states, to wit:

The transactions in question appear to be mere renewals of the loans the complainant-petitioners
earlier granted to BSA. However, just after they agreed to renew the loans, the ASB agents who dealt
with them issued to them receipts indicating that the borrower was ASB Realty, with the representation
that it was "the same entity as BSA or connected therewith." On the strength of this representation,
along with other claims relating to the status of ASB and its supposed financial capacity to meet
obligations, the complainant-petitioners acceded to lend the funds to ASB Realty instead. As it turned
out, however, ASB had in fact no financial capacity to repay the loans as it had an authorized capital
stock of only P500,000.00 and paid up capital of only P125,000.00. Clearly, the representations
regarding its supposed financial capacity to meet its obligations to the complainant-petitioners were
simply false. Had they known that ASB had in fact no such financial capacity, they would not have
invested millions of pesos. Indeed, no person in his proper frame of mind would venture to lend millions
of pesos to a business entity having such a meager capitalization. The fact that the complainant-
petitioners might have benefited from its earlier dealings with ASB, through interest earnings on their
previous loans, is of no moment, it appearing that they were not aware of the fraud at those times they
renewed the loans.

The false representations made by the ASB agents who dealt with the complainant-petitioners and
who inveigled them into investing their funds in ASB are properly imputable to respondents Roxas and
Nolasco, because they, as ASB’s president and senior vice president/treasurer, respectively, in charge
63
of its operations, directed its agents to make the false representations to the public, including the
complainant-petitioners, in order to convince them to invest their moneys in ASB. It is difficult to make
a different conclusion, judging from the fact that respondents Roxas and Nolasco authorized and
accepted for ASB the fraud-induced loans. This makes them liable for estafa under Article 315
(paragraph 2 [a]) of the Revised Penal Code. They cannot escape criminal liability on the ground that
they did not personally deal with the complainant-petitioners in regard to the transactions in question.
Suffice it to state that to commit a crime, inducement is as sufficient and effective as direct
participation.16

Notably, neither the Court of Appeals’ decision nor the dissent raises any serious disputation as to the
occurrence of the facts as narrated in the above passage. They take issue instead with the proposition
that such facts should result in a prima facie case against either Roxas or Nolasco, especially given
that neither of them engaged in any face-to-face dealings with petitioners. Leaving aside for the
moment whether this assumed remoteness of private respondents sufficiently insulates them from
criminal liability, let us first discern whether the above-stated findings do establish a prima facie case
that petitioners were indeed the victims of the crimes of estafa under Article 315(2)(a) of the Revised
Penal Code and of violation of the Revised Securities Act.

Article 315(2)(a) of the Revised Penal Code states:

ART. 315. Swindling (estafa). — Any person who shall defraud another by any of the means mentioned
herein below shall be punished by:

xxx xxx xxx

(2) By means of any of the following false pretenses or fraudulent acts executed prior to or
simultaneous with the commission of the fraud:

(a) By using a fictitious name, or falsely pretending to possess power, influence, qualifications,
property, credit, agency, business or imaginary transactions, or by means of other similar deceits;

xxx xxx xxx

The elements of estafa by means of deceit as defined under Article 315(2)(a) of the Revised Penal
Code are as follows: (1) that there must be a false pretense, fraudulent act or fraudulent means; (2)
that such false pretense, fraudulent act or fraudulent means must be made or executed prior to or
simultaneously with the commission of the fraud; (3) that the offended party must have relied on the
false pretense, fraudulent act or fraudulent means, that is, he was induced to part with his money or
property because of the false pretense, fraudulent act or fraudulent means; and (4) that as a result
thereof, the offended party suffered damage.17

Do the findings embodied in the DOJ Resolution align with the foregoing elements of estafa by means
of deceit?

First. The DOJ Resolution explicitly identified the false pretense, fraudulent act or fraudulent means
perpetrated upon the petitioners. It narrated that petitioners were made to believe that ASBHI had the
financial capacity to repay the loans it enticed petitioners to extend, despite the fact that "it had an
authorized capital stock of only P500,000.00 and paid up capital of only P125,000.00."18 The deficient
capitalization of ASBHI is evinced by its articles of incorporation, the treasurer’s affidavit executed by
Nolasco, the audited financial statements of the corporation for 1998 and the general information
sheets for 1998 and 1999, all of which petitioners attached to their respective affidavits.19

The Court of Appeals conceded the fact of insufficient capitalization, yet discounted its impact by noting
that ASBHI was able to make good its loans or borrowings from 1998 until the first quarter of
2000.20 The short-lived ability of ASBHI, to repay its loans does not negate the fraudulent
misrepresentation or inducement it has undertaken to obtain the loans in the first place. The material
question is not whether ASBHI inspired exculpatory confidence in its investors by making good on its
loans for a while, but whether such investors would have extended the loans in the first place had they
known its true financial setup. The DOJ reasonably noted that "no person in his proper frame of mind
would venture to lend millions of pesos to a business entity having such a meager capitalization." In
64
estafa under Article 315(2)(a), it is essential that such false statement or false representation constitute
the very cause or the only motive which induces the complainant to part with the thing. 21

Private respondents argue before this Court that the true capitalization of ASBHI has always been a
matter of public record, reflected as it is in several documents which could be obtained by the
petitioners from the SEC.22 We are not convinced. The material misrepresentations have been made
by the agents or employees of ASBHI to petitioners, to the effect that the corporation was structurally
sound and financially able to undertake the series of loan transactions that it induced petitioners to
enter into. Even if ASBHI’s lack of financial and structural integrity is verifiable from the articles of
incorporation or other publicly available SEC records, it does not follow that the crime of estafa through
deceit would be beyond commission when precisely there are bending representations that the
company would be able to meet its obligations. Moreover, respondents’ argument assumes that there
is legal obligation on the part of petitioners to undertake an investigation of ASBHI before agreeing to
provide the loans. There is no such obligation. It is unfair to expect a person to procure every available
public record concerning an applicant for credit to satisfy himself of the latter’s financial standing. At
least, that is not the way an average person takes care of his concerns.

Second. The DOJ Resolution also made it clear that the false representations have been made to
petitioners prior to or simultaneously with the commission of the fraud. The assurance given to them
by ASBHI that it is a worthy credit partner occurred before they parted with their money. Relevantly,
ASBHI is not the entity with whom petitioners initially transacted with, and they averred that they had
to be convinced with such representations that Roxas and the same group behind BSA were also
involved with ASBHI.

Third. As earlier stated, there was an explicit and reasonable conclusion drawn by the DOJ that it was
the representation of ASBHI to petitioners that it was creditworthy and financially capable to pay that
induced petitioners to extend the loans. Petitioners, in their respective complaint-affidavits, alleged
that they were enticed to extend the loans upon the following representations: that ASBHI was into the
very same activities of ASB Realty Corp., ASB Development Corp. and ASB Land, Inc., or otherwise
held controlling interest therein; that ASB could legitimately solicit funds from the public for
investment/borrowing purposes; that ASB, by itself, or through the corporations aforestated, owned
real and personal properties which would support and justify its borrowing program; that ASB was
connected with and firmly backed by DBS Bank in which Roxas held a substantial stake; and ASB
would, upon maturity of the checks it issued to its lenders, pay the same and that it had the necessary
resources to do so.23

Fourth. The DOJ Resolution established that petitioners sustained damage as a result of the acts
perpetrated against them. The damage is considerable as to petitioners. Gabionza
lost P12,160,583.32 whereas Tan lost 16,411,238.57.24 In addition, the DOJ Resolution noted that
neither Roxas nor Nolasco disputed that ASBHI had borrowed funds from about 700 individual
investors amounting to close to P4B.25

To the benefit of private respondents, the Court of Appeals ruled, citing Sesbreno v. Court of
Appeals,26 that the subject transactions "are akin to money market placements which partake the
nature of a loan, the non-payment of which does not give rise to criminal liability for estafa." The citation
is woefully misplaced. Sesbreno affirmed that "a money market transaction partakes the nature of a
loan and therefore ‘nonpayment thereof would not give rise to criminal liability for estafa through
misappropriation or conversion.’"27 Estafa through misappropriation or conversion is punishable under
Article 315(1)(b), while the case at bar involves Article 315 (2)(a), a mode of estafa by means of deceit.
Indeed, Sesbreno explains: "In money market placement, the investor is a lender who loans his money
to a borrower through a middleman or dealer. Petitioner here loaned his money to a borrower through
Philfinance. When the latter failed to deliver back petitioner's placement with the corresponding interest
earned at the maturity date, the liability incurred by Philfinance was a civil one." 28 That rationale is
wholly irrelevant to the complaint at bar, which centers not on the inability of ASBHI to repay petitioners
but on the fraud and misrepresentation committed by ASBHI to induce petitioners to part with their
money.

To be clear, it is possible to hold the borrower in a money market placement liable for estafa if the
creditor was induced to extend a loan upon the false or fraudulent misrepresentations of the borrower.
Such estafa is one by means of deceit. The borrower would not be generally liable for estafa through
65
misappropriation if he or she fails to repay the loan, since the liability in such instance is ordinarily civil
in nature.

We can thus conclude that the DOJ Resolution clearly supports a prima facie finding that the crime of
estafa under Article 315 (2)(a) has been committed against petitioners. Does it also establish a prima
facie finding that there has been a violation of the then-Revised Securities Act, specifically Section 4
in relation to Section 56 thereof?

Section 4 of Batas Pambansa Blg. 176, or the Revised Securities Act, generally requires the
registration of securities and prohibits the sale or distribution of unregistered securities. 29 The DOJ
extensively concluded that private respondents are liable for violating such prohibition against the sale
of unregistered securities:

Respondents Roxas and Nolasco do not dispute that in 1998, ASB borrowed funds about 700
individual investors amounting to close to P4 billion, on recurring, short-term basis, usually 30 or 45
days, promising high interest yields, issuing therefore mere postdate checks. Under the circumstances,
the checks assumed the character of "evidences of indebtedness," which are among the "securities"
mentioned under the Revised Securities Act. The term "securities" embodies a flexible rather than
static principle, one that is capable of adaptation to meet the countless and variable schemes devised
by those who seek to use the money of others on the promise of profits (69 Am Jur 2d, p. 604). Thus,
it has been held that checks of a debtor received and held by the lender also are evidences of
indebtedness and therefore "securities" under the Act, where the debtor agreed to pay interest on a
monthly basis so long as the principal checks remained uncashed, it being said that such principal
extent as would have promissory notes payable on demand (Id., p. 606, citing Untied States v. Attaway
(DC La) 211 F Supp 682). In the instant case, the checks were issued by ASB in lieu of the securities
enumerated under the Revised Securities Act in a clever attempt, or so they thought, to take the case
out of the purview of the law, which requires prior license to sell or deal in securities and registration
thereof. The scheme was to designed to circumvent the law. Checks constitute mere substitutes for
cash if so issued in payment of obligations in the ordinary course of business transactions. But when
they are issued in exchange for a big number of individual non-personalized loans solicited from the
public, numbering about 700 in this case, the checks cease to be such. In such a circumstance, the
checks assume the character of evidences of indebtedness. This is especially so where the individual
loans were not evidenced by appropriate debt instruments, such as promissory notes, loan
agreements, etc., as in this case. Purportedly, the postdated checks themselves serve as the
evidences of the indebtedness. A different rule would open the floodgates for a similar scheme,
whereby companies without prior license or authority from the SEC. This cannot be countenanced.
The subsequent repeal of the Revised Securities Act does not spare respondents Roxas and Nolasco
from prosecution thereunder, since the repealing law, Republic Act No. 8799 known as the "Securities
Regulation Code," continues to punish the same offense (see Section 8 in relation to Section 73, R.A.
No. 8799).30

The Court of Appeals however ruled that the postdated checks issued by ASBHI did not constitute a
security under the Revised Securities Act. To support this conclusion, it cited the general definition of
a check as "a bill of exchange drawn on a bank and payable on demand," and took cognizance of the
fact that "the issuance of checks for the purpose of securing a loan to finance the activities of the
corporation is well within the ambit of a valid corporate act" to note that a corporation does not need
prior registration with the SEC in order to be able to issue a check, which is a corporate prerogative.

This analysis is highly myopic and ignorant of the bigger picture. It is one thing for a corporation to
issue checks to satisfy isolated individual obligations, and another for a corporation to execute an
elaborate scheme where it would comport itself to the public as a pseudo-investment house and issue
postdated checks instead of stocks or traditional securities to evidence the investments of its patrons.
The Revised Securities Act was geared towards maintaining the stability of the national investment
market against activities such as those apparently engaged in by ASBHI. As the DOJ Resolution noted,
ASBHI adopted this scheme in an attempt to circumvent the Revised Securities Act, which requires a
prior license to sell or deal in securities. After all, if ASBHI’s activities were actually regulated by the
SEC, it is hardly likely that the design it chose to employ would have been permitted at all.

But was ASBHI able to successfully evade the requirements under the Revised Securities Act? As
found by the DOJ, there is ultimately a prima facie case that can at the very least sustain prosecution
66
of private respondents under that law. The DOJ Resolution is persuasive in citing American authorities
which countenance a flexible definition of securities. Moreover, it bears pointing out that the definition
of "securities" set forth in Section 2 of the Revised Securities Act includes "commercial papers
evidencing indebtedness of any person, financial or non-financial entity, irrespective of maturity,
issued, endorsed, sold, transferred or in any manner conveyed to another." 31 A check is a commercial
paper evidencing indebtedness of any person, financial or non-financial entity. Since the checks in this
case were generally rolled over to augment the creditor’s existing investment with ASBHI, they most
definitely take on the attributes of traditional stocks.

We should be clear that the question of whether the subject checks fall within the classification of
securities under the Revised Securities Act may still be the subject of debate, but at the very least, the
DOJ Resolution has established a prima facie case for prosecuting private respondents for such
offense. The thorough determination of such issue is best left to a full-blown trial of the merits, where
private respondents are free to dispute the theories set forth in the DOJ Resolution. It is clear error on
the part of the Court of Appeals to dismiss such finding so perfunctorily and on such flimsy grounds
that do not consider the grave consequences. After all, as the DOJ Resolution correctly pointed out:
"[T]he postdated checks themselves serve as the evidences of the indebtedness. A different rule would
open the floodgates for a similar scheme, whereby companies without prior license or authority from
the SEC. This cannot be countenanced."32

This conclusion quells the stance of the Court of Appeals that the unfortunate events befalling
petitioners were ultimately benign, not malevolent, a consequence of the economic crisis that beset
the Philippines during that era.33 That conclusion would be agreeable only if it were undisputed that
the activities of ASBHI are legal in the first place, but the DOJ puts forth a legitimate theory that the
entire modus operandi of ASBHI is illegal under the Revised Securities Act and if that were so, the
impact of the Asian economic crisis would not obviate the criminal liability of private respondents.

Private respondents cannot make capital of the fact that when the DOJ Resolution was issued, the
Revised Securities Act had already been repealed by the Securities Regulation Code of 2000. 34 As
noted by the DOJ, the new Code does punish the same offense alleged of petitioners, particularly
Section 8 in relation to Section 73 thereof. The complained acts occurred during the effectivity of the
Revised Securities Act. Certainly, the enactment of the new Code in lieu of the Revised Securities Act
could not have extinguished all criminal acts committed under the old law.

In 1909-1910, the Philippine and United States Supreme Courts affirmed the principle that when the
repealing act reenacts substantially the former law, and does not increase the punishment of the
accused, "the right still exists to punish the accused for an offense of which they were

convicted and sentenced before the passage of the later act."35 This doctrine was reaffirmed as
recently as 2001, where the Court, through Justice Quisumbing, held in Benedicto v. Court of
Appeals36 that an exception to the rule that the absolute repeal of a penal law deprives the court of
authority to punish a person charged with violating the old law prior to its repeal is "where the repealing
act reenacts the former statute and punishes the act previously penalized under the old law." 37 It is
worth noting that both the Revised Securities Act and the Securities Regulation Code of 2000 provide
for exactly the same penalty: "a fine of not less than five thousand (P5,000.00) pesos nor more than
five hundred thousand (P500,000.00) pesos or imprisonment of not less than seven (7) years nor more
than twenty one (21) years, or both, in the discretion of the court." 38

It is ineluctable that the DOJ Resolution established a prima facie case for violation of Article 315 (2)(a)
of the Revised Penal Code and Sections 4 in relation to 56 of the Revised Securities Act. We now turn
to the critical question of whether the same charges can be pinned against Roxas and Nolasco
likewise.

The DOJ Resolution did not consider it exculpatory that Roxas and Nolasco had not themselves dealt
directly with petitioners, observing that "to commit a crime, inducement is as sufficient and effective as
direct participation."39 This conclusion finds textual support in Article 1740 of the Revised Penal Code.
The Court of Appeals was unable to point to any definitive evidence that Roxas or Nolasco did not
instruct or induce the agents of ASBHI to make the false or misleading representations to the investors,
including petitioners. Instead, it sought to acquit Roxas and Nolasco of any liability on the ground that

67
the traders or employees of ASBHI who directly made the dubious representations to petitioners were
never identified or impleaded as respondents.

It appears that the Court of Appeals was, without saying so, applying the rule in civil cases that all
indispensable parties must be impleaded in a civil action. 41 There is no equivalent rule in criminal
procedure, and certainly the Court of Appeals’ decision failed to cite any statute, procedural rule or
jurisprudence to support its position that the failure to implead the traders who directly dealt with
petitioners is indeed fatal to the complaint.42

Assuming that the traders could be tagged as principals by direct participation in tandem with Roxas
and Nolasco – the principals by inducement – does it make sense to compel that they be jointly
charged in the same complaint to the extent that the exclusion of one leads to the dismissal of the
complaint? It does not. Unlike in civil cases, where indispensable parties are required to be impleaded
in order to allow for complete relief once the case is adjudicated, the determination of criminal liability
is individual to each of the defendants. Even if the criminal court fails to acquire jurisdiction over one
or some participants to a crime, it still is able to try those accused over whom it acquired jurisdiction.
The criminal court will still be able to ascertain the individual liability of those accused whom it could
try, and hand down penalties based on the degree of their participation in the crime. The absence of
one or some of the accused may bear impact on the available evidence for the prosecution or defense,
but it does not deprive the trial court to accordingly try the case based on the evidence that is actually
available.

At bar, if it is established after trial that Roxas and Nolasco instructed all the employees, agents and
traders of ASBHI to represent the corporation as financially able to engage in the challenged
transactions and repay its investors, despite their knowledge that ASBHI was not established to be in
a position to do so, and that representatives of ASBHI accordingly made such representations to
petitioners, then private respondents could be held liable for estafa. The failure to implead or try the
employees, agents or traders will not negate such potential criminal liability of Roxas and Nolasco. It
is possible that the non-participation of such traders or agents in the trial will affect the ability of both
petitioners and private respondents to adduce evidence during the trial, but it cannot quell the
existence of the crime even before trial is had. At the very least, the non-identification or non-
impleading of such traders or agents cannot negatively impact the finding of probable cause.

The assailed ruling unfortunately creates a wide loophole, especially in this age of call centers, that
would create a nearly fool-proof scheme whereby well-organized criminally-minded enterprises can
evade prosecution for criminal fraud. Behind the veil of the anonymous call center agent, such
enterprises could induce the investing public to invest in fictional or incapacitated corporations with
fraudulent impossible promises of definite returns on investment. The rule, as set forth by the Court of
Appeals’ ruling, will allow the masterminds and profiteers from the scheme to take the money and run
without fear of the law simply because the defrauded investor would be hard-pressed to identify the
anonymous call center agents who, reading aloud the script prepared for them in mellifluous tones,
directly enticed the investor to part with his or her money.

Is there sufficient basis then to establish probable cause against Roxas and Nolasco? Taking into
account the relative remoteness of private respondents to petitioners, the DOJ still concluded that
there was. To repeat:

The false representations made by the ASB agents who dealt with the complainant-petitioners and
who inveigled them into investing their funds in ASB are properly imputable to respondents Roxas and
Nolasco, because they, as ASB’s president and senior vice president/treasurer, respectively,
respectively, in charge of its operations, directed its agents to make the false representations to the
public, including the complainant-petitioners, in order to convince them to invest their moneys in ASB.
It is difficult to make a different conclusion, judging from the fact that respondents Roxas and Nolasco
authorized and accepted for ASB the fraud-induced loans.43

Indeed, the facts as thus established cannot lead to a definite, exculpatory conclusion that Roxas and
Nolasco did not instruct, much less forbid, their agents from making the misrepresentations to
petitioners. They could of course pose that defense, but such claim can only be established following
a trial on the merits considering that nothing in the record proves without doubt such law-abiding
prudence on their part. There is also the fact that ABSHI, their corporation, actually received the
68
alleged amounts of money from petitioners. It is especially curious that according to the ASBHI balance
sheets dated 31 December 1999, which petitioners attached to their affidavit-complaints,44 over five
billion pesos were booked as "advances to stockholder" when, according to the general information
sheet for 1999, Roxas owned 124,996 of the 125,000 subscribed shares of ASBHI. 45 Considering that
ASBHI had an authorized capital stock of only P500,000 and a subscribed capital of P125,000, it can
be reasonably deduced that such large amounts booked as "advances to stockholder" could have only
come from the loans extended by over 700 investors to ASBHI.

It is true that there are exceptions that may warrant departure from the general rule of non-interference
with the determination of probable cause by the DOJ, yet such exceptions do not lie in this case, and
the justifications actually cited in the Court of Appeals’ decision are exceptionally weak and ultimately
erroneous. Worse, it too hastily condoned the apparent evasion of liability by persons who seemingly
profited at the expense of investors who lost millions of pesos. The Court’s conclusion is that the DOJ’S
decision to prosecute private respondents is founded on sufficient probable cause, and the ultimate
determination of guilt or acquittal is best made through a full trial on the merits. Indeed, many of the
points raised by private respondents before this Court, related as they are to the factual context
surrounding the subject transactions, deserve the full assessment and verification only a trial on the
merits can accord.

WHEREFORE, the petition is GRANTED. The assailed Decision and Resolution of the Court of Appeals dated
18 July 2003 and 28 November 2003 are REVERSED and SET ASIDE. The Resolutions of the Department of
Justice in I.S. Nos. 2000-1418 to 1422 dated 15 October 2001 and 3 July 2002 are REINSTATED. Costs against
private respondents.
vii.

HI-CEMENT CORPORATION vs. INSULAR BANK OF ASIA AND AMERICA (later PHILIPPINE
COMMERCIAL INTERNATIONAL BANK and now, EQUITABLE-PCI BANK)
G.R. No. 132403 September 28, 2007

x-----------------------x
E.T. HENRY & CO. and SPOUSES ENRIQUE TAN and LILIA TAN vs. INSULAR BANK OF ASIA AND
AMERICA (later PHILIPPINE COMMERCIAL INTERNATIONAL BANK and now, EQUITABLE-PCI BANK)
G.R. No. 132419
CORONA, J.:

At bar are consolidated petitions assailing the decision of the Court of Appeals (CA) dated January 21, 1998 in CA-
G.R. CV No. 31600 entitled Insular Bank of Asia and America [now Philippine Commercial International Bank/(PCIB)]
v. E.T. Henry & Co., et al.1

The antecedent facts follow.

Petitioners Enrique Tan and Lilia Tan (spouses Tan) were the controlling stockholders of E.T. Henry & Co., Inc. (E.T.
Henry), a company engaged in the business of processing and distributing bunker fuel.2 Among E.T. Henry's
customers were petitioner Hi-Cement Corporation (Hi-Cement),3 Riverside Mills Corporation (Riverside) and Kanebo
Cosmetics Philippines, Inc. (Kanebo). For their purchases, these corporations issued postdated checks to E.T. Henry.

Sometime in 1979, respondent Insular Bank of Asia and America (later PCIB and now Equitable PCI-Bank) granted
E.T. Henry a credit facility known as "Purchase of Short Term Receivables." Through this arrangement, E.T. Henry
was able to encash, with pre-deducted interest, the postdated checks of its clients. In other words, E.T. Henry and
respondent were into "re-discounting" of checks.

For every transaction, respondent required E.T. Henry to execute a promissory note and a deed of assignment
bearing the conformity of the client to the re-discounting.4

From 1979 to 1981, E.T. Henry was able to re-discount its clients' checks (with deeds of assignment) with respondent.
However, in February 1981, 20 checks5 of Hi-Cement (which were crossed and which bore the restriction "deposit to
payee’s account only") were dishonored. So were the checks of Riverside and Kanebo.6

Respondent filed a complaint for sum of money7 in the then Court of First Instance of Rizal8 against E.T. Henry, the
spouses Tan, Hi-Cement (including its general manager9 and its treasurer 10 as signatories of the postdated crossed
checks), Riverside and Kanebo.11

69
In its complaint, respondent claimed that, due to the dishonor of the checks, it suffered actual damages equivalent
to their value, exclusive of accrued and accruing interests, charges and penalties such as attorney’s fees and
expenses of litigation, as follows:

1. Riverside Mills Corporation ₱ 115,312.50

2. Kanebo Cosmetics Philippines, Inc. 5,811,750.00

3. Hi-Cement Corporation 10,000,000.00

Respondent also sought to collect from E.T. Henry and the spouses Tan other loan obligations (amounting to
₱1,661,266.51 and ₱4,900,805, respectively) as deficiencies resulting from the foreclosure of the real estate
mortgage on E.T. Henry's property in Sucat, Parañaque.12

Hi-Cement filed its answer alleging, among others, that: (1) its general manager and treasurer were not authorized
to issue the postdated crossed checks in E.T. Henry's favor; (2) the deed of assignment purportedly executed by Hi-
Cement assigning them to respondent only bore the conformity of its treasurer and (3) respondent was not a holder
in due course as it should not have discounted them for being "crossed checks."13

In their answer (with counterclaim against respondent and cross-claims against Hi-Cement, Riverside and
Kanebo),14 E.T. Henry and the spouses Tan claimed that: (1) the drawers of the postdated checks failed to honor
them due to the adverse economic conditions prevailing at the time respondent presented them for payment; (2) the
extra-judicial sale of the mortgaged Sucat property was void due to gross inadequacy of the bid price15 and (3) their
loans were subjected to a usurious interest rate of 21% p.a.

For their part, Riverside and Kanebo sought the dismissal of the case against them, arguing that they were not privy
to the re-discounting arrangement between respondent and E.T. Henry.

On June 30, 1989, the trial court rendered a decision which read:

WHEREFORE, in view of the foregoing, and as a consequence of the preponderance of evidence, this Court hereby
renders judgment in favor of [respondent] and against [E.T. Henry, spouses Tan, Hi-Cement, Riverside and Kanebo],
to wit:

1. Ordering [E.T. Henry, spouses Tan, Hi-Cement, Riverside and Kanebo], jointly and severally, to pay
[respondent] damages represented by the face value of the postdated checks as follows:

(a) Riverside Mills Corporation ₱ 115,312.50

(b) Kanebo Cosmetics Philippines, Inc. 5,811,750.00

(c) Hi-Cement Corporation 10,000,000.00

plus interests, services, charges and penalties until fully paid;

2. Ordering [E.T. Henry] and/or [spouses Tan] to pay to [respondent] the sum of ₱4,900,805.00 plus accrued
interests, charges, penalties until fully paid;

3. Ordering [E.T. Henry and spouses Tan] to pay [respondent] the sum of ₱1,661,266.51 plus interests,
charges, and penalties until fully paid;

4. Ordering [E.T. Henry, spouses Tan, Hi-Cement, Riverside and Kanebo] to pay [respondent] [a]ttorney’s
fees and expenses of litigation in the amount of ₱200,000.00 and pay the cost of this suit.16

SO ORDERED.17

Only petitioners appealed the decision to the CA which affirmed it in toto. Hence, these petitions.

In G.R. No. 132403, petitioner Hi-Cement disclaims liability for the postdated crossed checks because (1) it did not
authorize their issuance; (2) respondent was not a holder in due course and (3) there was no basis for the lower
court’s holding that it was solidarily liable for the face value of Riverside’s and Kanebo’s checks.18

In G.R. No. 132419, on the other hand, E.T. Henry and the spouses Tan essentially contend that the lower courts
erred in: (1) applying the doctrine of piercing the veil of the corporate entity to make the spouses Tan solidarily liable

70
with E.T. Henry; (2) not ruling on their cross-claims and counterclaims, and (3) not declaring the foreclosure of E.T.
Henry's Sucat property as void.19

(A) G.R. 132403

As a rule, an appeal by certiorari under Rule 45 of the Rules of Court is limited to review of errors of law.20 The factual
findings of the trial court, specially when affirmed by the appellate court, are generally binding on us unless there
was a misapprehension of facts or when the inference drawn from the facts was manifestly mistaken.21 This case
falls within the exception.

Authority of Hi-Cement’s General Manager and Treasurer to Issue the Postdated Crossed Checks

Both the trial court and the CA concluded that Hi-Cement authorized its general manager and treasurer to issue the
subject postdated crossed checks. They both held that Hi-Cement was already estopped from denying such authority
since it never objected to the signatories' issuance of all previous checks to E.T. Henry which the latter, in turn, was
able to re-discount with respondent.

We agree with the lower courts that both the general manager and treasurer of Hi-Cement were authorized to issue
the subjects checks. However, notwithstanding such fact, respondent could not be considered a holder in due course.

Respondent Bank Not a Holder In Due Course

The Negotiable Instruments Law (NIL), specifically Section 191,22 provides:

"Holder" means the payee or indorsee of a bill or a note, or the person who is in possession of it, or the bearer
thereof.

On the other hand, Section 5223 states:

A holder in due course is a holder who has taken the instrument under the following conditions: (a) it is complete and
regular on its face; (b) he became the holder of it before it was overdue, and without notice that it has previously
been dishonored, if such was the fact; (c) he took it in good faith and for value and (d) at the time it was negotiated
to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

Absent any of the elements set forth in Section 52, the holder is not a holder in due course. In the case at bar, the
last two requirements were not met.

In Bataan Cigar and Cigarette Factory, Inc. (BCCF) v. CA,24 we held that the holder of crossed checks was not a
holder in due course. There, the drawer (BCCF) issued postdated crossed checks in favor of one of its suppliers
(George King) who promised to deliver bales of tobacco leaf but failed. George King, however, sold the checks on
discount to State Investment House, Inc. (SIHI) and upon the latter’s presentment to the drawee bank, BCCF ordered
a "stop payment." Thereafter, SIHI filed a collection case against it. In ruling that SIHI was not a holder in due course,
we explained:

In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of a check should
have the following effects: (a) the check may not be encashed but only deposited in the bank; (b) the check may be
negotiated only once – to one who has an account with a bank [and]; (c) the act of crossing the checks serves
as warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has
received the check pursuant to that purpose, otherwise, he is not a holder in due course.

Likewise, in Atrium Management Corporation v. CA,25 where E.T. Henry, Hi-Cement and its treasurer26 again
engaged in a legal scuffle over four postdated crossed checks, we held that Atrium (with which the checks were re-
discounted) was not a holder in due course. In that case, E.T. Henry was the payee of four Hi-Cement postdated
checks which it endorsed to Atrium. When the latter presented the crossed checks to the drawee bank, Hi-Cement
stopped payment.27 We held that Atrium was not a holder in due course:

In the instant case, the checks were crossed and specifically indorsed for deposit to payee’s account only. From the
beginning, Atrium was aware of the fact that the checks were all for deposit only to payee’s account, meaning E.T.
Henry. Clearly, then, Atrium could not be considered a holder in due course.

In the case at bar, respondent's claim that it acted in good faith when it accepted and discounted Hi-Cement’s
postdated crossed checks from E.T. Henry (as payee therein) fails to convince us. Good faith becomes
inconsequential amidst proof of respondent's grossly negligent conduct in dealing with the subject checks.

Respondent was all too aware that subject checks were crossed and bore restrictions that they were for deposit to
payee's account only; hence, they could not be further negotiated to it. The records likewise reveal that respondent
71
completely disregarded a telling sign of irregularity in the re-discounting of the checks when the general manager did
not acquiesce to it as only the treasurer's signature appeared on the deed of assignment. As a banking institution, it
behooved respondent to act with extraordinary diligence in every transaction.28 Its business is impressed with public
interest, thus, it was not expected to be careless and negligent, specially so where the checks it dealt with were
crossed. In Bataan Cigar and Cigarette Factory, Inc.,29 we ruled:

It is then settled that crossing of checks should put the holder on inquiry and upon him devolves the duty
to ascertain the indorser’s title to the check or the nature of his possession. Failing in this respect, the holder
is declared guilty of gross negligence amounting to legal absence of good faith…and as such[,] the consensus
of authority is to the effect that the holder of the check is not a holder in due course. (emphasis supplied)

The next query is whether Hi-Cement can still be made liable for the checks. We answer in the negative.

In State Investment House, Inc. (SIHI) v. Intermediate Appellate Court,30 SIHI re-discounted crossed checks and was
declared not a holder in due course. As a result, when it presented the checks for deposit, we deemed that its
presentment to the drawee bank was not proper, hence, the liability did not attach to the drawer of the checks. We
ruled that:

The three subject checks in the case at bar had been crossed…which could only mean that the drawer had intended
the same for deposit only by the rightful person, i.e., the payee named therein. Apparently, it was not the payee who
presented the same for payment and therefore, there was no proper presentment, and the liability did not attach to
the drawer. Thus, in the absence of due presentment, the drawer did not become liable. 31

Our resolution in the foregoing case was reiterated in Atrium Management Corporation v. CA,32 where we affirmed
the CA ruling that the drawer of the postdated crossed checks was not liable to the holder who was deemed not a
holder in due course.

We note, however, that in the two aforementioned cases, we made it clear that the NIL does not absolutely bar a
holder who is not a holder in due course from recovering on the checks. In both, we ruled that it may recover from
the party who indorsed/encashed the checks "if the latter has no valid excuse for refusing payment." Here, there was
no doubt that it was E.T. Henry that re-discounted Hi-Cement's checks and received their value from respondent.
Since E.T. Henry had no justification to refuse payment, it should pay respondent.

Solidary Liability of Hi-Cement for The Face Value of Riverside's and Kanebo's Checks

Hi-Cement could not also be made solidarily liable with Riverside and Kanebo for the face value of their checks. Hi-
Cement had nothing to do with the checks of these two corporations. However, although the language of the trial
court decision's dispositive portion seemed confusing, a reading of the decision in its entirety reveals that
the fallo was for each corporation to be liable solidarily with E.T. Henry and/or the spouses Tan for the respective
values of their checks.

Furthermore, solidary liability cannot be presumed but must be established by law or contract. Neither is present
here. Articles 1207 and 1208 of the Civil Code provide:

Art. 1207. The concurrence 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
presentation. There is solidary liability only when the obligation expressly so states, or when the obligation
requires solidarity. (emphasis supplied)

Art. 1208. If from the law, or the nature of the 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 credits or debts being considered distinct from one another, subject to the Rules governing
the multiplicity of suits.

At any rate, the issue has become moot in view of our ruling that Hi-Cement is not liable for the checks.

(B) G.R. No. 132419

Doctrine of Piercing the

Veil of Corporate Entity

In their petition, E.T. Henry and the spouses Tan argue that the lower courts erred in applying the "piercing the veil
of corporate entity" doctrine to their case. They claim that both the trial and appellate courts failed to cite the reasons
why the doctrine was relevant to them.

We agree with petitioners E.T. Henry and the spouses Tan in this respect.

72
If any general rule can be laid down, it is that the corporation will be looked upon as a legal entity until sufficient
reasons to the contrary appear. 33 It is only when the fiction or notion of legal entity is used to defeat public
convenience, justify wrong, perpetuate fraud or defend crime that the law will shred the corporate legal veil and
regard it as a mere association of persons.34 This is referred to as the doctrine of piercing the veil of corporate entity.

After a careful study of the records, we hold that E.T. Henry's corporate veil should not have been pierced at all.

First, the trial court failed to provide a clear ground why the doctrine was used. It merely stated that it agreed with
respondent’s arguments but did not explain why the doctrine was relevant to petitioner E.T. Henry's and the spouses
Tan’s case. On the other hand, the CA held:

…It appears that spouses Tan are controlling stockholders of E.T. Henry & Co., Inc. as well as its authorized
signatories. The business of the corporation was conducted solely for the benefit of the spouses Tan who colluded
with [Hi-Cement] in defrauding [respondent]. As the lower court cited…[I]t is a settled law in this and other jurisdictions
that when the corporation is a mere alter ego of a person, same being true when the corporation is controlled, and
its affairs are so conducted to make it merely an instrumentality, agency or conduit of another.35

Similarly, the CA left a gaping hole by failing to provide the basis for its ruling that E.T. Henry and the spouses Tan
defrauded respondent. It did not also state what act constituted the fraud. Fraud is an allegation of fact that demands
clear and convincing evidence.36 It is never presumed.37

Second, the mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock
of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.38 For this ground
to stand in this case, there must be proof that the spouses Tan: (1) had control or complete domination of E.T. Henry’s
finances and that the latter had no separate existence with respect to the act complained of; (2) used such control to
commit fraud or wrong and (3) the control was the proximate cause of the loss or injury complained of by
respondent.39 The records of this case do not show that these elements were present.

Inadequacy of the Bid Price to Annul Foreclosure Proceeding

With respect to the allegation that foreclosure was void due to the inadequacy of the bid price, we agree with the CA
that the "mere inadequacy of the price obtained at the [s]heriff’s sale, unless shocking to the conscience, (was) not
sufficient to set aside the sale if there (was) no showing that, in the event of a regular sale, a better price (could) be
obtained."401âwphi 1

Furthermore, in the absence of any irregularity in the foreclosure proceeding or proof that it was carried out without
strict observance of the procedure, we will continue to assume its regularity and strike down any attempt to vitiate it.
In this case, E.T. Henry and the spouses Tan made no mention of any anomaly to support the nullification of the
foreclosure sale but merely alleged a disparity in the bid price and the property’s fair market value.

Counterclaims and Cross-claims

Lastly, E.T. Henry and the spouses Tan call this Court's attention to the alleged failure of the lower court to pass
upon their counterclaim against respondent or cross-claims against Hi-Cement, Riverside and Kanebo. They ask us
now to hold these parties liable on the basis of said claims. We decline to do so.

First, E.T. Henry and the spouses Tan failed to implead Hi-Cement, Riverside and Kanebo as parties in the case at
bar. Under Rule 3 of the Rules of Court, every action, including a counterclaim (or a cross-claim), must be prosecuted
or defended in the name of the real party in interest.41 The term "defendant" may refer to the original defending party,
the defendant in a counterclaim, the cross-defendant or the third (fourth, etc.) party defendant.42 Hence, for this
technical lapse, we are constrained not to pass on E.T. Henry's and the spouses Tan's cross-claims.

Second, E.T. Henry and the spouses Tan filed the counterclaim against respondent on the basis of an alleged void
foreclosure proceeding on E.T. Henry's Sucat property due to an inadequate bid price. It is no longer necessary to
delve into this matter in view of our finding that the mere inadequacy of the bid price on the property did not
automatically render the foreclosure sale irregular or void.

Incidentally, the petition in G.R. No. 132419 posed no contest on the lower courts’ ruling on E.T. Henry’s and the
spouses Tan’s solidary liability with Riverside and Kanebo vis-a-vis their checks.43 To be consistent, however, with
our dictum on the separate personality of E.T. Henry and the spouses Tan, the solidarity liability arising from the
checks of Riverside and Kanebo shall only be enforced against E.T. Henry.

WHEREFORE, the assailed decision of the Court of Appeals in CA-G.R. CV No. 31600 is
hereby AFFIRMED with MODIFICATION. Accordingly, petitioner Hi-Cement Corporation is discharged from any
liability. Only petitioner E.T. Henry & Co. is ORDERED to pay respondent Insular Bank of Asia and America (later
Philippine Commercial International Bank and now Equitable PCI-Bank) the following:

73
 1. ₱10,000,000 representing the value of Hi-Cement's checks it received from respondent plus accrued
interests, charges and penalties until fully paid, and

2. the loans for ₱1,661,266.51 and ₱4,900,805 plus accrued interests, charges and penalties until fully paid.

Let the records of this case be remanded to the trial court for the proper computation of E.T. Henry's, Riverside's and
Kanebo's liabilities for the checks, attorney's fees and costs of litigation.

vii.

METROPOLITAN BANK AND TRUST COMPANY vs.

PHILIPPINE BANK OF COMMUNICATIONS, FILIPINAS ORIENT FINANCE CORPORATION, PIPE
MASTER CORPORATION and TAN JUAN LIAN
G.R. No. 141408 October 18, 2007
x---------------------------------------------x
SOLID BANK CORPORATION vs.
FILIPINAS ORIENT FINANCE CORPORATION, PIPE MASTER CORPORATION, TAN JUAN LIAN and/or
PHILIPPINE BANK OF COMMUNICATIONS
G.R. No. 141429 October 18, 2007
SANDOVAL-GUTIERREZ, J.:

Sometime in 1978, Pipe Master Corporation (Pipe Master) represented by Yu Kio, its president, applied for check
discounting with Filipinas Orient Finance Corporation (Filipinas Orient). The latter approved and granted the same.

On July 1, 1978, the Board of Directors of Pipe Master issued a Board Resolution authorizing Yu Kio, in his capacity
as president, and/or Tan Juan Lian, in his capacity as vice-president, to execute, indorse, make, sign, deliver or
negotiate instruments, documents and such other papers necessary in connection with any transaction coursed
through Filipinas Orient for and in behalf of the corporation.

Tan Juan Lian then executed in favor of Filipinas Orient a continuing guaranty that he shall pay at maturity any and
all promissory notes, drafts, checks, or other instruments or evidence of indebtedness for which Pipe Master may
become liable; that the extent of his liability shall not at any one time exceed the sum of ₱1,000,000.00; and that in
the event of default by Pipe Master, Filipinas Orient may proceed directly against him.

On April 9, 1980, under the check discounting agreement between Pipe Master and Filipinas Orient, Yu Kio sold to
Filipinas Orient four Metropolitan Bank and Trust Company (Metro Bank) checks amounting to ₱1,000,000.00. In
exchange for the four Metro Bank checks, Filipinas Orient issued to Yu Kio four Philippine Bank of Communications
(PBCom) crossed checks totaling ₱964,303.62, payable to Pipe Master with the statement "for payee’s account only."

Upon his receipt of the four PBCom checks, Yu Kio indorsed and deposited in the Metro Bank, in his personal
account, three of the checks valued at ₱721,596.95. As to the remaining check amounting to ₱242,706.67, he
deposited it in the Solid Bank Corporation (Solid Bank), also in his personal account. Eventually, PBCom paid Metro
Bank and Solid Bank the amounts of the checks. In turn, Metro Bank and Solid Bank credited the value of the checks
to the personal accounts of Yu Kio.

Subsequently, when Filipinas Orient presented the four Metro Bank checks equivalent to ₱1,000,000.00 it received
from Yu Kio, they were dishonored by the drawee bank. Pipe Master, the drawer, refused to pay the amounts of the
checks, claiming that it never received the proceeds of the PBCom checks as they were delivered and paid to the
wrong party, Yu Kio, who was not the named payee.

Filipinas Orient then demanded that PBCom restore to its (Filipinas Orient’s) account the value of the PBCom checks.
In turn, PBCom sought reimbursement from Metro Bank and Solid Bank, being the collecting banks, but they refused.
Thus, Filipinas Orient filed with the Regional Trial Court (RTC), Branch 39, Manila a complaint for a sum of money
against Pipe Master, Tan Juan Lian and/or PBCom.

In their answer to the complaint, Pipe Master and Tan Juan Lian averred that they did not authorize Yu Kio to
negotiate and enter into discounting transaction with Filipinas Orient, and even if Yu Kio was so authorized, Pipe
Master never received the proceeds of the checks. Consequently, they filed a cross-claim against PBCom for gross
negligence for having paid the wrong party. In turn, PBCom, Pipe Master and Tan Juan Lian filed third-party
complaints against Metro Bank and Solid Bank.

On July 12, 1990, the RTC rendered a Decision against Metro Bank and Solid Bank, the dispositive portion of which
reads:

74
WHEREFORE, premises considered, judgment is hereby rendered:

1. Ordering third-party defendant Metro Bank to pay plaintiff the amount of Seven Hundred Twenty One
Thousand Five Hundred Ninety Six Pesos and Ninety-Five Centavos (₱721,596.95) plus legal interest;

2. Ordering third-party defendant Solid Bank to pay plaintiff the amount of Two Hundred Forty-Two Thousand
Seven Hundred Six Pesos and Sixty-Seven Centavos (₱242,706.67) plus legal interest;

3. Ordering third-party defendants to pay the costs of suit.

SO ORDERED.

On appeal, the appellate court affirmed in toto the Decision of the trial court. Metro Bank and Solid Bank filed their
respective motions for reconsideration but the same were denied.

Hence, the instant consolidated petitions for review on certiorari filed by Metro Bank and Solid Bank.

The issue for our resolution is whether Metro Bank and Solid Bank, petitioners, are liable to respondent Filipinas
Orient for accepting the PBCom crossed checks payable to Pipe Master.

Petitioner banks contend that respondents Pipe Master, Tan Juan Lian and/or PBCom should be made liable to
respondent Filipinas Orient for the value of the checks.

Respondents Pipe Master and Tan Juan Lian counter that although Yu Kio was expressly authorized to indorse Pipe
Master’s checks, such authority extended only to acts done in the ordinary course of business, not in his personal
capacity. For its part, respondent Filipinas Orient contends that petitioner banks were negligent in allowing Yu Kio to
deposit the PBCom checks in his account. Respondent PBCom, as the drawee bank, maintains that it has no liability
because in clearing the checks, it relied on the express guarantee made by petitioner banks that the checks were
validly indorsed.

We find in favor of respondents.

A check is defined by law as a bill of exchange drawn on a bank payable on demand. 1 The Negotiable Instruments
Law is silent with respect to crossed checks. Nonetheless, this Court has taken judicial cognizance of the practice
that a check with two parallel lines on the upper left hand corner means that it could only be deposited and not
converted into cash.2 The crossing of a check with the phrase "Payee’s Account Only" is a warning that the check
should be deposited in the account of the payee. It is the collecting bank which is bound to scrutinize the check and
to know its depositors before it can make the clearing indorsement, "all prior indorsements and/or lack of indorsement
guaranteed."3

Here, petitioner banks have the obligation to ensure that the PBCom checks were deposited in accordance with the
instructions stated in the checks.4 The four PBCom checks in question had been crossed and issued "for payee’s
account only." This could only mean that the drawer, Filipinas Orient, intended the same for deposit only by the
payee, Pipe Master. The effect of crossing a check means that the drawer had intended the check for deposit only
by the rightful person, i.e., the payee named therein5 – Pipe Master.

As what transpired in this case, petitioner banks accommodated Yu Kio, being a valued client and the president of
Pipe Master, and accepted the crossed checks. They stamped at the back thereof that "all prior indorsements and/or
lack of indorsements are guaranteed." In so doing, they became general endorsers. Under Section 66 of the
Negotiable Instruments Law, an endorser warrants "that the instrument is genuine and in all respects what it purports
to be; that he has 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."

Clearly, petitioner banks, being endorsers, cannot deny liability.

In Associated Bank v. Court of Appeals,6 we held that the collecting bank or last endorser generally suffers the loss
because it has the duty to ascertain the genuineness of all prior indorsements and is privy to the depositor who
negotiated the check.

PBCom, as the drawee bank, cannot be held liable since it mainly relied on the express guarantee made by
petitioners, the collecting banks, of all prior indorsements.

Evidently, petitioner banks disregarded established banking rules and procedures. They were negligent in accepting
the checks and allowing the transaction to push through. In Jai-Alai Corp. of the Phil. v. Bank of the Phil. Islands,7 we
ruled that one who accepts and encashes a check from an individual knowing that the payee is a corporation does
so at his peril. Therefore, petitioner banks are liable to respondent Filipinas Orient. 1âw phi1

75
In fine, it must be emphasized that the law imposes on the collecting bank the duty to diligently scrutinize the checks
deposited with it for the purpose of determining their genuineness and regularity. The collecting bank, being primarily
engaged in banking, holds itself out to the public as the expert on this field, and the law thus holds it to a high standard
of conduct.8 Since petitioner banks’ negligence was the direct cause of the misappropriation of the checks, they
should bear and answer for respondent Filipinas Orient’s loss, without prejudice to their filing of an appropriate action
against Yu Kio.

WHEREFORE, we DENY the petitions. The challenged Decision9 and Resolution of the Court of Appeals in CA-G.R.
CV No. 30702 are AFFIRMED. Costs against petitioners.

SO ORDERED.

ix
WEE SION BEN and BEST EMPORIUM vs.
SEMEXCO/ZEST-O MARKETING CORPORATION G.R. No. 153898 October 18, 2007
SANDOVAL-GUTIERREZ, J.:

Before us is the instant Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, questioning the Decision1 dated February 2, 2002 and Resolution dated May 2, 2002 of the Court of
Appeals in CA-G.R. CV No. 58421.

Best Emporium (in Pagadian City) and its president, Wee Sion Ben, petitioners, purchased fruit juices from
SEMEXCO/ZEST-O Marketing Corporation, respondent, for the period from January to August 1995. Respondent
issued petitioners a Charge Invoice in the amount of ₱104,277.80 which bears this term/condition:

Note: Please make all checks payable to SEMEXCO Marketing Corporation only.2

In payment for the fruit juices, petitioners issued Metro Bank Pagadian City Branch Check No. PYD 1090770187
dated August 15, 1995 in the sum of ₱104,277.80 payable to cash. Maloney Sorolla, respondent corporation’s sales
representative, received the check. Sorolla encashed the check but did not remit the money to herein respondent.

Upon learning of the delivery of the check to Sorolla, Nelson Azarcon, district sales manager of respondent
corporation, inquired from petitioner Wee Sion Ben why he issued a "pay to cash" check when the Charge Invoice
states that all payments must be made payable to the order of respondent corporation. Thereupon, petitioner Wee
Sion Ben issued Metro Bank Pagadian City Branch Check No. PYD 1090770320 dated September 1, 1995 to replace
the "pay to cash" check. However, when presented for payment, respondent was informed by the drawee bank that
petitioner Wee Sion Ben directed it to "stop payment" or not to pay the new check.

Consequently, respondent made oral and written demands upon petitioners3 to pay ₱104,277.80, but to no avail.

Respondent thus filed with the Regional Trial Court, Branch 35, Ozamis City a complaint for sum of money, docketed
as Civil Case No. 96-34. On April 30, 1997, the trial court rendered its Decision finding that petitioners’ obligation had
been extinguished when they delivered the "pay to cash" check to respondent through Sorolla. The trial court then
dismissed both the complaint and the counterclaim.4

On appeal by respondent, the Court of Appeals rendered a Decision affirming with modification the trial court’s
judgment, thus:

Wherefore, premises considered, the appeal is granted; and the assailed 30 April 1997 Decision of the court a quo
is hereby AFFIRMED with MODIFICATION, as follows:

1. Defendants-appellees are jointly and severally liable to pay the sum of ₱104,277.80 to plaintiffs-appellants
plus 12% interest per annum from September 1995 until fully paid;

2. As stipulated in the Charge Invoice, defendants-appellees are hereby ordered to pay 25% of the total
monetary award to plaintiffs-appellants.

3. The rest of the court a quo’s dispositions are hereby affirmed.

Petitioners filed a motion for reconsideration but it was denied by the appellate court in its Resolution dated May 2,
2002. 1âwphi1

Hence, the present petition.

76
The issue for our resolution is whether petitioner Wee Sion Ben’s issuance of the check payable to cash delivered
and received by Sorolla constitutes a valid payment of petitioners’ obligation to respondent.

As mentioned earlier, the Charge Invoice issued by respondent to petitioners clearly states that they shall "make all
checks payable to SEMEXCO Marketing Corporation only."

Evidently, both parties in their business transaction are bound by this term or condition.

Petitioners contend that since the Charge Invoice is a contract of adhesion,5 they are not obliged to comply with its
term or condition. Petitioners’ contention lacks merit. We have repeatedly held that contracts of adhesion are as
binding as ordinary contracts.6 Those who adhere to the contract are in reality free to reject it entirely and if they
adhere, they give their consent.7

Clearly then, petitioners’ issuance of the "pay to cash" check is a clear violation on their part of the term or condition
stipulated in the Charge Invoice.

Petitioners should have been wary in issuing such check. Records show that it was Sorolla himself who requested
them to issue the check payable to cash. This should have warned them of the possible risk – that the check may
not reach respondent.

At any rate, when petitioners realized they made a serious mistake in issuing the "pay to cash" check to Sorolla, they
readily issued a second check payable to respondent corporation. For reason they only know, petitioners directed
the drawee bank to stop its payment. Obviously, they admitted that they violated the condition in the Charge Invoice.
Hence, their obligation to pay the fruit juices delivered to them is not extinguished.

Article 1595(1) of the Civil Code provides:

Where, under a contract of sale, the ownership of the goods has passed to the buyer and he wrongfully neglects or
refuses to pay for the goods according to the terms of the contract of sale, the seller may maintain an action against
him for the price of the goods.

WHEREFORE, we DENY the petition and AFFIRM the assailed Decision and Resolution of the Court of Appeals in
CA-G.R. CV No. 58421.

SO ORDERED.

x.
PNB vs. SPOUSES RODRIGUEZ
G.R. No. 170325 September 26, 2008
REYES, R.T., J.:

WHEN the payee of the check is not intended to be the true recipient of its proceeds, is it payable to order or bearer? What
is the fictitious-payee rule and who is liable under it? Is there any exception?

These questions seek answers in this petition for review on certiorari of the Amended Decision 1 of the Court of Appeals
(CA) which affirmed with modification that of the Regional Trial Court (RTC). 2

The Facts

The facts as borne by the records are as follows:

Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner Philippine National Bank (PNB), Amelia
Avenue Branch, Cebu City. They maintained savings and demand/checking accounts, namely, PNBig Demand Deposits
(Checking/Current Account No. 810624-6 under the account name Erlando and/or Norma Rodriguez), and PNBig Demand
Deposit (Checking/Current Account No. 810480-4 under the account name Erlando T. Rodriguez).

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

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

77
It was PEMSLA’s policy not to approve applications for loans of members with outstanding debts. To subvert this policy,
some PEMSLA officers devised a scheme to obtain additional loans despite their outstanding loan accounts. They took
out loans in the names of unknowing members, without the knowledge or consent of the latter. The PEMSLA checks issued
for these loans were then given to the spouses for rediscounting. The officers carried this out by forging the indorsement
of the named payees in the checks.

In return, the spouses issued their personal checks (Rodriguez checks) in the name of the members and delivered the
checks to an officer of PEMSLA. The PEMSLA checks, on the other hand, were deposited by the spouses to their account.

Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings account without any indorsement
from the named payees. This was an irregular procedure made possible through the facilitation of Edmundo Palermo, Jr.,
treasurer of PEMSLA and bank teller in the PNB Branch. It appears that this became the usual practice for the parties.

For the period November 1998 to February 1999, the spouses issued sixty nine (69) checks, in the total amount
of P2,345,804.00. These were payable to forty seven (47) individual payees who were all members of PEMSLA. 4

Petitioner PNB eventually found out about these fraudulent acts. To put a stop to this scheme, PNB closed the current
account of PEMSLA. As a result, the PEMSLA checks deposited by the spouses were returned or dishonored for the
reason "Account Closed." The corresponding Rodriguez checks, however, were deposited as usual to the PEMSLA
savings account. The amounts were duly debited from the Rodriguez account. Thus, because the PEMSLA checks given
as payment were returned, spouses Rodriguez incurred losses from the rediscounting transactions.

RTC Disposition

Alarmed over the unexpected turn of events, the spouses Rodriguez filed a civil complaint for damages against PEMSLA,
the Multi-Purpose Cooperative of Philnabankers (MCP), and petitioner PNB. They sought to recover the value of their
checks that were deposited to the PEMSLA savings account amounting to P2,345,804.00. The spouses contended that
because PNB credited the checks to the PEMSLA account even without indorsements, PNB violated its contractual
obligation to them as depositors. PNB paid the wrong payees, hence, it should bear the loss.

PNB moved to dismiss the complaint on the ground of lack of cause of action. PNB argued that the claim for damages
should come from the payees of the checks, and not from spouses Rodriguez. Since there was no demand from the said
payees, the obligation should be considered as discharged.

In an Order dated January 12, 2000, the RTC denied PNB’s motion to dismiss.

In its Answer,5 PNB claimed it is not liable for the checks which it paid to the PEMSLA account without any indorsement
from the payees. The bank contended that spouses Rodriguez, the makers, actually did not intend for the named payees
to receive the proceeds of the checks. Consequently, the payees were considered as "fictitious payees" as defined under
the Negotiable Instruments Law (NIL). Being checks made to fictitious payees which are bearer instruments, the checks
were negotiable by mere delivery. PNB’s Answer included its cross-claim against its co-defendants PEMSLA and the MCP,
praying that in the event that judgment is rendered against the bank, the cross-defendants should be ordered to reimburse
PNB the amount it shall pay.

After trial, the RTC rendered judgment in favor of spouses Rodriguez (plaintiffs). It ruled that PNB (defendant) is liable to
return the value of the checks. All counterclaims and cross-claims were dismissed. The dispositive portion of the RTC
decision reads:

WHEREFORE, in view of the foregoing, the Court hereby renders judgment, as follows:

1. Defendant is hereby ordered to pay the plaintiffs the total amount of P2,345,804.00 or reinstate or restore the
amount of P775,337.00 in the PNBig Demand Deposit Checking/Current Account No. 810480-4 of Erlando T.
Rodriguez, and the amount of P1,570,467.00 in the PNBig Demand Deposit, Checking/Current Account No.
810624-6 of Erlando T. Rodriguez and/or Norma Rodriguez, plus legal rate of interest thereon to be computed
from the filing of this complaint until fully paid;

2. The defendant PNB is hereby ordered to pay the plaintiffs the following reasonable amount of damages suffered
by them taking into consideration the standing of the plaintiffs being sugarcane planters, realtors, residential
subdivision owners, and other businesses:

(a) Consequential damages, unearned income in the amount of P4,000,000.00, as a result of their having
incurred great dificulty (sic) especially in the residential subdivision business, which was not pushed
through and the contractor even threatened to file a case against the plaintiffs;

(b) Moral damages in the amount of P1,000,000.00;

(c) Exemplary damages in the amount of P500,000.00;

78
 (d) Attorney’s fees in the amount of P150,000.00 considering that this case does not involve very
complicated issues; and for the

(e) Costs of suit.

3. Other claims and counterclaims are hereby dismissed.6

CA Disposition

PNB appealed the decision of the trial court to the CA on the principal ground that the disputed checks should be considered
as payable to bearer and not to order.

In a Decision7 dated July 22, 2004, the CA reversed and set aside the RTC disposition. The CA concluded that the checks
were obviously meant by the spouses to be really paid to PEMSLA. The court a quo declared:

We are not swayed by the contention of the plaintiffs-appellees (Spouses Rodriguez) that their cause of action arose from
the alleged breach of contract by the defendant-appellant (PNB) when it paid the value of the checks to PEMSLA despite
the checks being payable to order. Rather, we are more convinced by the strong and credible evidence for the defendant-
appellant with regard to the plaintiffs-appellees’ and PEMSLA’s business arrangement – that the value of the rediscounted
checks of the plaintiffs-appellees would be deposited in PEMSLA’s account for payment of the loans it has approved in
exchange for PEMSLA’s checks with the full value of the said loans. This is the only obvious explanation as to why all the
disputed sixty-nine (69) checks were in the possession of PEMSLA’s errand boy for presentment to the defendant-appellant
that led to this present controversy. It also appears that the teller who accepted the said checks was PEMSLA’s officer,
and that such was a regular practice by the parties until the defendant-appellant discovered the scam. The logical
conclusion, therefore, is that the checks were never meant to be paid to order, but instead, to PEMSLA. We thus find no
breach of contract on the part of the defendant-appellant.

According to plaintiff-appellee Erlando Rodriguez’ testimony, PEMSLA allegedly issued post-dated checks to its qualified
members who had applied for loans. However, because of PEMSLA’s insufficiency of funds, PEMSLA approached the
plaintiffs-appellees for the latter to issue rediscounted checks in favor of said applicant members. Based on the
investigation of the defendant-appellant, meanwhile, this arrangement allowed the plaintiffs-appellees to make a profit by
issuing rediscounted checks, while the officers of PEMSLA and other members would be able to claim their loans, despite
the fact that they were disqualified for one reason or another. They were able to achieve this conspiracy by using other
members who had loaned lesser amounts of money or had not applied at all. x x x. 8 (Emphasis added)

The CA found that the checks were bearer instruments, thus they do not require indorsement for negotiation; and that
spouses Rodriguez and PEMSLA conspired with each other to accomplish this money-making scheme. The payees in the
checks were "fictitious payees" because they were not the intended payees at all.

The spouses Rodriguez moved for reconsideration. They argued, inter alia, that the checks on their faces were
unquestionably payable to order; and that PNB committed a breach of contract when it paid the value of the checks to
PEMSLA without indorsement from the payees. They also argued that their cause of action is not only against PEMSLA
but also against PNB to recover the value of the checks.

On October 11, 2005, the CA reversed itself via an Amended Decision, the last paragraph and fallo of which read:

In sum, we rule that the defendant-appellant PNB is liable to the plaintiffs-appellees Sps. Rodriguez for the following:

1. Actual damages in the amount of P2,345,804 with interest at 6% per annum from 14 May 1999 until fully paid;

2. Moral damages in the amount of P200,000;

3. Attorney’s fees in the amount of P100,000; and

4. Costs of suit.

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by Us AFFIRMING WITH MODIFICATION
the assailed decision rendered in Civil Case No. 99-10892, as set forth in the immediately next preceding paragraph hereof,
and SETTING ASIDE Our original decision promulgated in this case on 22 July 2004.

SO ORDERED.9

The CA ruled that the checks were payable to order. According to the appellate court, PNB failed to present sufficient proof
to defeat the claim of the spouses Rodriguez that they really intended the checks to be received by the specified payees.
Thus, PNB is liable for the value of the checks which it paid to PEMSLA without indorsements from the named payees.
The award for damages was deemed appropriate in view of the failure of PNB to treat the Rodriguez account with the
highest degree of care considering the fiduciary nature of their relationship, which constrained respondents to seek legal
action.

79
Hence, the present recourse under Rule 45.

Issues

The issues may be compressed to whether the subject checks are payable to order or to bearer and who bears the loss?

PNB argues anew that when the spouses Rodriguez issued the disputed checks, they did not intend for the named payees
to receive the proceeds. Thus, they are bearer instruments that could be validly negotiated by mere delivery. Further,
testimonial and documentary evidence presented during trial amply proved that spouses Rodriguez and the officers of
PEMSLA conspired with each other to defraud the bank.

Our Ruling

Prefatorily, amendment of decisions is more acceptable than an erroneous judgment attaining finality to the prejudice of
innocent parties. A court discovering an erroneous judgment before it becomes final may, motu proprio or upon motion of
the parties, correct its judgment with the singular objective of achieving justice for the litigants. 10

However, a word of caution to lower courts, the CA in Cebu in this particular case, is in order. The Court does not sanction
careless disposition of cases by courts of justice. The highest degree of diligence must go into the study of every
controversy submitted for decision by litigants. Every issue and factual detail must be closely scrutinized and analyzed,
and all the applicable laws judiciously studied, before the promulgation of every judgment by the court. Only in this manner
will errors in judgments be avoided.

Now to the core of the petition.

As a rule, when the payee is fictitious or not intended to be the true recipient of the proceeds, the check is considered as
a bearer instrument. A check is "a bill of exchange drawn on a bank payable on demand." 11 It is either an order or a bearer
instrument. Sections 8 and 9 of the NIL states:

SEC. 8. When payable to order. – The instrument is payable to order where it is drawn payable to the order of a specified
person or to him or his order. It may be drawn payable to the order of –

(a) A payee who is not maker, drawer, or drawee; or

(b) The drawer or maker; or

(c) The drawee; or

(d) Two or more payees jointly; or

(e) One or some of several payees; or

(f) The holder of an office for the time being.

Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable
certainty.

SEC. 9. When payable to bearer. – The instrument is payable to bearer –

(a) When it is expressed to be so payable; or

(b) When it is payable to a person named therein or bearer; or

(c) When it is payable to the order of a fictitious or non-existing person, and such fact is known to the person
making it so payable; or

(d) When the name of the payee does not purport to be the name of any person; or

(e) Where the only or last indorsement is an indorsement in blank.12 (Underscoring supplied)

The distinction between bearer and order instruments lies in their manner of negotiation. Under Section 30 of the NIL, an
order instrument requires an indorsement from the payee or holder before it may be validly negotiated. A bearer instrument,
on the other hand, does not require an indorsement to be validly negotiated. It is negotiable by mere delivery. The provision
reads:

80
SEC. 30. What constitutes negotiation. – An instrument is negotiated when it is transferred from one person to another in
such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable
to order, it is negotiated by the indorsement of the holder completed by delivery.

A check that is payable to a specified payee is an order instrument. However, under Section 9(c) of the NIL, a check
payable to a specified payee may nevertheless be considered as a bearer instrument if it is payable to the order of a
fictitious or non-existing person, and such fact is known to the person making it so payable. Thus, checks issued to "Prinsipe
Abante" or "Si Malakas at si Maganda," who are well-known characters in Philippine mythology, are bearer instruments
because the named payees are fictitious and non-existent.

We have yet to discuss a broader meaning of the term "fictitious" as used in the NIL. It is for this reason that We look
elsewhere for guidance. Court rulings in the United States are a logical starting point since our law on negotiable
instruments was directly lifted from the Uniform Negotiable Instruments Law of the United States. 13

A review of US jurisprudence yields that an actual, existing, and living payee may also be "fictitious" if the maker of the
check did not intend for the payee to in fact receive the proceeds of the check. This usually occurs when the maker places
a name of an existing payee on the check for convenience or to cover up an illegal activity. 14 Thus, a check made expressly
payable to a non-fictitious and existing person is not necessarily an order instrument. If the payee is not the intended
recipient of the proceeds of the check, the payee is considered a "fictitious" payee and the check is a bearer instrument.

In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer bears the loss. When faced with a
check payable to a fictitious payee, it is treated as a bearer instrument that can be negotiated by delivery. The underlying
theory is that one cannot expect a fictitious payee to negotiate the check by placing his indorsement thereon. And since
the maker knew this limitation, he must have intended for the instrument to be negotiated by mere delivery. Thus, in case
of controversy, the drawer of the check will bear the loss. This rule is justified for otherwise, it will be most convenient for
the maker who desires to escape payment of the check to always deny the validity of the indorsement. This despite the
fact that the fictitious payee was purposely named without any intention that the payee should receive the proceeds of the
check.15

The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty Insurance Bank.16 In the said case, the corporation
Mueller & Martin was defrauded by George L. Martin, one of its authorized signatories. Martin drew seven checks payable
to the German Savings Fund Company Building Association (GSFCBA) amounting to $2,972.50 against the account of
the corporation without authority from the latter. Martin was also an officer of the GSFCBA but did not have signing
authority. At the back of the checks, Martin placed the rubber stamp of the GSFCBA and signed his own name as
indorsement. He then successfully drew the funds from Liberty Insurance Bank for his own personal profit. When the
corporation filed an action against the bank to recover the amount of the checks, the claim was denied.

The US Supreme Court held in Mueller that when the person making the check so payable did not intend for the specified
payee to have any part in the transactions, the payee is considered as a fictitious payee. The check is then considered as
a bearer instrument to be validly negotiated by mere delivery. Thus, the US Supreme Court held that Liberty Insurance
Bank, as drawee, was authorized to make payment to the bearer of the check, regardless of whether prior indorsements
were genuine or not.17

The more recent Getty Petroleum Corp. v. American Express Travel Related Services Company, Inc. 18 upheld the fictitious-
payee rule. The rule protects the depositary bank and assigns the loss to the drawer of the check who was in a better
position to prevent the loss in the first place. Due care is not even required from the drawee or depositary bank in accepting
and paying the checks. The effect is that a showing of negligence on the part of the depositary bank will not defeat the
protection that is derived from this rule.

However, there is a commercial bad faith exception to the fictitious-payee rule. A showing of commercial bad faith on the
part of the drawee bank, or any transferee of the check for that matter, will work to strip it of this defense. The exception
will cause it to bear the loss. Commercial bad faith is present if the transferee of the check acts dishonestly, and is a party
to the fraudulent scheme. Said the US Supreme Court in Getty:

Consequently, a transferee’s lapse of wary vigilance, disregard of suspicious circumstances which might have well induced
a prudent banker to investigate and other permutations of negligence are not relevant considerations under Section 3-405
x x x. Rather, there is a "commercial bad faith" exception to UCC 3-405, applicable when the transferee "acts dishonestly
– where it has actual knowledge of facts and circumstances that amount to bad faith, thus itself becoming a participant in
a fraudulent scheme. x x x Such a test finds support in the text of the Code, which omits a standard of care requirement
from UCC 3-405 but imposes on all parties an obligation to act with "honesty in fact." x x x 19 (Emphasis added)

Getty also laid the principle that the fictitious-payee rule extends protection even to non-bank transferees of the checks.

In the case under review, the Rodriguez checks were payable to specified payees. It is unrefuted that the 69 checks were
payable to specific persons. Likewise, it is uncontroverted that the payees were actual, existing, and living persons who
were members of PEMSLA that had a rediscounting arrangement with spouses Rodriguez.

What remains to be determined is if the payees, though existing persons, were "fictitious" in its broader context.

81
For the fictitious-payee rule to be available as a defense, PNB must show that the makers did not intend for the named
payees to be part of the transaction involving the checks. At most, the bank’s thesis shows that the payees did not have
knowledge of the existence of the checks. This lack of knowledge on the part of the payees, however, was not tantamount
to a lack of intention on the part of respondents-spouses that the payees would not receive the checks’ proceeds.
Considering that respondents-spouses were transacting with PEMSLA and not the individual payees, it is understandable
that they relied on the information given by the officers of PEMSLA that the payees would be receiving the checks.

Verily, the subject checks are presumed order instruments. This is because, as found by both lower courts, PNB failed to
present sufficient evidence to defeat the claim of respondents-spouses that the named payees were the intended recipients
of the checks’ proceeds. The bank failed to satisfy a requisite condition of a fictitious-payee situation – that the maker of
the check intended for the payee to have no interest in the transaction.

Because of a failure to show that the payees were "fictitious" in its broader sense, the fictitious-payee rule does not apply.
Thus, the checks are to be deemed payable to order. Consequently, the drawee bank bears the loss. 20

PNB was remiss in its duty as the drawee bank. It does not dispute the fact that its teller or tellers accepted the 69 checks
for deposit to the PEMSLA account even without any indorsement from the named payees. It bears stressing that order
instruments can only be negotiated with a valid indorsement.

A bank that regularly processes checks that are neither payable to the customer nor duly indorsed by the payee is
apparently grossly negligent in its operations.21 This Court has recognized the unique public interest possessed by the
banking industry and the need for the people to have full trust and confidence in their banks. 22 For this reason, banks are
minded to treat their customer’s accounts with utmost care, confidence, and honesty. 23

In a checking transaction, the drawee bank has the duty to verify the genuineness of the signature of the drawer and to
pay the check strictly in accordance with the drawer’s instructions, i.e., to the named payee in the check. It should charge
to the drawer’s accounts only the payables authorized by the latter. Otherwise, the drawee will be violating the instructions
of the drawer and it shall be liable for the amount charged to the drawer’s account. 24

In the case at bar, respondents-spouses were the bank’s depositors. The checks were drawn against respondents-
spouses’ accounts. PNB, as the drawee bank, had the responsibility to ascertain the regularity of the indorsements, and
the genuineness of the signatures on the checks before accepting them for deposit. Lastly, PNB was obligated to pay the
checks in strict accordance with the instructions of the drawers. Petitioner miserably failed to discharge this burden.

The checks were presented to PNB for deposit by a representative of PEMSLA absent any type of indorsement, forged or
otherwise. The facts clearly show that the bank did not pay the checks in strict accordance with the instructions of the
drawers, respondents-spouses. Instead, it paid the values of the checks not to the named payees or their order, but to
PEMSLA, a third party to the transaction between the drawers and the payees.alf-ITC

Moreover, PNB was negligent in the selection and supervision of its employees. The trustworthiness of bank employees
is indispensable to maintain the stability of the banking industry. Thus, banks are enjoined to be extra vigilant in the
management and supervision of their employees. In Bank of the Philippine Islands v. Court of Appeals, 25 this Court
cautioned thus:

Banks handle daily transactions involving millions of pesos. By the very nature of their work the degree of responsibility,
care and trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and
employees. For obvious reasons, the banks are expected to exercise the highest degree of diligence in the selection and
supervision of their employees.26

PNB’s tellers and officers, in violation of banking rules of procedure, permitted the invalid deposits of checks to the PEMSLA
account. Indeed, when it is the gross negligence of the bank employees that caused the loss, the bank should be held
liable.27

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

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

One Last Note

We note that the RTC failed to thresh out the merits of PNB’s cross-claim against its co-defendants PEMSLA and MPC.
The records are bereft of any pleading filed by these two defendants in answer to the complaint of respondents-spouses
and cross-claim of PNB. The Rules expressly provide that failure to file an answer is a ground for a declaration that
defendant is in default.28 Yet, the RTC failed to sanction the failure of both PEMSLA and MPC to file responsive pleadings.

82
Verily, the RTC dismissal of PNB’s cross-claim has no basis. Thus, this judgment shall be without prejudice to whatever
action the bank might take against its co-defendants in the trial court.

To PNB’s credit, it became involved in the controversial transaction not of its own volition but due to the actions of some
of its employees. Considering that moral damages must be understood to be in concept of grants, not punitive or corrective
in nature, We resolve to reduce the award of moral damages to P50,000.00.29

WHEREFORE, the appealed Amended Decision is AFFIRMED with the MODIFICATION that the award for moral damages
is reduced to P50,000.00, and that this is without prejudice to whatever civil, criminal, or administrative action PNB might
take against PEMSLA, MPC, and the employees involved.

SO ORDERED.

xi
BPI vs. CA, SALAZAR and TEMPLONUEVO
G.R. No. 136202 January 25, 2007
AZCUNA, J.:

This is a petition for review under Rule 45 of the Rules of Court seeking the reversal of the Decision 1 dated April 3,
1998, and the Resolution2 dated November 9, 1998, of the Court of Appeals in CA-G.R. CV No. 42241.

The facts3 are as follows:

A.A. Salazar Construction and Engineering Services filed an action for a sum of money with damages against herein
petitioner Bank of the Philippine Islands (BPI) on December 5, 1991 before Branch 156 of the Regional Trial Court
(RTC) of Pasig City. The complaint was later amended by substituting the name of Annabelle A. Salazar as the real
party in interest in place of A.A. Salazar Construction and Engineering Services. Private respondent Salazar prayed
for the recovery of the amount of Two Hundred Sixty-Seven Thousand, Seven Hundred Seven Pesos and Seventy
Centavos (P267,707.70) debited by petitioner BPI from her account. She likewise prayed for damages and attorney’s
fees.

Petitioner BPI, in its answer, alleged that on August 31, 1991, Julio R. Templonuevo, third-party defendant and herein
also a private respondent, demanded from the former payment of the amount of Two Hundred Sixty-Seven
Thousand, Six Hundred Ninety-Two Pesos and Fifty Centavos (P267,692.50) representing the aggregate value of
three (3) checks, which were allegedly payable to him, but which were deposited with the petitioner bank to private
respondent Salazar’s account (Account No. 0203-1187-67) without his knowledge and corresponding endorsement.

Accepting that Templonuevo’s claim was a valid one, petitioner BPI froze Account No. 0201-0588-48 of A.A. Salazar
and Construction and Engineering Services, instead of Account No. 0203-1187-67 where the checks were deposited,
since this account was already closed by private respondent Salazar or had an insufficient balance.

Private respondent Salazar was advised to settle the matter with Templonuevo but they did not arrive at any
settlement. As it appeared that private respondent Salazar was not entitled to the funds represented by the checks
which were deposited and accepted for deposit, petitioner BPI decided to debit the amount of P267,707.70 from her
Account No. 0201-0588-48 and the sum of P267,692.50 was paid to Templonuevo by means of a cashier’s check.
The difference between the value of the checks (P267,692.50) and the amount actually debited from her account
(P267,707.70) represented bank charges in connection with the issuance of a cashier’s check to Templonuevo.

In the answer to the third-party complaint, private respondent Templonuevo admitted the payment to him
of P267,692.50 and argued that said payment was to correct the malicious deposit made by private respondent
Salazar to her private account, and that petitioner bank’s negligence and tolerance regarding the matter was violative
of the primary and ordinary rules of banking. He likewise contended that the debiting or taking of the reimbursed
amount from the account of private respondent Salazar by petitioner BPI was a matter exclusively between said
parties and may be pursuant to banking rules and regulations, but did not in any way affect him. The debiting from
another account of private respondent Salazar, considering that her other account was effectively closed, was not
his concern.

After trial, the RTC rendered a decision, the dispositive portion of which reads thus:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff [private respondent
Salazar] and against the defendant [petitioner BPI] and ordering the latter to pay as follows:

1. The amount of P267,707.70 with 12% interest thereon from September 16, 1991 until the said amount is
fully paid;
83
 2. The amount of P30,000.00 as and for actual damages;

3. The amount of P50,000.00 as and for moral damages;

4. The amount of P50,000.00 as and for exemplary damages;

5. The amount of P30,000.00 as and for attorney’s fees; and

6. Costs of suit.

The counterclaim is hereby ordered DISMISSED for lack of factual basis.

The third-party complaint [filed by petitioner] is hereby likewise ordered DISMISSED for lack of merit.

Third-party defendant’s [i.e., private respondent Templonuevo’s] counterclaim is hereby likewise DISMISSED for lack
of factual basis.

SO ORDERED.4

On appeal, the Court of Appeals (CA) affirmed the decision of the RTC and held that respondent Salazar was entitled
to the proceeds of the three (3) checks notwithstanding the lack of endorsement thereon by the payee. The CA
concluded that Salazar and Templonuevo had previously agreed that the checks payable to JRT Construction and
Trading5 actually belonged to Salazar and would be deposited to her account, with petitioner acquiescing to the
arrangement.6

Petitioner therefore filed this petition on these grounds:

I.

The Court of Appeals committed reversible error in misinterpreting Section 49 of the Negotiable Instruments Law and
Section 3 (r and s) of Rule 131 of the New Rules on Evidence.

II.

The Court of Appeals committed reversible error in NOT applying the provisions of Articles 22, 1278 and 1290 of the
Civil Code in favor of BPI.

III.

The Court of Appeals committed a reversible error in holding, based on a misapprehension of facts, that the account
from which BPI debited the amount of P267,707.70 belonged to a corporation with a separate and distinct personality.

IV.

The Court of Appeals committed a reversible error in holding, based entirely on speculations, surmises or
conjectures, that there was an agreement between SALAZAR and TEMPLONUEVO that checks payable to
TEMPLONUEVO may be deposited by SALAZAR to her personal account and that BPI was privy to this agreement.

V.

The Court of Appeals committed reversible error in holding, based entirely on speculation, surmises or conjectures,
that SALAZAR suffered great damage and prejudice and that her business standing was eroded.

VI.

The Court of Appeals erred in affirming instead of reversing the decision of the lower court against BPI and dismissing
SALAZAR’s complaint.

VII.

The Honorable Court erred in affirming the decision of the lower court dismissing the third-party complaint of BPI.7

The issues center on the propriety of the deductions made by petitioner from private respondent Salazar’s account.
Stated otherwise, does a collecting bank, over the objections of its depositor, have the authority to withdraw

84
unilaterally from such depositor’s account the amount it had previously paid upon certain unendorsed order
instruments deposited by the depositor to another account that she later closed?

Petitioner argues thus:

1. There is no presumption in law that a check payable to order, when found in the possession of a person
who is neither a payee nor the indorsee thereof, has been lawfully transferred for value. Hence, the CA should
not have presumed that Salazar was a transferee for value within the contemplation of Section 49 of the
Negotiable Instruments Law,8 as the latter applies only to a holder defined under Section 191of the same.9

2. Salazar failed to adduce sufficient evidence to prove that her possession of the three checks was lawful
despite her allegations that these checks were deposited pursuant to a prior internal arrangement with
Templonuevo and that petitioner was privy to the arrangement.

3. The CA should have applied the Civil Code provisions on legal compensation because in deducting the
subject amount from Salazar’s account, petitioner was merely rectifying the undue payment it made upon the
checks and exercising its prerogative to alter or modify an erroneous credit entry in the regular course of its
business.

4. The debit of the amount from the account of A.A. Salazar Construction and Engineering Services was
proper even though the value of the checks had been originally credited to the personal account of Salazar
because A.A. Salazar Construction and Engineering Services, an unincorporated single proprietorship, had
no separate and distinct personality from Salazar.

5. Assuming the deduction from Salazar’s account was improper, the CA should not have dismissed
petitioner’s third-party complaint against Templonuevo because the latter would have the legal duty to return
to petitioner the proceeds of the checks which he previously received from it.

6. There was no factual basis for the award of damages to Salazar.

The petition is partly meritorious.

First, the issue raised by petitioner requires an inquiry into the factual findings made by the CA. The CA’s conclusion
that the deductions from the bank account of A.A. Salazar Construction and Engineering Services were improper
stemmed from its finding that there was no ineffective payment to Salazar which would call for the exercise of
petitioner’s right to set off against the former’s bank deposits. This finding, in turn, was drawn from the pleadings of
the parties, the evidence adduced during trial and upon the admissions and stipulations of fact made during the pre-
trial, most significantly the following:

(a) That Salazar previously had in her possession the following checks:

(1) Solid Bank Check No. CB766556 dated January 30, 1990 in the amount of P57,712.50;

(2) Solid Bank Check No. CB898978 dated July 31, 1990 in the amount of P55,180.00; and,

(3) Equitable Banking Corporation Check No. 32380638 dated August 28, 1990 for the amount
of P154,800.00;

(b) That these checks which had an aggregate amount of P267,692.50 were payable to the order of JRT
Construction and Trading, the name and style under which Templonuevo does business;

(c) That despite the lack of endorsement of the designated payee upon such checks, Salazar was able to
deposit the checks in her personal savings account with petitioner and encash the same;

(d) That petitioner accepted and paid the checks on three (3) separate occasions over a span of eight months
in 1990; and

(e) That Templonuevo only protested the purportedly unauthorized encashment of the checks after the lapse
of one year from the date of the last check.10

Petitioner concedes that when it credited the value of the checks to the account of private respondent Salazar, it
made a mistake because it failed to notice the lack of endorsement thereon by the designated payee. The CA,
however, did not lend credence to this claim and concluded that petitioner’s actions were deliberate, in view of its
admission that the "mistake" was committed three times on three separate occasions, indicating acquiescence to the
internal arrangement between Salazar and Templonuevo. The CA explained thus:

85
It was quite apparent that the three checks which appellee Salazar deposited were not indorsed. Three times she
deposited them to her account and three times the amounts borne by these checks were credited to the same. And
in those separate occasions, the bank did not return the checks to her so that she could have them indorsed. Neither
did the bank question her as to why she was depositing the checks to her account considering that she was not the
payee thereof, thus allowing us to come to the conclusion that defendant-appellant BPI was fully aware that the
proceeds of the three checks belong to appellee.

For if the bank was not privy to the agreement between Salazar and Templonuevo, it is most unlikely that appellant
BPI (or any bank for that matter) would have accepted the checks for deposit on three separate times nary any
question. Banks are most finicky over accepting checks for deposit without the corresponding indorsement by their
payee. In fact, they hesitate to accept indorsed checks for deposit if the depositor is not one they know very well.11

The CA likewise sustained Salazar’s position that she received the checks from Templonuevo pursuant to an internal
arrangement between them, ratiocinating as follows:

If there was indeed no arrangement between Templonuevo and the plaintiff over the three questioned checks, it
baffles us why it was only on August 31, 1991 or more than a year after the third and last check was deposited that
he demanded for the refund of the total amount of P267,692.50.

A prudent man knowing that payment is due him would have demanded payment by his debtor from the moment the
same became due and demandable. More so if the sum involved runs in hundreds of thousand of pesos. By and
large, every person, at the very moment he learns that he was deprived of a thing which rightfully belongs to him,
would have created a big fuss. He would not have waited for a year within which to do so. It is most inconceivable
that Templonuevo did not do this.12

Generally, only questions of law may be raised in an appeal by certiorari under Rule 45 of the Rules of
Court.13 Factual findings of the CA are entitled to great weight and respect, especially when the CA affirms the factual
findings of the trial court.14 Such questions on whether certain items of evidence should be accorded probative value
or weight, or rejected as feeble or spurious, or whether or not the proofs on one side or the other are clear and
convincing and adequate to establish a proposition in issue, are questions of fact. The same holds true for questions
on whether or not the body of proofs presented by a party, weighed and analyzed in relation to contrary evidence
submitted by the adverse party may be said to be strong, clear and convincing, or whether or not inconsistencies in
the body of proofs of a party are of such gravity as to justify refusing to give said proofs weight – all these are issues
of fact which are not reviewable by the Court.15

This rule, however, is not absolute and admits of certain exceptions, namely: a) when the conclusion is a finding
grounded entirely on speculations, surmises, or conjectures; b) when the inference made is manifestly mistaken,
absurd, or impossible; c) when there is a grave abuse of discretion; d) when the judgment is based on a
misapprehension of facts; e) when the findings of fact are conflicting; f) when the CA, in making its findings, went
beyond the issues of the case and the same are contrary to the admissions of both appellant and appellee; g) when
the findings of the CA are contrary to those of the trial court; h) when the findings of fact are conclusions without
citation of specific evidence on which they are based; i) when the finding of fact of the CA is premised on the supposed
absence of evidence but is contradicted by the evidence on record; and j) when the CA manifestly overlooked certain
relevant facts not disputed by the parties and which, if properly considered, would justify a different conclusion.16

In the present case, the records do not support the finding made by the CA and the trial court that a prior arrangement
existed between Salazar and Templonuevo regarding the transfer of ownership of the checks. This fact is crucial as
Salazar’s entitlement to the value of the instruments is based on the assumption that she is a transferee within the
contemplation of Section 49 of the Negotiable Instruments Law.

Section 49 of the Negotiable Instruments Law contemplates a situation whereby the payee or indorsee delivers a
negotiable instrument for value without indorsing it, thus:

Transfer without indorsement; effect of- Where the holder of an instrument payable to his order transfers it for value
without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee
acquires in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether
the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually
made. 17

It bears stressing that the above transaction is an equitable assignment and the transferee acquires the instrument
subject to defenses and equities available among prior parties. Thus, if the transferor had legal title, the transferee
acquires such title and, in addition, the right to have the indorsement of the transferor and also the right, as holder of
the legal title, to maintain legal action against the maker or acceptor or other party liable to the transferor. The
underlying premise of this provision, however, is that a valid transfer of ownership of the negotiable instrument in
question has taken place.

86
Transferees in this situation do not enjoy the presumption of ownership in favor of holders since they are neither
payees nor indorsees of such instruments. The weight of authority is that the mere possession of a negotiable
instrument does not in itself conclusively establish either the right of the possessor to receive payment, or of the right
of one who has made payment to be discharged from liability. Thus, something more than mere possession by
persons who are not payees or indorsers of the instrument is necessary to authorize payment to them in the absence
of any other facts from which the authority to receive payment may be inferred.18

The CA and the trial court surmised that the subject checks belonged to private respondent Salazar based on the
pre-trial stipulation that Templonuevo incurred a one-year delay in demanding reimbursement for the proceeds of the
same. To the Court’s mind, however, such period of delay is not of such unreasonable length as to estop
Templonuevo from asserting ownership over the checks especially considering that it was readily apparent on the
face of the instruments19 that these were crossed checks.

In State Investment House v. IAC,20 the Court enumerated the effects of crossing a check, thus: (1) that the check
may not be encashed but only deposited in the bank; (2) that the check may be negotiated only once - to one who
has an account with a bank; and (3) that the act of crossing the check serves as a warning to the holder that the
check has been issued for a definite purpose so that such holder must inquire if the check has been received pursuant
to that purpose.

Thus, even if the delay in the demand for reimbursement is taken in conjunction with Salazar’s possession of the
checks, it cannot be said that the presumption of ownership in Templonuevo’s favor as the designated payee therein
was sufficiently overcome. This is consistent with the principle that if instruments payable to named payees or to their
order have not been indorsed in blank, only such payees or their indorsees can be holders and entitled to receive
payment in their own right.21

The presumption under Section 131(s) of the Rules of Court stating that a negotiable instrument was given for a
sufficient consideration will not inure to the benefit of Salazar because the term "given" does not pertain merely to a
transfer of physical possession of the instrument. The phrase "given or indorsed" in the context of a negotiable
instrument refers to the manner in which such instrument may be negotiated. Negotiable instruments are negotiated
by "transfer to one person or another in such a manner as to constitute the transferee the holder thereof. If payable
to bearer it is negotiated by delivery. If payable to order it is negotiated by the indorsement completed by
delivery."22 The present case involves checks payable to order. Not being a payee or indorsee of the checks, private
respondent Salazar could not be a holder thereof.

It is an exception to the general rule for a payee of an order instrument to transfer the instrument without indorsement.
Precisely because the situation is abnormal, it is but fair to the maker and to prior holders to require possessors to
prove without the aid of an initial presumption in their favor, that they came into possession by virtue of a legitimate
transaction with the last holder.23 Salazar failed to discharge this burden, and the return of the check proceeds to
Templonuevo was therefore warranted under the circumstances despite the fact that Templonuevo may not have
clearly demonstrated that he never authorized Salazar to deposit the checks or to encash the same. Noteworthy also
is the fact that petitioner stamped on the back of the checks the words: "All prior endorsements and/or lack of
endorsements guaranteed," thereby making the assurance that it had ascertained the genuineness of all prior
endorsements. Having assumed the liability of a general indorser, petitioner’s liability to the designated payee cannot
be denied.

Consequently, petitioner, as the collecting bank, had the right to debit Salazar’s account for the value of the checks
it previously credited in her favor. It is of no moment that the account debited by petitioner was different from the
original account to which the proceeds of the check were credited because both admittedly belonged to Salazar, the
former being the account of the sole proprietorship which had no separate and distinct personality from her, and the
latter being her personal account.

The right of set-off was explained in Associated Bank v. Tan:24

A bank generally has a right of set-off over the deposits therein for the payment of any withdrawals on the part of a
depositor. The right of a collecting bank to debit a client's account for the value of a dishonored check that has
previously been credited has fairly been established by jurisprudence. To begin with, Article 1980 of the Civil Code
provides that "[f]ixed, savings, and current deposits of money in banks and similar institutions shall be governed by
the provisions concerning simple loan."

Hence, the relationship between banks and depositors has been held to be that of creditor and debtor. Thus, legal
compensation under Article 1278 of the Civil Code may take place "when all the requisites mentioned in Article 1279
are present," as follows:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of
the other;

87
 (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind,
and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.

While, however, it is conceded that petitioner had the right of set-off over the amount it paid to Templonuevo against
the deposit of Salazar, the issue of whether it acted judiciously is an entirely different matter.25 As businesses affected
with public interest, and because of the nature of their functions, banks are under obligation to treat the accounts of
their depositors with meticulous care, always having in mind the fiduciary nature of their relationship.26 In this regard,
petitioner was clearly remiss in its duty to private respondent Salazar as its depositor.

To begin with, the irregularity appeared plainly on the face of the checks. Despite the obvious lack of indorsement
thereon, petitioner permitted the encashment of these checks three times on three separate occasions. This negates
petitioner’s claim that it merely made a mistake in crediting the value of the checks to Salazar’s account and instead
bolsters the conclusion of the CA that petitioner recognized Salazar’s claim of ownership of checks and acted
deliberately in paying the same, contrary to ordinary banking policy and practice. It must be emphasized that the law
imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it, for the purpose of
determining their genuineness and regularity. The collecting bank, being primarily engaged in banking, holds itself
out to the public as the expert on this field, and the law thus holds it to a high standard of conduct. 27 The taking and
collection of a check without the proper indorsement amount to a conversion of the check by the bank.28

More importantly, however, solely upon the prompting of Templonuevo, and with full knowledge of the brewing
dispute between Salazar and Templonuevo, petitioner debited the account held in the name of the sole proprietorship
of Salazar without even serving due notice upon her. This ran contrary to petitioner’s assurances to private
respondent Salazar that the account would remain untouched, pending the resolution of the controversy between
her and Templonuevo.29 In this connection, the CA cited the letter dated September 5, 1991 of Mr. Manuel Ablan,
Senior Manager of petitioner bank’s Pasig/Ortigas branch, to private respondent Salazar informing her that her
account had been frozen, thus:

From the tenor of the letter of Manuel Ablan, it is safe to conclude that Account No. 0201-0588-48 will remain frozen
or untouched until herein [Salazar] has settled matters with Templonuevo. But, in an unexpected move, in less than
two weeks (eleven days to be precise) from the time that letter was written, [petitioner] bank issued a cashier’s check
in the name of Julio R. Templonuevo of the J.R.T. Construction and Trading for the sum of P267,692.50 (Exhibit "8")
and debited said amount from Ms. Arcilla’s account No. 0201-0588-48 which was supposed to be frozen or controlled.
Such a move by BPI is, to Our minds, a clear case of negligence, if not a fraudulent, wanton and reckless disregard
of the right of its depositor.

The records further bear out the fact that respondent Salazar had issued several checks drawn against the account
of A.A. Salazar Construction and Engineering Services prior to any notice of deduction being served. The CA
sustained private respondent Salazar’s claim of damages in this regard:

The act of the bank in freezing and later debiting the amount of P267,692.50 from the account of A.A. Salazar
Construction and Engineering Services caused plaintiff-appellee great damage and prejudice particularly when she
had already issued checks drawn against the said account. As can be expected, the said checks bounced. To prove
this, plaintiff-appellee presented as exhibits photocopies of checks dated September 8, 1991, October 28, 1991, and
November 14, 1991 (Exhibits "D", "E" and "F" respectively)30

These checks, it must be emphasized, were subsequently dishonored, thereby causing private respondent Salazar
undue embarrassment and inflicting damage to her standing in the business community. Under the circumstances,
she was clearly not given the opportunity to protect her interest when petitioner unilaterally withdrew the above
amount from her account without informing her that it had already done so.

For the above reasons, the Court finds no reason to disturb the award of damages granted by the CA against
petitioner. This whole incident would have been avoided had petitioner adhered to the standard of diligence expected
of one engaged in the banking business. A depositor has the right to recover reasonable moral damages even if the
bank’s negligence may not have been attended with malice and bad faith, if the former suffered mental anguish,
serious anxiety, embarrassment and humiliation.31 Moral damages are not meant to enrich a complainant at the
expense of defendant. It is only intended to alleviate the moral suffering she has undergone. The award of exemplary
damages is justified, on the other hand, when the acts of the bank are attended by malice, bad faith or gross
negligence. The award of reasonable attorney’s fees is proper where exemplary damages are awarded. It is proper
where depositors are compelled to litigate to protect their interest.32

88
WHEREFORE, the petition is partially GRANTED. The assailed Decision dated April 3, 1998 and Resolution dated
April 3, 1998 rendered by the Court of Appeals in CA-G.R. CV No. 42241 are MODIFIED insofar as it ordered
petitioner Bank of the Philippine Islands to return the amount of Two Hundred Sixty-seven Thousand Seven Hundred
and Seven and 70/100 Pesos (P267,707.70) to respondent Annabelle A. Salazar, which portion
is REVERSED and SET ASIDE. In all other respects, the same are AFFIRMED.

No costs.

SO ORDERED.

IV.
PARTIES TO A NEGOTIABLE INSTRUMENT
i.
ALLIED BANKING CORPORATION vs.
COURT OF APPEALS, G.G. SPORTSWEAR MANUFACTURING CORPORATION, NARI GIDWANI,
SPOUSES LETICIA AND LEON DE VILLA AND ALCRON INTERNATIONAL LTD.
G.R. No. 125851 July 11, 2006
QUISUMBING, J.:

This petition for review on certiorari assails (a) the July 31, 1996 Decision 1 of the Court of Appeals, ordering
respondent G.G. Sportswear Manufacturing Corp. to reimburse petitioner US $20,085; and exonerating the
guarantors from liability; and (b) the January 17, 1997 Resolution2 denying the motion for reconsideration.

The facts are undisputed.

On January 6, 1981, petitioner Allied Bank, Manila (ALLIED) purchased Export Bill No. BDO-81-002 in the amount
of US $20,085.00 from respondent G.G. Sportswear Mfg. Corporation (GGS). The bill, drawn under a letter of credit
No. BB640549 covered Men's Valvoline Training Suit that was in transit to West Germany (Uniger via Rotterdam)
under Cont. #73/S0299. The export bill was issued by Chekiang First Bank Ltd., Hongkong. With the purchase of the
bill, ALLIED credited GGS the peso equivalent of the aforementioned bill amounting to P151,474.52 and the receipt
of which was acknowledged by the latter in its letter dated June 22, 1981.

On the same date, respondents Nari Gidwani and Alcron International Ltd. (Alcron) executed their respective Letters
of Guaranty, holding themselves liable on the export bill if it should be dishonored or retired by the drawee for any
reason.

Subsequently, the spouses Leon and Leticia de Villa and Nari Gidwani also executed a Continuing
Guaranty/Comprehensive Surety (surety, for brevity), guaranteeing payment of any and all such credit
accommodations which ALLIED may extend to GGS. When ALLIED negotiated the export bill to Chekiang, payment
was refused due to some material discrepancies in the documents submitted by GGS relative to the exportation
covered by the letter of credit. Consequently, ALLIED demanded payment from all the respondents based on the
Letters of Guaranty and Surety executed in favor of ALLIED. However, respondents refused to pay, prompting
ALLIED to file an action for a sum of money.

In their joint answer, respondents GGS and Nari Gidwani admitted the due execution of the export bill and the Letters
of Guaranty in favor of ALLIED, but claimed that they signed blank forms of the Letters of Guaranty and the Surety,
and the blanks were only filled up by ALLIED after they had affixed their signatures. They also added that the
documents did not cover the transaction involving the subject export bill.

On the other hand, the respondents, spouses de Villa, claimed that they were not aware of the existence of the export
bill; they signed blank forms of the surety; and averred that the guaranty was not meant to secure the export bill.

Respondent Alcron, for its part, alleged that as a foreign corporation doing business in the Philippines, its branch in
the Philippines is merely a liaison office confined to the following duties and responsibilities, to wit: acting as a
message center between its office in Hongkong and its clients in the Philippines; conducting credit investigations on
Filipino clients; and providing its office in Hongkong with shipping arrangements and other details in connection with
its office in Hongkong. Respondent Alcron further alleged that neither its liaison office in the Philippines nor its then
representative, Hans-Joachim Schloer, had the authority to issue Letters of Guaranty for and in behalf of local entities
and persons. It also invoked laches against petitioner ALLIED.

GGS and Nari Gidwani filed a Motion for Summary Judgment on the ground that since the plaintiff admitted not
having protested the dishonor of the export bill, it thereby discharged GGS from liability. But the trial court denied the
motion. After the presentation of evidence by the petitioner, only the spouses de Villa presented their evidence. The
other respondents did not. The trial court dismissed the complaint.
89
On appeal, the Court of Appeals modified the ruling of the trial court holding respondent GGS liable to reimburse
petitioner ALLIED the peso equivalent of the export bill, but it exonerated the guarantors from their liabilities under
the Letters of Guaranty. The CA decision reads as follows:

For the foregoing considerations, appellee GGS is obliged to reimburse appellant Allied Bank the amount
of P151,474.52 which was the equivalent of GGS's contracted obligation of US$20,085.00.

The lower court however correctly exonerated the guarantors from their liability under their Letters of
Guaranty. A guaranty is an accessory contract. What the guarantors guaranteed in the instant case was the
bill which had been discharged. Consequently, the guarantors should be correspondingly released.

WHEREFORE, judgment is hereby rendered ordering defendant-appellee G.G. Sportswear Mfg. Corporation
to pay appellant the sum of P151,474.52 with interest thereon at the legal rate from the filing of the complaint,
and the costs.

SO ORDERED.3

The petitioner filed a Motion for Reconsideration, but to no avail. Hence, this appeal, raising a single issue:

WHETHER OR NOT RESPONDENTS NARI, DE VILLA AND ALCRON ARE LIABLE UNDER THE LETTERS
OF GUARANTY AND THE CONTINUING GUARANTY/ COMPREHENSIVE SURETY NOTWITHSTANDING
THE FACT THAT NO PROTEST WAS MADE AFTER THE BILL, A FOREIGN BILL OF EXCHANGE, WAS
DISHONORED.4

The main issue raised before us is: Can respondents, in their capacity as guarantors and surety, be held jointly and
severally liable under the Letters of Guaranty and Continuing Guaranty/Comprehensive Surety, in the absence of
protest on the bill in accordance with Section 152 of the Negotiable Instruments Law?5

The petitioner contends that part of the Court of Appeals' decision exonerating respondents Nari Gidwani, Alcron
International Ltd., and spouses Leon and Leticia de Villa as guarantors and/or sureties. Respondents rely on Section
152 of the Negotiable Instruments Law to support their contention.

Our review of the records shows that what transpired in this case is a discounting arrangement of the subject export
bill, between petitioner ALLIED and respondent GGS. Previously, we ruled that in a letter of credit transaction, once
the credit is established, the seller ships the goods to the buyer and in the process secures the required shipping
documents of title. To get paid, the seller executes a draft and presents it together with the required documents to
the issuing bank. The issuing bank redeems the draft and pays cash to the seller if it finds that the documents
submitted by the seller conform with what the letter of credit requires. The bank then obtains possession of the
documents upon paying the seller. The transaction is completed when the buyer reimburses the issuing bank and
acquires the documents entitling him to the goods.6 However, in most cases, instead of going to the issuing bank to
claim payment, the buyer (or the beneficiary of the draft) may approach another bank, termed the negotiating bank,
to have the draft discounted.7 While the negotiating bank owes no contractual duty toward the beneficiary of the draft
to discount or purchase it, it may still do so. Nothing can prevent the negotiating bank from requiring additional
requirements, like contracts of guaranty and surety, in consideration of the discounting arrangement.

In this case, respondent GGS, as the beneficiary of the export bill, instead of going to Chekiang First Bank Ltd.
(issuing bank), went to petitioner ALLIED, to have the export bill purchased or discounted. Before ALLIED agreed to
purchase the subject export bill, it required respondents Nari Gidwani and Alcron to execute Letters of Guaranty,
holding them liable on demand,in case the subject export bill was dishonored or retired for any reason.8

Likewise, respondents Nari Gidwani and spouses Leon and Leticia de Villa executed Continuing
Guaranty/Comprehensive Surety, holding themselves jointly and severally liable on any and all credit
accommodations, instruments, loans, advances, credits and/or other obligation that may be granted by the petitioner
ALLIED to respondent GGS.9 The surety also contained a clause whereby said sureties waive protest and notice of
dishonor of any and all such instruments, loans, advances, credits and/or obligations.10 These letters of guaranty and
surety are now the basis of the petitioner's action.

At this juncture, we must stress that obligations arising from contracts have the force of law between the parties and
should be complied with in good faith.11 Nothing can stop the parties from establishing stipulations, clauses, terms
and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public
order, or public policy.12

Here, Art. 2047 of the New Civil Code is pertinent. Art. 2047 states,

Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of
the principal debtor in case the latter should fail to do so.

90
 If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of
this Book shall be observed. In such case the contract is called a suretyship.

In this case, the Letters of Guaranty and Surety clearly show that respondents undertook and bound themselves as
guarantors and surety to pay the full amount of the export bill.

Respondents claim that the petitioner did not protest13 upon dishonor of the export bill by Chekiang First Bank, Ltd.
According to respondents, since there was no protest made upon dishonor of the export bill, all of them, as indorsers
were discharged under Section 152 of the Negotiable Instruments Law.

Section 152 of the Negotiable Instruments Law pertaining to indorsers, relied on by respondents, is not pertinent to
this case. There are well-defined distinctions between the contract of an indorser and that of a guarantor/surety of a
commercial paper, which is what is involved in this case. The contract of indorsement is primarily that of transfer,
while the contract of guaranty is that of personal security.14 The liability of a guarantor/surety is broader than that of
an indorser. Unless the bill is promptly presented for payment at maturity and due notice of dishonor given to the
indorser within a reasonable time, he will be discharged from liability thereon.15 On the other hand, except where
required by the provisions of the contract of suretyship, a demand or notice of default is not required to fix the surety's
liability.16 He cannot complain that the creditor has not notified him in the absence of a special agreement to that
effect in the contract of suretyship.17 Therefore, no protest on the export bill is necessary to charge all the respondents
jointly and severally liable with G.G. Sportswear since the respondents held themselves liable upon demand in case
the instrument was dishonored and on the surety, they even waived notice of dishonor as stipulated in their Letters
of Guarantee.

As to respondent Alcron, it is bound by the Letter of Guaranty executed by its representative Hans-Joachim Schloer.
As to the other respondents, not to be overlooked is the fact that, the "Suretyship Agreement" they executed,
expressly contemplated a solidary obligation, providing as it did that "… the sureties hereby guarantee jointly and
severally the punctual payment of any and all such credit accommodations, instruments, loans, … which is/are now
or may hereafter become due or owing … by the borrower".18 It is a cardinal rule that if the terms of a contract are
clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its stipulation shall
control.19 In the present case, there can be no mistaking about respondents' intent, as sureties, to be jointly and
severally obligated with respondent G.G. Sportswear.

Respondents also aver that, (1) they only signed said documents in blank; (2) they were never made aware that said
documents will cover the payment of the export bill; and (3) laches have set in.

Respondents' stance lacks merit. Under Section 3 (d), Rule 131 of the Rules of Court, it is presumed that a person
takes ordinary care of his concerns. Hence, the natural presumption is that one does not sign a document without
first informing himself of its contents and consequences. Said presumption acquires greater force in the case at bar
where not only one document but several documents were executed at different times and at different places by the
herein respondent guarantors and sureties.20

In this case, having affixed their consenting signatures in several documents executed at different times, it is safe to
presume that they had full knowledge of its terms and conditions, hence, they are precluded from asserting ignorance
of the legal effects of the undertaking they assumed thereunder. It is also presumed that private transactions have
been fair and regular21 and that he who alleges has the burden of proving his allegation with the requisite quantum
of evidence.22 But here the records of this case do not support their claims.

Last, we find the defense of laches unavailing. The question of laches is addressed to the sound discretion of the
court and since laches is an equitable doctrine, its application is controlled by equitable
considerations.23 Respondents, however, failed to show that the collection suit against them as sureties was
inequitable. Remedies in equity address only situations tainted with inequity, not those expressly governed by
statutes.24

After considering the facts of this case vis-à-vis the pertinent laws, we are constrained to rule for the petitioner.

WHEREFORE, the instant petition is GRANTED.The assailed Decision of the Court of Appeals is hereby MODIFIED,
and we hold that respondent Alcron International Ltd. is subsidiarily liable, while respondents Nari Gidwani, and
Spouses Leon and Leticia de Villa are jointly and severally liable together with G.G. Sportswear, to pay petitioner
Bank the sum of P151,474.52 with interest at the legal rate from the filing of the complaint, and the costs.

SO ORDERED.

ii.
BAUTISTA v. AUTO PLUS TRADERS, INC. and CA
G.R. NO. 166405 August 6, 2008

91
 QUISUMBING, J.:

This petition for review on certiorari assails the Decision1 dated August 10, 2004 of the Court of Appeals in CA-G.R. CR
No. 28464 and the Resolution2 dated October 29, 2004, which denied petitioner's motion for reconsideration. The Court of
Appeals affirmed the February 24, 2004 Decision and May 11, 2004 Order of the Regional Trial Court (RTC), Davao City,
Branch 16, in Criminal Case Nos. 52633-03 and 52634-03.

The antecedent facts are as follows:

Petitioner Claude P. Bautista, in his capacity as President and Presiding Officer of Cruiser Bus Lines and Transport
Corporation, purchased various spare parts from private respondent Auto Plus Traders, Inc. and issued two postdated
checks to cover his purchases. The checks were subsequently dishonored. Private respondent then executed an affidavit-
complaint for violation of Batas Pambansa Blg. 223 against petitioner. Consequently, two Informations for violation of BP
Blg. 22 were filed with the Municipal Trial Court in Cities (MTCC) of Davao City against the petitioner. These were docketed
as Criminal Case Nos. 102,004-B-2001 and 102,005-B-2001. The Informations4 read:

Criminal Case No. 102,004-B-2001:

The undersigned accuses the above-named accused for violation of Batas Pambansa Bilang 22,
committed as follows:

That on or about December 15, 2000, in the City of Davao, Philippines, and within the jurisdiction of this
Honorable Court, the above-mentioned accused, knowing fully well that he had no sufficient funds and/or
credit with the drawee bank, wilfully, unlawfully and feloniously issued and made out Rural Bank of Digos,
Inc. Check No. 058832, dated December 15, 2000, in the amount of P151,200.00, in favor of Auto Plus
Traders, Inc., but when said check was presented to the drawee bank for encashment, the same was
dishonored for the reason "DRAWN AGAINST INSUFFICIENT FUNDS" and despite notice of dishonor
and demands upon said accused to make good the check, accused failed and refused to make payment
to the damage and prejudice of herein complainant.

CONTRARY TO LAW.

Criminal Case No. 102,005-B-2001:

The undersigned accuses the above-named accused for violation of Batas Pambansa Bilang 22,
committed as follows:

That on or about October 30, 2000, in the City of Davao, Philippines, and within the jurisdiction of this
Honorable Court, the above-mentioned accused, knowing fully well that he had no sufficient funds and/or
credit with the drawee bank, wilfully, unlawfully and feloniously issued and made out Rural Bank of Digos,
Inc. Check No. 059049, dated October 30, 2000, in the amount of P97,500.00, in favor of Auto Plus
Traders, [Inc.], but when said check was presented to the drawee bank for encashment, the same was
dishonored for the reason "DRAWN AGAINST INSUFFICIENT FUNDS" and despite notice of dishonor
and demands upon said accused to make good the check, accused failed and refused to make payment,
to the damage and prejudice of herein complainant.

CONTRARY TO LAW.

Petitioner pleaded not guilty. Trial on the merits ensued. After the presentation of the prosecution's evidence, petitioner
filed a demurrer to evidence. On April 21, 2003, the MTCC granted the demurrer, thus:

WHEREFORE, the demurrer to evidence is granted, premised on reasonable doubt as to the guilt of the accused.
Cruiser Bus Line[s] and Transport Corporation, through the accused is directed to pay the complainant the sum
of P248,700.00 representing the value of the two checks, with interest at the rate of 12% per annum to be computed
from the time of the filing of these cases in Court, until the account is paid in full; ordering further Cruiser Bus
Line[s] and Transport Corporation, through the accused, to reimburse complainant the expense representing filing
fees amounting to P1,780.00 and costs of litigation which this Court hereby fixed at P5,000.00.

SO ORDERED.5

Petitioner moved for partial reconsideration but his motion was denied. Thereafter, both parties appealed to the RTC. On
February 24, 2004, the trial court ruled:

WHEREFORE, the assailed Order dated April 21, 2003 is hereby MODIFIED to read as follows: Accused is
directed to pay and/or reimburse the complainant the following sums: (1) P248,700.00 representing the value of
the two checks, with interest at the rate of 12% per annum to be computed from the time of the filing of these cases
in Court, until the account is paid in full; (2) P1,780.00 for filing fees and P5,000.00 as cost of litigation.

92
 SO ORDERED.6

Petitioner moved for reconsideration, but his motion was denied on May 11, 2004. Petitioner elevated the case to the Court
of Appeals, which affirmed the February 24, 2004 Decision and May 11, 2004 Order of the RTC:

WHEREFORE, premises considered, the instant petition is DENIED. The assailed Decision of the Regional Trial
Court, Branch 16, Davao City, dated February 24, 2004 and its Order dated May 11, 2004 are AFFIRMED.

SO ORDERED.7

Petitioner now comes before us, raising the sole issue of whether the Court of Appeals erred in upholding the RTC's ruling
that petitioner, as an officer of the corporation, is personally and civilly liable to the private respondent for the value of the
two checks.8

Petitioner asserts that BP Blg. 22 merely pertains to the criminal liability of the accused and that the corporation, which has
a separate personality from its officers, is solely liable for the value of the two checks.

Private respondent counters that petitioner should be held personally liable for both checks. Private respondent alleged
that petitioner issued two postdated checks: a personal check in his name for the amount of P151,200 and a corporation
check under the account of Cruiser Bus Lines and Transport Corporation for the amount of P97,500. According to private
respondent, petitioner, by issuing his check to cover the obligation of the corporation, became an accommodation party.
Under Section 299 of the Negotiable Instruments Law, an accommodation party is liable on the instrument to a holder for
value. Private respondent adds that petitioner should also be liable for the value of the corporation check because instituting
another civil action against the corporation would result in multiplicity of suits and delay.

At the outset, we note that private respondent's allegation that petitioner issued a personal check disputes the factual
findings of the MTCC. The MTCC found that the two checks belong to Cruiser Bus Lines and Transport Corporation while
the RTC found that one of the checks was a personal check of the petitioner. Generally this Court, in a petition for review
on certiorari under Rule 45 of the Rules of Court, has no jurisdiction over questions of facts. But, considering that the
findings of the MTCC and the RTC are at variance,10 we are compelled to settle this issue.

A perusal of the two check return slips11 in conjunction with the Current Account Statements 12 would show that the check
for P151,200 was drawn against the current account of Claude Bautista while the check for P97,500 was drawn against
the current account of Cruiser Bus Lines and Transport Corporation. Hence, we sustain the factual finding of the RTC.

Nonetheless, we find the appellate court in error for affirming the decision of the RTC holding petitioner liable for the value
of the checks considering that petitioner was acquitted of the crime charged and that the debts are clearly corporate debts
for which only Cruiser Bus Lines and Transport Corporation should be held liable.

Juridical entities have personalities separate and distinct from its officers and the persons composing it. 13 Generally, the
stockholders and officers are not personally liable for the obligations of the corporation except only when the veil of
corporate fiction is being used as a cloak or cover for fraud or illegality, or to work injustice.14 These situations, however,
do not exist in this case. The evidence shows that it is Cruiser Bus Lines and Transport Corporation that has obligations
to Auto Plus Traders, Inc. for tires. There is no agreement that petitioner shall be held liable for the corporation's obligations
in his personal capacity. Hence, he cannot be held liable for the value of the two checks issued in payment for the
corporation's obligation in the total amount of P248,700.

Likewise, contrary to private respondent's contentions, petitioner cannot be considered liable as an accommodation party
for Check No. 58832. Section 29 of the Negotiable Instruments Law defines an accommodation party as a person "who
has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of
lending his name to some other person." As gleaned from the text, an accommodation party is one who meets all the three
requisites, viz: (1) he must be a party to the instrument, signing as maker, drawer, acceptor, or indorser; (2) he must not
receive value therefor; and (3) he must sign for the purpose of lending his name or credit to some other person. 15 An
accommodation party lends his name to enable the accommodated party to obtain credit or to raise money; he receives
no part of the consideration for the instrument but assumes liability to the other party/ies thereto. 16 The first two elements
are present here, however there is insufficient evidence presented in the instant case to show the presence of the third
requisite. All that the evidence shows is that petitioner signed Check No. 58832, which is drawn against his personal
account. The said check, dated December 15, 2000, corresponds to the value of 24 sets of tires received by Cruiser Bus
Lines and Transport Corporation on August 29, 2000. 17 There is no showing of when petitioner issued the check and in
what capacity. In the absence of concrete evidence it cannot just be assumed that petitioner intended to lend his name to
the corporation. Hence, petitioner cannot be considered as an accommodation party.

Cruiser Bus Lines and Transport Corporation, however, remains liable for the checks especially since there is no evidence
that the debts covered by the subject checks have been paid.

WHEREFORE, the petition is GRANTED. The Decision dated August 10, 2004 and the Resolution dated October 29, 2004
of the Court of Appeals in CA-G.R. CR No. 28464 are REVERSED and SET ASIDE. Criminal Case Nos. 52633-03 and
52634-03 are DISMISSED, without prejudice to the right of private respondent Auto Plus Traders, Inc., to file the proper
civil action against Cruiser Bus Lines and Transport Corporation for the value of the two checks.

93
No pronouncement as to costs.

SO ORDERED.

Consideration and Accommodation Party

iii.
ANG vs. ASSOCIATED BANK and ENG LIONG
G.R. No. 146511 September 5, 2007
AZCUNA, J.:

This petition for certiorari under Rule 45 of the Rules on Civil Procedure seeks to review the October 9, 2000
Decision1 and December 26, 2000 Resolution2 of the Court of Appeals in CA-G.R. CV No. 53413 which reversed and
set aside the January 5, 1996 Decision3 of the Regional Trial Court, Branch 16, Davao City, in Civil Case No. 20,299-
90, dismissing the complaint filed by respondents for collection of a sum of money.

On August 28, 1990, respondent Associated Bank (formerly Associated Banking Corporation and now known as
United Overseas Bank Philippines) filed a collection suit against Antonio Ang Eng Liong and petitioner Tomas Ang
for the two (2) promissory notes that they executed as principal debtor and co-maker, respectively.

In the Complaint,4 respondent Bank alleged that on October 3 and 9, 1978, the defendants obtained a loan
of P50,000, evidenced by a promissory note bearing PN-No. DVO-78-382, and P30,000, evidenced by a promissory
note bearing PN-No. DVO-78-390. As agreed, the loan would be payable, jointly and severally, on January 31, 1979
and December 8, 1978, respectively. In addition, subsequent amendments5 to the promissory notes as well as the
disclosure statements6 stipulated that the loan would earn 14% interest rate per annum, 2% service charge per
annum, 1% penalty charge per month from due date until fully paid, and attorney's fees equivalent to 20% of the
outstanding obligation.

Despite repeated demands for payment, the latest of which were on September 13, 1988 and September 9, 1986,
on Antonio Ang Eng Liong and Tomas Ang, respectively, respondent Bank claimed that the defendants failed and
refused to settle their obligation, resulting in a total indebtedness of P539,638.96 as of July 31, 1990, broken down
as follows:

PN-No. DVO-78-382 PN-No. DVO-78-390

Outstanding Balance P50,000.00 P30,000.00

Add Past due charges for 4,199 days Past due charges for 4,253 days
(from 01-31-79 to 07-31-90) (from 12-8-78 to 07-31-90)
14% Interest P203,538.98 P125,334.41
2% Service Charge P11,663.89 P7,088.34
12% Overdue Charge P69,983.34 P42,530.00
Total P285,186.21 P174,952.75
Less: Charges paid P500.00 None
Amount Due P334,686.21 P204,952.75

In his Answer,7 Antonio Ang Eng Liong only admitted to have secured a loan amounting to P80,000. He pleaded
though that the bank "be ordered to submit a more reasonable computation" considering that there had been "no
correct and reasonable statement of account" sent to him by the bank, which was allegedly collecting excessive
interest, penalty charges, and attorney's fees despite knowledge that his business was destroyed by fire, hence, he
had no source of income for several years.

For his part, petitioner Tomas Ang filed an Answer with Counterclaim and Cross-claim.8 He interposed the affirmative
defenses that: the bank is not the real party in interest as it is not the holder of the promissory notes, much less a
holder for value or a holder in due course; the bank knew that he did not receive any valuable consideration for
affixing his signatures on the notes but merely lent his name as an accommodation party; he accepted the promissory
notes in blank, with only the printed provisions and the signature of Antonio Ang Eng Liong appearing therein; it was
the bank which completed the notes upon the orders, instructions, or representations of his co-defendant; PN-No.
DVO-78-382 was completed in excess of or contrary to the authority given by him to his co-defendant who
represented that he would only borrow P30,000 from the bank; his signature in PN-No. DVO-78-390 was procured
through fraudulent means when his co-defendant claimed that his first loan did not push through; the promissory
notes did not indicate in what capacity he was intended to be bound; the bank granted his co-defendant successive
extensions of time within which to pay, without his (Tomas Ang) knowledge and consent; the bank imposed new and

94
additional stipulations on interest, penalties, services charges and attorney's fees more onerous than the terms of
the notes, without his knowledge and consent, in the absence of legal and factual basis and in violation of the Usury
Law; the bank caused the inclusion in the promissory notes of stipulations such as waiver of presentment for payment
and notice of dishonor which are against public policy; and the notes had been impaired since they were never
presented for payment and demands were made only several years after they fell due when his co-defendant could
no longer pay them.

Regarding his counterclaim, Tomas Ang argued that by reason of the bank's acts or omissions, it should be held
liable for the amount of P50,000 for attorney's fees and expenses of litigation. Furthermore, on his cross-claim against
Antonio Ang Eng Liong, he averred that he should be reimbursed by his co-defendant any and all sums that he may
be adjudged liable to pay, plus P30,000, P20,000 and P50,000 for moral and exemplary damages, and attorney's
fees, respectively.

In its Reply,9 respondent Bank countered that it is the real party in interest and is the holder of the notes since the
Associated Banking Corporation and Associated Citizens Bank are its predecessors-in-interest. The fact that Tomas
Ang never received any moneys in consideration of the two (2) loans and that such was known to the bank are
immaterial because, as an accommodation maker, he is considered as a solidary debtor who is primarily liable for
the payment of the promissory notes. Citing Section 29 of the Negotiable Instruments Law (NIL), the bank posited
that absence or failure of consideration is not a matter of defense; neither is the fact that the holder knew him to be
only an accommodation party.

Respondent Bank likewise retorted that the promissory notes were completely filled up at the time of their delivery.
Assuming that such was not the case, Sec. 14 of the NIL provides that the bank has the prima facie authority to
complete the blank form. Moreover, it is presumed that one who has signed as a maker acted with care and had
signed the document with full knowledge of its content. The bank noted that Tomas Ang is a prominent businessman
in Davao City who has been engaged in the auto parts business for several years, hence, certainly he is not so naïve
as to sign the notes without knowing or bothering to verify the amounts of the loans covered by them. Further, he is
already in estoppel since despite receipt of several demand letters there was not a single protest raised by him that
he signed for only one note in the amount of P30,000.

It was denied by the bank that there were extensions of time for payment accorded to Antonio Ang Eng Liong.
Granting that such were the case, it said that the same would not relieve Tomas Ang from liability as he would still
be liable for the whole obligation less the share of his co-debtor who received the extended term.

The bank also asserted that there were no additional or new stipulations imposed other than those agreed upon. The
penalty charge, service charge, and attorney's fees were reflected in the amendments to the promissory notes and
disclosure statements. Reference to the Usury Law was misplaced as usury is legally non-existent; at present,
interest can be charged depending on the agreement of the lender and the borrower.

Lastly, the bank contended that the provisions on presentment for payment and notice of dishonor were expressly
waived by Tomas Ang and that such waiver is not against public policy pursuant to Sections 82 (c) and 109 of the
NIL. In fact, there is even no necessity therefor since being a solidary debtor he is absolutely required to pay and
primarily liable on both promissory notes.

On October 19, 1990, the trial court issued a preliminary pre-trial order directing the parties to submit their respective
pre-trial guide.10 When Antonio Ang Eng Liong failed to submit his brief, the bank filed an ex-parte motion to declare
him in default.11 Per Order of November 23, 1990, the court granted the motion and set the ex-parte hearing for the
presentation of the bank's evidence.12 Despite Tomas Ang's motion13 to modify the Order so as to exclude or cancel
the ex-parte hearing based on then Sec. 4, Rule 18 of the old Rules of Court (now Sec. 3[c.], Rule 9 of the Revised
Rules on Civil Procedure), the hearing nonetheless proceeded.14

Eventually, a decision15 was rendered by the trial court on February 21, 1991. For his supposed bad faith and
obstinate refusal despite several demands from the bank, Antonio Ang Eng Liong was ordered to pay the principal
amount of P80,000 plus 14% interest per annum and 2% service charge per annum. The overdue penalty charge
and attorney's fees were, however, reduced for being excessive, thus:

WHEREFORE, judgment is rendered against defendant Antonio Ang Eng Liong and in favor of plaintiff,
ordering the former to pay the latter:

On the first cause of action:

1) the amount of P50,000.00 representing the principal obligation with 14% interest per annum from
June 27, 1983 with 2% service charge and 6% overdue penalty charges per annum until fully paid;

2) P11,663.89 as accrued service charge; and

3) P34,991.67 as accrued overdue penalty charge.

95
 On the second cause of action:

1) the amount of P50,000.00 (sic) representing the principal account with 14% interest from June 27,
1983 with 2% service charge and 6% overdue penalty charges per annum until fully paid;

2) P7,088.34 representing accrued service charge;

3) P21,265.00 as accrued overdue penalty charge;

4) the amount of P10,000.00 as attorney's fees; and

5) the amount of P620.00 as litigation expenses and to pay the costs.

SO ORDERED.16

The decision became final and executory as no appeal was taken therefrom. Upon the bank's ex-parte motion, the
court accordingly issued a writ of execution on April 5, 1991.17

Thereafter, on June 3, 1991, the court set the pre-trial conference between the bank and Tomas Ang,18 who, in turn,
filed a Motion to Dismiss19 on the ground of lack of jurisdiction over the case in view of the alleged finality of the
February 21, 1991 Decision. He contended that Sec. 4, Rule 18 of the old Rules sanctions only one judgment in case
of several defendants, one of whom is declared in default. Moreover, in his Supplemental Motion to Dismiss,20 Tomas
Ang maintained that he is released from his obligation as a solidary guarantor and accommodation party because,
by the bank's actions, he is now precluded from asserting his cross-claim against Antonio Ang Eng Liong, upon whom
a final and executory judgment had already been issued.

The court denied the motion as well as the motion for reconsideration thereon.21 Tomas Ang subsequently filed a
petition for certiorari and prohibition before this Court, which, however, resolved to refer the same to the Court of
Appeals.22 In accordance with the prayer of Tomas Ang, the appellate court promulgated its Decision on January 29,
1992 in CA G.R. SP No. 26332, which annulled and set aside the portion of the Order dated November 23, 1990
setting the ex-parte presentation of the bank's evidence against Antonio Ang Eng Liong, the Decision dated February
21, 1991 rendered against him based on such evidence, and the Writ of Execution issued on April 5, 1991.23

Trial then ensued between the bank and Tomas Ang. Upon the latter's motion during the pre-trial conference, Antonio
Ang Eng Liong was again declared in default for his failure to answer the cross-claim within the reglementary period.24

When Tomas Ang was about to present evidence in his behalf, he filed a Motion for Production of
Documents,25 reasoning:

xxx

2. That corroborative to, and/or preparatory or incident to his testimony[,] there is [a] need for him to examine
original records in the custody and possession of plaintiff, viz:

a. original Promissory Note (PN for brevity) # DVO-78-382 dated October 3, 1978[;]

b. original of Disclosure Statement in reference to PN # DVO-78-382;

c. original of PN # DVO-78-390 dated October 9, 1978;

d. original of Disclosure Statement in reference to PN # DVO-78-390;

e. Statement or Record of Account with the Associated Banking Corporation or its successor, of
Antonio Ang in CA No. 470 (cf. Exh. O) including bank records, withdrawal slips, notices, other papers
and relevant dates relative to the overdraft of Antonio Eng Liong in CA No. 470;

f. Loan Applications of Antonio Ang Eng Liong or borrower relative to PN Nos. DVO-78-382 and DVO-
78-390 (supra);

g. Other supporting papers and documents submitted by Antonio Ang Eng Liong relative to his loan
application vis-à-vis PN. Nos. DVO-78-382 and DVO-78-390 such as financial statements, income
tax returns, etc. as required by the Central Bank or bank rules and regulations.

3. That the above matters are very material to the defenses of defendant Tomas Ang, viz:

96
 - the bank is not a holder in due course when it accepted the [PNs] in blank.

- The real borrower is Antonio Ang Eng Liong which fact is known to the bank.

- That the PAYEE not being a holder in due course and knowing that defendant Tomas Ang is merely
an accommodation party, the latter may raise against such payee or holder or successor-in-interest
(of the notes) PERSONAL and EQUITABLE DEFENSES such as FRAUD in INDUCEMENT,
DISCHARGE ON NOTE, Application of [Articles] 2079, 2080 and 1249 of the Civil Code,
NEGLIGENCE in delaying collection despite Eng Liong's OVERDRAFT in C.A. No. 470, etc.26

In its Order dated May 16, 1994,27 the court denied the motion stating that the promissory notes and the disclosure
statements have already been shown to and inspected by Tomas Ang during the trial, as in fact he has already copies
of the same; the Statements or Records of Account of Antonio Ang Eng Liong in CA No. 470, relative to his overdraft,
are immaterial since, pursuant to the previous ruling of the court, he is being sued for the notes and not for the
overdraft which is personal to Antonio Ang Eng Liong; and besides its non-existence in the bank's records, there
would be legal obstacle for the production and inspection of the income tax return of Antonio Ang Eng Liong if done
without his consent.

When the motion for reconsideration of the aforesaid Order was denied, Tomas Ang filed a petition for certiorari and
prohibition with application for preliminary injunction and restraining order before the Court of Appeals docketed as
CA G.R. SP No. 34840.28 On August 17, 1994, however, the Court of Appeals denied the issuance of a Temporary
Restraining Order.29

Meanwhile, notwithstanding its initial rulings that Tomas Ang was deemed to have waived his right to present
evidence for failure to appear during the pendency of his petition before the Court of Appeals, the trial court decided
to continue with the hearing of the case.30

After the trial, Tomas Ang offered in evidence several documents, which included a copy of the Trust Agreement
between the Republic of the Philippines and the Asset Privatization Trust, as certified by the notary public, and news
clippings from the Manila Bulletin dated May 18, 1994 and May 30, 1994.31 All the documentary exhibits were
admitted for failure of the bank to submit its comment to the formal offer.32 Thereafter, Tomas Ang elected to withdraw
his petition in CA G.R. SP No. 34840 before the Court of Appeals, which was then granted.33

On January 5, 1996, the trial court rendered judgment against the bank, dismissing the complaint for lack of cause
of action.34 It held that:

Exh. "9" and its [sub-markings], the Trust Agreement dated 27 February 1987 for the defense shows that:
the Associated Bank as of June 30, 1986 is one of DBP's or Development Bank of the [Philippines'] non-
performing accounts for transfer; on February 27, 1987 through Deeds of Transfer executed by and between
the Philippine National Bank and Development Bank of the Philippines and the National Government, both
financial institutions assigned, transferred and conveyed their non-performing assets to the National
Government; the National Government in turn and as TRUSTOR, transferred, conveyed and assigned by
way of trust unto the Asset Privatization Trust said non-performing assets, [which] took title to and possession
of, [to] conserve, provisionally manage and dispose[,] of said assets identified for privatization or disposition;
one of the powers and duties of the APT with respect to trust properties consisting of receivables is to handle
the administration, collection and enforcement of the receivables; to bring suit to enforce payment of the
obligations or any installment thereof or to settle or compromise any of such obligations, or any other claim
or demand which the government may have against any person or persons[.]

The Manila Bulletin news clippings dated May 18, 1994 and May 30, 1994, Exh. "9-A", "9-B", "9-C", and "9-
D", show that the Monetary Board of the Bangko Sentral ng Pilipinas approved the rehabilitation plan of the
Associated Bank. One main feature of the rehabilitation plan included the financial assistance for the bank
by the Philippine Deposit Insurance Corporation (PDIC) by way of the purchase of AB Assets worth P1.3945
billion subject to a buy-back arrangement over a 10 year period. The PDIC had approved of the rehab
scheme, which included the purchase of AB's bad loans worth P1.86 at 25% discount. This will then be paid
by AB within a 10-year period plus a yield comparable to the prevailing market rates x x x.

Based then on the evidence presented by the defendant Tomas Ang, it would readily appear that at the time
this suit for Sum of Money was filed which was on August [28], 1990, the notes were held by the Asset
Privatization Trust by virtue of the Deeds of Transfer and Trust Agreement, which was empowered to bring
suit to enforce payment of the obligations. Consequently, defendant Tomas Ang has sufficiently established
that plaintiff at the time this suit was filed was not the holder of the notes to warrant the dismissal of the
complaint.35

Respondent Bank then elevated the case to the Court of Appeals. In the appellant's brief captioned, "ASSOCIATED
BANK, Plaintiff-Appellant versus ANTONIO ANG ENG LIONG and TOMAS ANG, Defendants, TOMAS ANG,
Defendant-Appellee," the following errors were alleged:
97
 I.

THE LOWER COURT ERRED IN NOT HOLDING DEFENDANT ANTONIO ANG ENG LIONG AND
DEFENDANT-APPELLEE TOMAS ANG LIABLE TO PLAINTIFF-APPELLANT ON THEIR UNPAID LOANS
DESPITE THE LATTER'S DOCUMENTARY EXHIBITS PROVING THE SAID OBLIGATIONS.

II.

THE LOWER COURT ERRED IN DISMISSING PLAINTIFF-APPELLANT'S COMPLAINT ON THE BASIS

OF NEWSPAPER CLIPPINGS WHICH WERE COMPLETELY HEARSAY IN CHARACTER AND
IMPROPER FOR JUDICIAL NOTICE.36

The bank stressed that it has established the causes of action outlined in its Complaint by a preponderance of
evidence. As regards the Deed of Transfer and Trust Agreement, it contended that the same were never
authenticated by any witness in the course of the trial; the Agreement, which was not even legible, did not mention
the promissory notes subject of the Complaint; the bank is not a party to the Agreement, which showed that it was
between the Government of the Philippines, acting through the Committee on Privatization represented by the
Secretary of Finance as trustor and the Asset Privatization Trust, which was created by virtue of Proclamation No.
50; and the Agreement did not reflect the signatures of the contracting parties. Lastly, the bank averred that the news
items appearing in the Manila Bulletin could not be the subject of judicial notice since they were completely hearsay
in character.37

On October 9, 2000, the Court of Appeals reversed and set aside the trial court's ruling. The dispositive portion of
the Decision38 reads:

WHEREFORE, premises considered, the Decision of the Regional Trial Court of Davao City, Branch 16, in
Civil Case No. 20,299-90 is hereby REVERSED AND SET ASIDE and another one entered ordering
defendant-appellee Tomas Ang to pay plaintiff-appellant Associated Bank the following:

1. P50,000.00 representing the principal amount of the loan under PN-No. DVO-78-382 plus 14% interest
thereon per annum computed from January 31, 1979 until the full amount thereof is paid;

2. P30,000.00 representing the principal amount of the loan under PN-No. DVO-78-390 plus 14% interest
thereon per annum computed from December 8, 1978 until the full amount thereof is paid;

All other claims of the plaintiff-appellant are DISMISSED for lack of legal basis. Defendant-appellee's
counterclaim is likewise DISMISSED for lack of legal and factual bases.

No pronouncement as to costs.

SO ORDERED.39

The appellate court disregarded the bank's first assigned error for being "irrelevant in the final determination of the
case" and found its second assigned error as "not meritorious." Instead, it posed for resolution the issue of whether
the trial court erred in dismissing the complaint for collection of sum of money for lack of cause of action as the bank
was said to be not the "holder" of the notes at the time the collection case was filed.

In answering the lone issue, the Court of Appeals held that the bank is a "holder" under Sec. 191 of the NIL. It
concluded that despite the execution of the Deeds of Transfer and Trust Agreement, the Asset Privatization Trust
cannot be declared as the "holder" of the subject promissory notes for the reason that it is neither the payee or
indorsee of the notes in possession thereof nor is it the bearer of said notes. The Court of Appeals observed that the
bank, as the payee, did not indorse the notes to the Asset Privatization Trust despite the execution of the Deeds of
Transfer and Trust Agreement and that the notes continued to remain with the bank until the institution of the
collection suit.

With the bank as the "holder" of the promissory notes, the Court of Appeals held that Tomas Ang is accountable
therefor in his capacity as an accommodation party. Citing Sec. 29 of the NIL, he is liable to the bank in spite of the
latter's knowledge, at the time of taking the notes, that he is only an accommodation party. Moreover, as a co-maker
who agreed to be jointly and severally liable on the promissory notes, Tomas Ang cannot validly set up the defense
that he did not receive any consideration therefor as the fact that the loan was granted to the principal debtor already
constitutes a sufficient consideration.

Further, the Court of Appeals agreed with the bank that the experience of Tomas Ang in business rendered it
implausible that he would just sign the promissory notes as a co-maker without even checking the real amount of the
debt to be incurred, or that he merely acted on the belief that the first loan application was cancelled. According to

98
the appellate court, it is apparent that he was negligent in falling for the alibi of Antonio Ang Eng Liong and such fact
would not serve to exonerate him from his responsibility under the notes.

Nonetheless, the Court of Appeals denied the claims of the bank for service, penalty and overdue charges as well
as attorney's fees on the ground that the promissory notes made no mention of such charges/fees.

In his motion for reconsideration,40 Tomas Ang raised for the first time the assigned errors as follows:

xxx

2) Related to the above jurisdictional issues, defendant-appellee Tomas Ang has recently discovered that
upon the filing of the complaint on August 28, 1990, under the jurisdictional rule laid down in BP Blg. 129,
appellant bank fraudulently failed to specify the amount of compounded interest at 14% per annum, service
charges at 2% per annum and overdue penalty charges at 12% per annum in the prayer of the complaint as
of the time of its filing, paying a total of only P640.00(!!!) as filing and court docket fees although the total sum
involved as of that time was P647,566.75 including 20% attorney's fees. In fact, the stated interest in the
body of the complaint alone amount to P328,373.39 (which is actually compounded and capitalized) in both
causes of action and the total service and overdue penalties and charges and attorney's fees further amount
to P239,193.36 in both causes of action, as of July 31, 1990, the time of filing of the complaint. Significantly,
appellant fraudulently misled the Court, describing the 14% imposition as interest, when in fact the same was
capitalized as principal by appellant bank every month to earn more interest, as stated in the notes. In view
thereof, the trial court never acquired jurisdiction over the case and the same may not be now corrected by
the filing of deficiency fees because the causes of action had already prescribed and more importantly, the
jurisdiction of the Municipal Trial Court had been increased to P100,000.00 in principal claims last March 20,
1999, pursuant to SC Circular No. 21-99, section 5 of RA No. 7691, and section 31, Book I of the 1987
Administrative Code. In other words, as of today, jurisdiction over the subject falls within the exclusive
jurisdiction of the MTC, particularly if the bank foregoes capitalization of the stipulated interest.

3) BY FAILING TO GIVE NOTICE OF ITS APPEAL AND APPEAL BRIEF TO APPELLEE ANG ENG LIONG,
THE APPEALED JUDGMENT OF THE TRIAL COURT WHICH LEFT OUT TOMAS ANG'S CROSS-CLAIM
AGAINST ENG LIONG (BECAUSE IT DISMISSED THE MAIN CLAIM), HAD LONG BECOME FINAL AND
EXECUTORY, AS AGAINST ENG LIONG. Accordingly, Tomas Ang's right of subrogation against Ang Eng
Liong, expressed in his cross-claim, is now SEVERAL TIMES foreclosed because of the fault or negligence
of appellant bank since 1979 up to its insistence of an ex-parte trial, and now when it failed to serve notice of
appeal and appellant's brief upon him. Accordingly, appellee Tomas Ang should be released from his
suretyship obligation pursuant to Art. 2080 of the Civil Code. The above is related to the issues above-stated.

4) This Court may have erred in ADDING or ASSIGNING its own bill of error for the benefit of appellant bank
which defrauded the judiciary by the payment of deficient docket fees.41

Finding no cogent or compelling reason to disturb the Decision, the Court of Appeals denied the motion in its
Resolution dated December 26, 2000.42

Petitioner now submits the following issues for resolution:

1. Is [A]rticle 2080 of the Civil Code applicable to discharge petitioner Tomas Ang as accommodation maker
or surety because of the failure of [private] respondent bank to serve its notice of appeal upon the principal
debtor, respondent Eng Liong?

2. Did the trial court have jurisdiction over the case at all?

3. Did the Court of Appeals [commit] error in assigning its own error and raising its own issue?

4. Are petitioner's other real and personal defenses such as successive extensions coupled with fraudulent
collusion to hide Eng Liong's default, the payee's grant of additional burdens, coupled with the insolvency of
the principal debtor, and the defense of incomplete but delivered instrument, meritorious?43

Petitioner allegedly learned after the promulgation of the Court of Appeals' decision that, pursuant to the parties'
agreement on the compounding of interest with the principal amount (per month in case of default), the interest on
the promissory notes as of July 31, 1990 should have been only P81,647.22 for PN No. DVO-78-382 (instead
of P203,538.98) and P49,618.33 for PN No. DVO-78-390 (instead of P125,334.41) while the principal debt as of said
date should increase to P647,566.75 (instead of P539,638.96). He submits that the bank carefully and shrewdly hid
the fact by describing the amounts as interest instead of being part of either the principal or penalty in order to pay a
lesser amount of docket fees. According to him, the total fees that should have been paid at the time of the filing of
the complaint on August 28, 1990 was P2,216.30 and not P614.00 or a shortage of 71%. Petitioner contends that
the bank may not now pay the deficiency because the last demand letter sent to him was dated September 9, 1986,

99
or more than twenty years have elapsed such that prescription had already set in. Consequently, the bank's claim
must be dismissed as the trial court loses jurisdiction over the case.

Petitioner also argues that the Court of Appeals should not have assigned its own error and raised it as an issue of
the case, contending that no question should be entertained on appeal unless it has been advanced in the court
below or is within the issues made by the parties in the pleadings. At any rate, he opines that the appellate court's
decision that the bank is the real party in interest because it is the payee named in the note or the holder thereof is
too simplistic since: (1) the power and control of Asset Privatization Trust over the bank are clear from the explicit
terms of the duly certified trust documents and deeds of transfer and are confirmed by the newspaper clippings; (2)
even under P.D. No. 902-A or the General Banking Act, where a corporation or a bank is under receivership,
conservation or rehabilitation, it is only the representative (liquidator, receiver, trustee or conservator) who may
properly act for said entity, and, in this case, the bank was held by Asset Privatization Trust as trustee; and (3) it is
not entirely accurate to say that the payee who has not indorsed the notes in all cases is the real party in interest
because the rights of the payee may be subject of an assignment of incorporeal rights under Articles 1624 and 1625
of the Civil Code.

Lastly, petitioner maintains that when respondent Bank served its notice of appeal and appellant's brief only on him,
it rendered the judgment of the trial court final and executory with respect to Antonio Ang Eng Liong, which, in effect,
released him (Antonio Ang Eng Liong) from any and all liability under the promissory notes and, thereby, foreclosed
petitioner's cross-claims. By such act, the bank, even if it be the "holder" of the promissory notes, allegedly discharged
a simple contract for the payment of money (Sections 119 [d] and 122, NIL [Act No. 2031]), prevented a surety like
petitioner from being subrogated in the shoes of his principal (Article 2080, Civil Code), and impaired the notes,
producing the effect of payment (Article 1249, Civil Code).

The petition is unmeritorious.

Procedurally, it is well within the authority of the Court of Appeals to raise, if it deems proper under the circumstances
obtaining, error/s not assigned on an appealed case. In Mendoza v. Bautista,44 this Court recognized the broad
discretionary power of an appellate court to waive the lack of proper assignment of errors and to consider errors not
assigned, thus:

As a rule, no issue may be raised on appeal unless it has been brought before the lower tribunal for its
consideration. Higher courts are precluded from entertaining matters neither alleged in the pleadings nor
raised during the proceedings below, but ventilated for the first time only in a motion for reconsideration or
on appeal.

However, as with most procedural rules, this maxim is subject to exceptions. Indeed, our rules recognize the
broad discretionary power of an appellate court to waive the lack of proper assignment of errors and to
consider errors not assigned. Section 8 of Rule 51 of the Rules of Court provides:

SEC. 8. Questions that may be decided. — No error which does not affect the jurisdiction over the subject
matter or the validity of the judgment appealed from or the proceedings therein will be considered, unless
stated in the assignment of errors, or closely related to or dependent on an assigned error and properly
argued in the brief, save as the court may pass upon plain errors and clerical errors.

Thus, an appellate court is clothed with ample authority to review rulings even if they are not assigned as
errors in the appeal in these instances: (a) grounds not assigned as errors but affecting jurisdiction over the
subject matter; (b) matters not assigned as errors on appeal but are evidently plain or clerical errors within
contemplation of law; (c) matters not assigned as errors on appeal but consideration of which is necessary
in arriving at a just decision and complete resolution of the case or to serve the interests of justice or to avoid
dispensing piecemeal justice; (d) matters not specifically assigned as errors on appeal but raised in the trial
court and are matters of record having some bearing on the issue submitted which the parties failed to raise
or which the lower court ignored; (e) matters not assigned as errors on appeal but closely related to an error
assigned; and (f) matters not assigned as errors on appeal but upon which the determination of a question
properly assigned is dependent. (Citations omitted)45

To the Court's mind, even if the Court of Appeals regarded petitioner's two assigned errors as "irrelevant" and "not
meritorious," the issue of whether the trial court erred in dismissing the complaint for collection of sum of money for
lack of cause of action (on the ground that the bank was not the "holder" of the notes at the time of the filing of the
action) is in reality closely related to and determinant of the resolution of whether the lower court correctly ruled in
not holding Antonio Ang Eng Liong and petitioner Tomas Ang liable to the bank on their unpaid loans despite
documentary exhibits allegedly proving their obligations and in dismissing the complaint based on newspaper
clippings. Hence, no error could be ascribed to the Court of Appeals on this point.

Now, the more relevant question is: who is the real party in interest at the time of the institution of the complaint, is it
the bank or the Asset Privatization Trust?

100
To answer the query, a brief history on the creation of the Asset Privatization Trust is proper.

Taking into account the imperative need of formally launching a program for the rationalization of the government
corporate sector, then President Corazon C. Aquino issued Proclamation No. 5046 on December 8, 1986. As one of
the twin cornerstones of the program was to establish the privatization of a good number of government corporations,
the proclamation created the Asset Privatization Trust, which would, for the benefit of the National Government, take
title to and possession of, conserve, provisionally manage and dispose of transferred assets that were identified for
privatization or disposition.47

In accordance with the provisions of Section 2348 of the proclamation, then President Aquino subsequently issued
Administrative Order No. 14 on February 3, 1987, which approved the identification of and transfer to the National
Government of certain assets (consisting of loans, equity investments, accrued interest receivables, acquired assets
and other assets) and liabilities (consisting of deposits, borrowings, other liabilities and contingent guarantees) of the
Development Bank of the Philippines (DBP) and the Philippine National Bank (PNB). The transfer of assets was
implemented through a Deed of Transfer executed on February 27, 1987 between the National Government, on one
hand, and the DBP and PNB, on the other. In turn, the National Government designated the Asset Privatization Trust
to act as its trustee through a Trust Agreement, whereby the non-performing accounts of DBP and PNB, including,
among others, the DBP's equity with respondent Bank, were entrusted to the Asset Privatization Trust.49 As provided
for in the Agreement, among the powers and duties of the Asset Privatization Trust with respect to the trust properties
consisting of receivables was to handle their administration and collection by bringing suit to enforce payment of the
obligations or any installment thereof or settling or compromising any of such obligations or any other claim or
demand which the Government may have against any person or persons, and to do all acts, institute all proceedings,
and to exercise all other rights, powers, and privileges of ownership that an absolute owner of the properties would
otherwise have the right to do.50

Incidentally, the existence of the Asset Privatization Trust would have expired five (5) years from the date of issuance
of Proclamation No. 50.51 However, its original term was extended from December 8, 1991 up to August 31,
1992,52 and again from December 31, 1993 until June 30, 1995,53 and then from July 1, 1995 up to December 31,
1999,54 and further from January 1, 2000 until December 31, 2000.55 Thenceforth, the Privatization and Management
Office was established and took over, among others, the powers, duties and functions of the Asset Privatization Trust
under the proclamation.56

Based on the above backdrop, respondent Bank does not appear to be the real party in interest when it instituted the
collection suit on August 28, 1990 against Antonio Ang Eng Liong and petitioner Tomas Ang. At the time the complaint
was filed in the trial court, it was the Asset Privatization Trust which had the authority to enforce its claims against
both debtors. In fact, during the pre-trial conference, Atty. Roderick Orallo, counsel for the bank, openly admitted that
it was under the trusteeship of the Asset Privatization Trust.57 The Asset Privatization Trust, which should have been
represented by the Office of the Government Corporate Counsel, had the authority to file and prosecute the case.

The foregoing notwithstanding, this Court can not, at present, readily subscribe to petitioner's insistence that the case
must be dismissed. Significantly, it stands without refute, both in the pleadings as well as in the evidence presented
during the trial and up to the time this case reached the Court, that the issue had been rendered moot with the
occurrence of a supervening event – the "buy-back" of the bank by its former owner, Leonardo Ty, sometime in
October 1993. By such re-acquisition from the Asset Privatization Trust when the case was still pending in the lower
court, the bank reclaimed its real and actual interest over the unpaid promissory notes; hence, it could rightfully
qualify as a "holder"58 thereof under the NIL.

Notably, Section 29 of the NIL defines an accommodation party as a person "who has signed the instrument as
maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to
some other person." As gleaned from the text, an accommodation party is one who meets all the three requisites,
viz: (1) he must be a party to the instrument, signing as maker, drawer, acceptor, or indorser; (2) he must not receive
value therefor; and (3) he must sign for the purpose of lending his name or credit to some other person. 59 An
accommodation party lends his name to enable the accommodated party to obtain credit or to raise money; he
receives no part of the consideration for the instrument but assumes liability to the other party/ies thereto. 60 The
accommodation party is liable on the instrument to a holder for value even though the holder, at the time of taking
the instrument, knew him or her to be merely an accommodation party, as if the contract was not for accommodation.61

As petitioner acknowledged it to be, the relation between an accommodation party and the accommodated party is
one of principal and surety – the accommodation party being the surety.62 As such, he is deemed an original promisor
and debtor from the beginning;63 he is considered in law as the same party as the debtor in relation to whatever is
adjudged touching the obligation of the latter since their liabilities are interwoven as to be inseparable.64 Although a
contract of suretyship is in essence accessory or collateral to a valid principal obligation, the surety's liability to the
creditor is immediate, primary and absolute; he is directly and equally bound with the principal.65 As an equivalent of
a regular party to the undertaking, a surety becomes liable to the debt and duty of the principal obligor even without
possessing a direct or personal interest in the obligations nor does he receive any benefit therefrom.66

Contrary to petitioner's adamant stand, however, Article 208067 of the Civil Code does not apply in a contract of
suretyship.68 Art. 2047 of the Civil Code states that if a person binds himself solidarily with the principal debtor, the
101
provisions of Section 4, Chapter 3, Title I, Book IV of the Civil Code must be observed. Accordingly, Articles 1207 up
to 1222 of the Code (on joint and solidary obligations) shall govern the relationship of petitioner with the bank.

The case of Inciong, Jr. v. CA69 is illuminating:

Petitioner also argues that the dismissal of the complaint against Naybe, the principal debtor, and against
Pantanosas, his co-maker, constituted a release of his obligation, especially because the dismissal of the
case against Pantanosas was upon the motion of private respondent itself. He cites as basis for his argument,
Article 2080 of the Civil Code which provides that:

"The guarantors, even though they be solidary, are released from their obligation whenever by come act of
the creditor, they cannot be subrogated to the rights, mortgages, and preferences of the latter."

It is to be noted, however, that petitioner signed the promissory note as a solidary co-maker and not as a
guarantor. This is patent even from the first sentence of the promissory note which states as follows:

"Ninety one (91) days after date, for value received, I/we, JOINTLY and SEVERALLY promise to pay to the
PHILIPPINE BANK OF COMMUNICATIONS at its office in the City of Cagayan de Oro, Philippines the sum
of FIFTY THOUSAND ONLY (P50,000.00) Pesos, Philippine Currency, together with interest x x x at the rate
of SIXTEEN (16) per cent per annum until fully paid."

A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation, and
each creditor is entitled to demand the whole obligation. On the other hand, Article 2047 of the Civil Code
states:

"By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of
this Book shall be observed. In such a case the contract is called a suretyship." (Italics supplied.)

While a guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is different
from that of a solidary debtor. Thus, Tolentino explains:

"A guarantor who binds himself in solidum with the principal debtor under the provisions of the second
paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference between
a solidary co-debtor, and a fiador in solidum (surety). The later, outside of the liability he assumes to pay the
debt before the property of the principal debtor has been exhausted, retains all the other rights, actions and
benefits which pertain to him by reason of rights of the fiansa; while a solidary co-debtor has no other rights
than those bestowed upon him in Section 4, Chapter 3, title I, Book IV of the Civil Code."

Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several obligations. Under
Art. 1207 thereof, when there are two or more debtors in one and the same obligation, the presumption is
that obligation is joint so that each of the debtors is liable only for a proportionate part of the debt. There is a
solidarily liability only when the obligation expressly so states, when the law so provides or when the nature
of the obligation so requires.

Because the promissory note involved in this case expressly states that the three signatories therein
are jointly and severally liable, any one, some or all of them may be proceeded against for the entire
obligation. The choice is left to the solidary creditor to determine against whom he will enforce collection.
(Citations omitted)70

In the instant case, petitioner agreed to be "jointly and severally" liable under the two promissory notes that he co-
signed with Antonio Ang Eng Liong as the principal debtor. This being so, it is completely immaterial if the bank would
opt to proceed only against petitioner or Antonio Ang Eng Liong or both of them since the law confers upon the
creditor the prerogative to choose whether to enforce the entire obligation against any one, some or all of the debtors.
Nonetheless, petitioner, as an accommodation party, may seek reimbursement from Antonio Ang Eng Liong, being
the party accommodated.71

It is plainly mistaken for petitioner to say that just because the bank failed to serve the notice of appeal and appellant's
brief to Antonio Ang Eng Liong, the trial court's judgment, in effect, became final and executory as against the latter
and, thereby, bars his (petitioner's) cross-claims against him: First, although no notice of appeal and appellant's brief
were served to Antonio Ang Eng Liong, he was nonetheless impleaded in the case since his name appeared in the
caption of both the notice and the brief as one of the defendants-appellees;72 Second, despite including in the caption
of the appellee's brief his co-debtor as one of the defendants-appellees, petitioner did not also serve him a copy
thereof;73 Third, in the caption of the Court of Appeals' decision, Antonio Ang Eng Liong was expressly named as
one of the defendants-appellees;74 and Fourth, it was only in his motion for reconsideration from the adverse
102
judgment of the Court of Appeals that petitioner belatedly chose to serve notice to the counsel of his co-defendant-
appellee.75

Likewise, this Court rejects the contention of Antonio Ang Eng Liong, in his "special appearance" through counsel,
that the Court of Appeals, much less this Court, already lacked jurisdiction over his person or over the subject matter
relating to him because he was not a party in CA-G.R. CV No. 53413. Stress must be laid of the fact that he had
twice put himself in default – one, in not filing a pre-trial brief and another, in not filing his answer to petitioner's cross-
claims. As a matter of course, Antonio Ang Eng Liong, being a party declared in default, already waived his right to
take part in the trial proceedings and had to contend with the judgment rendered by the court based on the evidence
presented by the bank and petitioner. Moreover, even without considering these default judgments, Antonio Ang Eng
Liong even categorically admitted having secured a loan totaling P80,000. In his Answer to the complaint, he did not
deny such liability but merely pleaded that the bank "be ordered to submit a more reasonable computation" instead
of collecting excessive interest, penalty charges, and attorney's fees. For failing to tender an issue and in not denying
the material allegations stated in the complaint, a judgment on the pleadings76 would have also been proper since
not a single issue was generated by the Answer he filed.

As the promissory notes were not discharged or impaired through any act or omission of the bank, Sections 119
(d)77 and 12278 of the NIL as well as Art. 124979 of the Civil Code would necessarily find no application. Again, neither
was petitioner's right of reimbursement barred nor was the bank's right to proceed against Antonio Ang Eng Liong
expressly renounced by the omission to serve notice of appeal and appellant's brief to a party already declared in
default.

Consequently, in issuing the two promissory notes, petitioner as accommodating party warranted to the holder in due
course that he would pay the same according to its tenor.80 It is no defense to state on his part that he did not receive
any value therefor81 because the phrase "without receiving value therefor" used in Sec. 29 of the NIL means "without
receiving value by virtue of the instrument" and not as it is apparently supposed to mean, "without receiving payment
for lending his name."82 Stated differently, when a third person advances the face value of the note to the
accommodated party at the time of its creation, the consideration for the note as regards its maker is the money
advanced to the accommodated party. It is enough that value was given for the note at the time of its creation.83 As
in the instant case, a sum of money was received by virtue of the notes, hence, it is immaterial so far as the bank is
concerned whether one of the signers, particularly petitioner, has or has not received anything in payment of the use
of his name.84

Under the law, upon the maturity of the note, a surety may pay the debt, demand the collateral security, if there be
any, and dispose of it to his benefit, or, if applicable, subrogate himself in the place of the creditor with the right to
enforce the guaranty against the other signers of the note for the reimbursement of what he is entitled to recover
from them.85 Regrettably, none of these were prudently done by petitioner. When he was first notified by the bank
sometime in 1982 regarding his accountabilities under the promissory notes, he lackadaisically relied on Antonio Ang
Eng Liong, who represented that he would take care of the matter, instead of directly communicating with the bank
for its settlement.86 Thus, petitioner cannot now claim that he was prejudiced by the supposed "extension of time"
given by the bank to his co-debtor.

Furthermore, since the liability of an accommodation party remains not only primary but also unconditional to a holder
for value, even if the accommodated party receives an extension of the period for payment without the consent of
the accommodation party, the latter is still liable for the whole obligation and such extension does not release him
because as far as a holder for value is concerned, he is a solidary co-debtor.87 In Clark v. Sellner,88 this Court held:

x x x The mere delay of the creditor in enforcing the guaranty has not by any means impaired his action
against the defendant. It should not be lost sight of that the defendant's signature on the note is an assurance
to the creditor that the collateral guaranty will remain good, and that otherwise, he, the defendant, will be
personally responsible for the payment.

True, that if the creditor had done any act whereby the guaranty was impaired in its value, or discharged,
such an act would have wholly or partially released the surety; but it must be born in mind that it is a
recognized doctrine in the matter of suretyship that with respect to the surety, the creditor is under no
obligation to display any diligence in the enforcement of his rights as a creditor. His mere inaction indulgence,
passiveness, or delay in proceeding against the principal debtor, or the fact that he did not enforce the
guaranty or apply on the payment of such funds as were available, constitute no defense at all for the surety,
unless the contract expressly requires diligence and promptness on the part of the creditor, which is not the
case in the present action. There is in some decisions a tendency toward holding that the creditor's laches
may discharge the surety, meaning by laches a negligent forbearance. This theory, however, is not generally
accepted and the courts almost universally consider it essentially inconsistent with the relation of the parties
to the note. (21 R.C.L., 1032-1034)89

Neither can petitioner benefit from the alleged "insolvency" of Antonio Ang Eng Liong for want of clear and convincing
evidence proving the same. Assuming it to be true, he also did not exercise diligence in demanding security to protect
himself from the danger thereof in the event that he (petitioner) would eventually be sued by the bank. Further,
whether petitioner may or may not obtain security from Antonio Ang Eng Liong cannot in any manner affect his liability
103
to the bank; the said remedy is a matter of concern exclusively between themselves as accommodation party and
accommodated party. The fact that petitioner stands only as a surety in relation to Antonio Ang Eng Liong is
immaterial to the claim of the bank and does not a whit diminish nor defeat the rights of the latter as a holder for
value. To sanction his theory is to give unwarranted legal recognition to the patent absurdity of a situation where a
co-maker, when sued on an instrument by a holder in due course and for value, can escape liability by the convenient
expedient of interposing the defense that he is a merely an accommodation party.90

In sum, as regards the other issues and errors alleged in this petition, the Court notes that these were the very same
questions of fact raised on appeal before the Court of Appeals, although at times couched in different terms and
explained more lengthily in the petition. Suffice it to say that the same, being factual, have been satisfactorily passed
upon and considered both by the trial and appellate courts. It is doctrinal that only errors of law and not of fact are
reviewable by this Court in petitions for review on certiorari under Rule 45 of the Rules of Court. Save for the most
cogent and compelling reason, it is not our function under the rule to examine, evaluate or weigh the probative value
of the evidence presented by the parties all over again.91

WHEREFORE, the October 9, 2000 Decision and December 26, 2000 Resolution of the Court of Appeals in CA-G.R.
CV No. 53413 are AFFIRMED. The petition is DENIED for lack of merit.

No costs.

SO ORDERED.

iv.
Tuazon, et. al. vs. Heirs of Bartolome Ramos
GR No. 156262 July 14, 2005
Panganiban, J.

Stripped of nonessentials, the present case involves the collection of a sum of money. Specifically, this case arose
from the failure of petitioners to pay respondents’ predecessor-in-interest. This fact was shown by the non-
encashment of checks issued by a third person, but indorsed by herein Petitioner Maria Tuazon in favor of the said
predecessor. Under these circumstances, to enable respondents to collect on the indebtedness, the check drawer
need not be impleaded in the Complaint. Thus, the suit is directed, not against the drawer, but against the debtor
who indorsed the checks in payment of the obligation.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, challenging the July 31, 2002 Decision2 of
the Court of Appeals (CA) in CA-GR CV No. 46535. The decretal portion of the assailed Decision reads:

"WHEREFORE, the appeal is DISMISSED and the appealed decision is AFFIRMED."

On the other hand, the affirmed Decision3 of Branch 34 of the Regional Trial Court (RTC) of Gapan, Nueva Ecija,
disposed as follows:

"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendants, ordering the
defendants spouses Leonilo Tuazon and Maria Tuazon to pay the plaintiffs, as follows:

"1. The sum of ₱1,750,050.00, with interests from the filing of the second amended complaint;

"2. The sum of ₱50,000.00, as attorney’s fees;

"3. The sum of ₱20,000.00, as moral damages

"4. And to pay the costs of suit.

x x x x x x x x x"4

The Facts

The facts are narrated by the CA as follows:

"[Respondents] alleged that between the period of May 2, 1988 and June 5, 1988, spouses Leonilo and Maria Tuazon
purchased a total of 8,326 cavans of rice from [the deceased Bartolome] Ramos [predecessor-in-interest of

104
respondents]. That of this [quantity,] x x x only 4,437 cavans [have been paid for so far], leaving unpaid 3,889 cavans
valued at ₱1,211,919.00. In payment therefor, the spouses Tuazon issued x x x [several] Traders Royal Bank checks.

xxxxxxxxx

[B]ut when these [checks] were encashed, all of the checks bounced due to insufficiency of funds. [Respondents]
advanced that before issuing said checks[,] spouses Tuazon already knew that they had no available fund to support
the checks, and they failed to provide for the payment of these despite repeated demands made on them.

"[Respondents] averred that because spouses Tuazon anticipated that they would be sued, they conspired with the
other [defendants] to defraud them as creditors by executing x x x fictitious sales of their properties. They executed
x x x simulated sale[s] [of three lots] in favor of the x x x spouses Buenaventura x x x[,] as well as their residential lot
and the house thereon[,] all located at Nueva Ecija, and another simulated deed of sale dated July 12, 1988 of a
Stake Toyota registered with the Land Transportation Office of Cabanatuan City on September 7, 1988. [Co-
petitioner] Melecio Tuazon, a son of spouses Tuazon, registered a fictitious Deed of Sale on July 19, 1988 x x x over
a residential lot located at Nueva Ecija. Another simulated sale of a Toyota Willys was executed on January 25, 1988
in favor of their other son, [co-petitioner] Alejandro Tuazon x x x. As a result of the said sales, the titles of these
properties issued in the names of spouses Tuazon were cancelled and new ones were issued in favor of the [co-
]defendants spouses Buenaventura, Alejandro Tuazon and Melecio Tuazon. Resultantly, by the said ante-dated and
simulated sales and the corresponding transfers there was no more property left registered in the names of spouses
Tuazon answerable to creditors, to the damage and prejudice of [respondents].

"For their part, defendants denied having purchased x x x rice from [Bartolome] Ramos. They alleged that it was
Magdalena Ramos, wife of said deceased, who owned and traded the merchandise and Maria Tuazon was merely
her agent. They argued that it was Evangeline Santos who was the buyer of the rice and issued the checks to Maria
Tuazon as payments therefor. In good faith[,] the checks were received [by petitioner] from Evangeline Santos and
turned over to Ramos without knowing that these were not funded. And it is for this reason that [petitioners] have
been insisting on the inclusion of Evangeline Santos as an indispensable party, and her non-inclusion was a fatal
error. Refuting that the sale of several properties were fictitious or simulated, spouses Tuazon contended that these
were sold because they were then meeting financial difficulties but the disposals were made for value and in good
faith and done before the filing of the instant suit. To dispute the contention of plaintiffs that they were the buyers of
the rice, they argued that there was no sales invoice, official receipts or like evidence to prove this. They assert that
they were merely agents and should not be held answerable."5

The corresponding civil and criminal cases were filed by respondents against Spouses Tuazon. Those cases were
later consolidated and amended to include Spouses Anastacio and Mary Buenaventura, with Alejandro Tuazon and
Melecio Tuazon as additional defendants. Having passed away before the pretrial, Bartolome Ramos was substituted
by his heirs, herein respondents.

Contending that Evangeline Santos was an indispensable party in the case, petitioners moved to file a third-party
complaint against her. Allegedly, she was primarily liable to respondents, because she was the one who had
purchased the merchandise from their predecessor, as evidenced by the fact that the checks had been drawn in her
name. The RTC, however, denied petitioners’ Motion.

Since the trial court acquitted petitioners in all three of the consolidated criminal cases, they appealed only its decision
finding them civilly liable to respondents.

Ruling of the Court of Appeals

Sustaining the RTC, the CA held that petitioners had failed to prove the existence of an agency between respondents
and Spouses Tuazon. The appellate court disbelieved petitioners’ contention that Evangeline Santos should have
been impleaded as an indispensable party. Inasmuch as all the checks had been indorsed by Maria Tuazon, who
thereby became liable to subsequent holders for the amounts stated in those checks, there was no need to implead
Santos.

Hence, this Petition.6

Issues

Petitioners raise the following issues for our consideration:

"1. Whether or not the Honorable Court of Appeals erred in ruling that petitioners are not agents of the respondents.

"2. Whether or not the Honorable Court of Appeals erred in rendering judgment against the petitioners despite x x x
the failure of the respondents to include in their action Evangeline Santos, an indispensable party to the suit."7

105
The Court’s Ruling

The Petition is unmeritorious.

First Issue:

Agency

Well-entrenched is the rule that the Supreme Court’s role in a petition under Rule 45 is limited to reviewing errors of
law allegedly committed by the Court of Appeals. Factual findings of the trial court, especially when affirmed by the
CA, are conclusive on the parties and this Court.8 Petitioners have not given us sufficient reasons to deviate from
this rule.

In a contract of agency, one binds oneself to render some service or to do something in representation or on behalf
of another, with the latter’s consent or authority.9 The following are the elements of agency: (1) the parties’ consent,
express or implied, to establish the relationship; (2) the object, which is the execution of a juridical act in relation to
a third person; (3) the representation, by which the one who acts as an agent does so, not for oneself, but as a
representative; (4) the limitation that the agent acts within the scope of his or her authority.10 As the basis of agency
is representation, there must be, on the part of the principal, an actual intention to appoint, an intention naturally
inferable from the principal’s words or actions. In the same manner, there must be an intention on the part of the
agent to accept the appointment and act upon it. Absent such mutual intent, there is generally no agency.11

This Court finds no reversible error in the findings of the courts a quo that petitioners were the rice buyers themselves;
they were not mere agents of respondents in their rice dealership. The question of whether a contract is one of sale
or of agency depends on the intention of the parties.12

The declarations of agents alone are generally insufficient to establish the fact or extent of their authority.13 The law
makes no presumption of agency; proving its existence, nature and extent is incumbent upon the person alleging
it.14 In the present case, petitioners raise the fact of agency as an affirmative defense, yet fail to prove its existence.

The Court notes that petitioners, on their own behalf, sued Evangeline Santos for collection of the amounts
represented by the bounced checks, in a separate civil case that they sought to be consolidated with the current one.
If, as they claim, they were mere agents of respondents, petitioners should have brought the suit against Santos for
and on behalf of their alleged principal, in accordance with Section 2 of Rule 3 of the Rules on Civil Procedure.15 Their
filing a suit against her in their own names negates their claim that they acted as mere agents in selling the rice
obtained from Bartolome Ramos.

Second Issue:

Indispensable Party

Petitioners argue that the lower courts erred in not allowing Evangeline Santos to be impleaded as an indispensable
party. They insist that respondents’ Complaint against them is based on the bouncing checks she issued; hence,
they point to her as the person primarily liable for the obligation.

We hold that respondents’ cause of action is clearly founded on petitioners’ failure to pay the purchase price of the
rice. The trial court held that Petitioner Maria Tuazon had indorsed the questioned checks in favor of respondents, in
accordance with Sections 31 and 63 of the Negotiable Instruments Law.16 That Santos was the drawer of the checks
is thus immaterial to the respondents’ cause of action.

As indorser, Petitioner Maria Tuazon warranted that upon due presentment, the checks were to be accepted or paid,
or both, according to their tenor; and that in case they were dishonored, she would pay the corresponding
amount.17 After an instrument is dishonored by nonpayment, indorsers cease to be merely secondarily liable; they
become principal debtors whose liability becomes identical to that of the original obligor. The holder of a negotiable
instrument need not even proceed against the maker before suing the indorser.18 Clearly, Evangeline Santos -- as
the drawer of the checks -- is not an indispensable party in an action against Maria Tuazon, the indorser of the
checks.

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

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioners.

SO ORDERED.

106
 v.
CRISOLOGO-JOSE vs. CA and SANTOS, JR.
G.R. No. 80599 September 15, 1989.
REGALADO, J.:

Petitioner seeks the annulment of the decision 1 of respondent Court of Appeals, promulgated on September 8, 1987,
which reversed the decision of the trial Court 2 dismissing the complaint for consignation filed by therein plaintiff
Ricardo S. Santos, Jr.

The parties are substantially agreed on the following facts as found by both lower courts:

In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-president of Mover Enterprises, Inc. in-charge of
marketing and sales; and the president of the said corporation was Atty. Oscar Z. Benares. On April
30, 1980, Atty. Benares, in accommodation of his clients, the spouses Jaime and Clarita Ong, issued
Check No. 093553 drawn against Traders Royal Bank, dated June 14, 1980, in the amount of
P45,000.00 (Exh- 'I') payable to defendant Ernestina Crisologo-Jose. Since the check was under the
account of Mover Enterprises, Inc., the same was to be signed by its president, Atty. Oscar Z.
Benares, and the treasurer of the said corporation. However, since at that time, the treasurer of Mover
Enterprises was not available, Atty. Benares prevailed upon the plaintiff, Ricardo S. Santos, Jr., to
sign the aforesaid chEck as an alternate story. Plaintiff Ricardo S. Santos, Jr. did sign the check.

It appears that the check (Exh. '1') was issued to defendant Ernestina Crisologo-Jose in consideration
of the waiver or quitclaim by said defendant over a certain property which the Government Service
Insurance System (GSIS) agreed to sell to the clients of Atty. Oscar Benares, the spouses Jaime and
Clarita Ong, with the understanding that upon approval by the GSIS of the compromise agreement
with the spouses Ong, the check will be encashed accordingly. However, since the compromise
agreement was not approved within the expected period of time, the aforesaid check for P45,000.00
(Exh. '1') was replaced by Atty. Benares with another Traders Royal Bank cheek bearing No. 379299
dated August 10, 1980, in the same amount of P45,000.00 (Exhs. 'A' and '2'), also payable to the
defendant Jose. This replacement check was also signed by Atty. Oscar Z. Benares and by the
plaintiff Ricardo S. Santos, Jr. When defendant deposited this replacement check (Exhs. 'A' and '2')
with her account at Family Savings Bank, Mayon Branch, it was dishonored for insufficiency of funds.
A subsequent redepositing of the said check was likewise dishonored by the bank for the same
reason. Hence, defendant through counsel was constrained to file a criminal complaint for violation
of Batas Pambansa Blg. 22 with the Quezon City Fiscal's Office against Atty. Oscar Z. Benares and
plaintiff Ricardo S. Santos, Jr. The investigating Assistant City Fiscal, Alfonso Llamas, accordingly
filed an amended information with the court charging both Oscar Benares and Ricardo S. Santos, Jr.,
for violation of Batas Pambansa Blg. 22 docketed as Criminal Case No. Q-14867 of then Court of
First Instance of Rizal, Quezon City.

Meanwhile, during the preliminary investigation of the criminal charge against Benares and the
plaintiff herein, before Assistant City Fiscal Alfonso T. Llamas, plaintiff Ricardo S. Santos, Jr. tendered
cashier's check No. CC 160152 for P45,000.00 dated April 10, 1981 to the defendant Ernestina
Crisologo-Jose, the complainant in that criminal case. The defendant refused to receive the cashier's
check in payment of the dishonored check in the amount of P45,000.00. Hence, plaintiff encashed
the aforesaid cashier's check and subsequently deposited said amount of P45,000.00 with the Clerk
of Court on August 14, 1981 (Exhs. 'D' and 'E'). Incidentally, the cashier's check adverted to above
was purchased by Atty. Oscar Z. Benares and given to the plaintiff herein to be applied in payment
of the dishonored check. 3

After trial, the court a quo, holding that it was "not persuaded to believe that consignation referred to in Article 1256
of the Civil Code is applicable to this case," rendered judgment dismissing plaintiff s complaint and defendant's
counterclaim. 4

As earlier stated, respondent court reversed and set aside said judgment of dismissal and revived the complaint for
consignation, directing the trial court to give due course thereto.

Hence, the instant petition, the assignment of errors wherein are prefatorily stated and discussed seriatim.

1. Petitioner contends that respondent Court of Appeals erred in holding that private respondent, one
of the signatories of the check issued under the account of Mover Enterprises, Inc., is an
accommodation party under the Negotiable Instruments Law and a debtor of petitioner to the extent
of the amount of said check.

107
Petitioner avers that the accommodation party in this case is Mover Enterprises, Inc. and not private respondent who
merely signed the check in question in a representative capacity, that is, as vice-president of said corporation, hence
he is not liable thereon under the Negotiable Instruments Law.

The pertinent provision of said law referred to provides:

Sec. 29. Liability of accommodation party an accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the
purpose of lending his name to some other person. Such a person is liable on the instrument to a
holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be
only an accommodation party.

Consequently, to be considered an accommodation party, a person must (1) be a party to the instrument, signing as
maker, drawer, acceptor, or indorser, (2) not receive value therefor, and (3) sign for the purpose of lending his name
for the credit of some other person.

Based on the foregoing requisites, it is not a valid defense that the accommodation party did not receive any valuable
consideration when he executed the instrument. From the standpoint of contract law, he differs from the ordinary
concept of a debtor therein in the sense that he has not received any valuable consideration for the instrument he
signs. Nevertheless, he is liable to a holder for value as if the contract was not for accommodation 5 in whatever
capacity such accommodation party signed the instrument, whether primarily or secondarily. Thus, it has been held
that in lending his name to the accommodated party, the accommodation party is in effect a surety for the latter. 6

Assuming arguendo that Mover Enterprises, Inc. is the accommodation party in this case, as petitioner suggests, the
inevitable question is whether or not it may be held liable on the accommodation instrument, that is, the check issued
in favor of herein petitioner.

We hold in the negative.

The aforequoted provision of the Negotiable Instruments Law which holds an accommodation party liable on the
instrument to a holder for value, although such holder at the time of taking the instrument knew him to be only an
accommodation party, does not include nor apply to corporations which are accommodation parties. 7 This is because
the issue or indorsement of negotiable paper by a corporation without consideration and for the accommodation of
another is ultra vires. 8 Hence, one who has taken the instrument with knowledge of the accommodation nature
thereof cannot recover against a corporation where it is only an accommodation party. If the form of the instrument,
or the nature of the transaction, is such as to charge the indorsee with knowledge that the issue or indorsement of
the instrument by the corporation is for the accommodation of another, he cannot recover against the corporation
thereon. 9

By way of exception, an officer or agent of a corporation shall have the power to execute or indorse a negotiable
paper in the name of the corporation for the accommodation of a third person only if specifically authorized to do
so. 10 Corollarily, corporate officers, such as the president and vice-president, have no power to execute for mere
accommodation a negotiable instrument of the corporation for their individual debts or transactions arising from or in
relation to matters in which the corporation has no legitimate concern. Since such accommodation paper cannot thus
be enforced against the corporation, especially since it is not involved in any aspect of the corporate business or
operations, the inescapable conclusion in law and in logic is that the signatories thereof shall be personally liable
therefor, as well as the consequences arising from their acts in connection therewith.

The instant case falls squarely within the purview of the aforesaid decisional rules. If we indulge petitioner in her
aforesaid postulation, then she is effectively barred from recovering from Mover Enterprises, Inc. the value of the
check. Be that as it may, petitioner is not without recourse.

The fact that for lack of capacity the corporation is not bound by an accommodation paper does not thereby absolve,
but should render personally liable, the signatories of said instrument where the facts show that the accommodation
involved was for their personal account, undertaking or purpose and the creditor was aware thereof.

Petitioner, as hereinbefore explained, was evidently charged with the knowledge that the cheek was issued at the
instance and for the personal account of Atty. Benares who merely prevailed upon respondent Santos to act as co-
signatory in accordance with the arrangement of the corporation with its depository bank. That it was a personal
undertaking of said corporate officers was apparent to petitioner by reason of her personal involvement in the financial
arrangement and the fact that, while it was the corporation's check which was issued to her for the amount involved,
she actually had no transaction directly with said corporation.

There should be no legal obstacle, therefore, to petitioner's claims being directed personally against Atty. Oscar Z.
Benares and respondent Ricardo S. Santos, Jr., president and vice-president, respectively, of Mover Enterprises,
Inc.

108
 2. On her second assignment of error, petitioner argues that the Court of Appeals erred in holding
that the consignation of the sum of P45,000.00, made by private respondent after his tender of
payment was refused by petitioner, was proper under Article 1256 of the Civil Code.

Petitioner's submission is that no creditor-debtor relationship exists between the parties, hence consignation is not
proper. Concomitantly, this argument was premised on the assumption that private respondent Santos is not an
accommodation party.

As previously discussed, however, respondent Santos is an accommodation party and is, therefore, liable for the
value of the check. The fact that he was only a co-signatory does not detract from his personal liability. A co-maker
or co-drawer under the circumstances in this case is as much an accommodation party as the other co-signatory or,
for that matter, as a lone signatory in an accommodation instrument. Under the doctrine in Philippine Bank of
Commerce vs. Aruego, supra, he is in effect a co-surety for the accommodated party with whom he and his co-
signatory, as the other co-surety, assume solidary liability ex lege for the debt involved. With the dishonor of the
check, there was created a debtor-creditor relationship, as between Atty. Benares and respondent Santos, on the
one hand, and petitioner, on the other. This circumstance enables respondent Santos to resort to an action of
consignation where his tender of payment had been refused by petitioner.

We interpose the caveat, however, that by holding that the remedy of consignation is proper under the given
circumstances, we do not thereby rule that all the operative facts for consignation which would produce the effect of
payment are present in this case. Those are factual issues that are not clear in the records before us and which are
for the Regional Trial Court of Quezon City to ascertain in Civil Case No. Q-33160, for which reason it has advisedly
been directed by respondent court to give due course to the complaint for consignation, and which would be subject
to such issues or claims as may be raised by defendant and the counterclaim filed therein which is hereby ordered
similarly revived.

3. That respondent court virtually prejudged Criminal Case No. Q-14687 of the Regional Trial Court
of Quezon City filed against private respondent for violation of Batas Pambansa Blg. 22, by holding
that no criminal liability had yet attached to private respondent when he deposited with the court the
amount of P45,000.00 is the final plaint of petitioner.

We sustain petitioner on this score.

Indeed, respondent court went beyond the ratiocination called for in the appeal to it in CA-G.R. CV. No. 05464. In its
own decision therein, it declared that "(t)he lone issue dwells in the question of whether an accommodation party can
validly consign the amount of the debt due with the court after his tender of payment was refused by the creditor."
Yet, from the commercial and civil law aspects determinative of said issue, it digressed into the merits of the aforesaid
Criminal Case No. Q-14867, thus:

Section 2 of B.P. 22 establishes the prima facie evidence of knowledge of such insufficiency of funds
or credit. Thus, the making, drawing and issuance of a check, payment of which is refused by the
drawee because of insufficient funds in or credit with such bank is prima facie evidence of knowledge
of insufficiency of funds or credit, when the check is presented within 90 days from the date of the
check.

It will be noted that the last part of Section 2 of B.P. 22 provides that the element of knowledge of
insufficiency of funds or credit is not present and, therefore, the crime does not exist, when the drawer
pays the holder the amount due or makes arrangements for payment in full by the drawee of such
check within five (5) banking days after receiving notice that such check has not been paid by the
drawee.

Based on the foregoing consideration, this Court finds that the plaintiff-appellant acted within Ms legal
rights when he consigned the amount of P45,000.00 on August 14, 1981, between August 7, 1981,
the date when plaintiff-appellant receive (sic) the notice of non-payment, and August 14, 1981, the
date when the debt due was deposited with the Clerk of Court (a Saturday and a Sunday which are
not banking days) intervened. The fifth banking day fell on August 14, 1981. Hence, no criminal
liability has yet attached to plaintiff-appellant when he deposited the amount of P45,000.00 with the
Court a quo on August 14, 1981. 11

That said observations made in the civil case at bar and the intrusion into the merits of the criminal case pending in
another court are improper do not have to be belabored. In the latter case, the criminal trial court has to grapple with
such factual issues as, for instance, whether or not the period of five banking days had expired, in the process
determining whether notice of dishonor should be reckoned from any prior notice if any has been given or from receipt
by private respondents of the subpoena therein with supporting affidavits, if any, or from the first day of actual
preliminary investigation; and whether there was a justification for not making the requisite arrangements for payment
in full of such check by the drawee bank within the said period. These are matters alien to the present controversy
on tender and consignation of payment, where no such period and its legal effects are involved.

109
These are aside from the considerations that the disputed period involved in the criminal case is only a presumptive
rule, juris tantum at that, to determine whether or not there was knowledge of insufficiency of funds in or credit with
the drawee bank; that payment of civil liability is not a mode for extinguishment of criminal liability; and that the
requisite quantum of evidence in the two types of cases are not the same.

To repeat, the foregoing matters are properly addressed to the trial court in Criminal Case No. Q-14867, the resolution
of which should not be interfered with by respondent Court of Appeals at the present posture of said case, much less
preempted by the inappropriate and unnecessary holdings in the aforequoted portion of the decision of said
respondent court. Consequently, we modify the decision of respondent court in CA-G.R. CV No. 05464 by setting
aside and declaring without force and effect its pronouncements and findings insofar as the merits of Criminal Case
No. Q-14867 and the liability of the accused therein are concerned.

WHEREFORE, subject to the aforesaid modifications, the judgment of respondent Court of Appeals is AFFIRMED.

SO ORDERED.

vi.

TRAVEL-ON, INC vs. CA and MIRANDA

G.R. No. L-56169 June 26, 1992

Petitioner Travel-On. Inc. ("Travel-On") is a travel agency selling airline tickets on commission basis for and in behalf
of different airline companies. Private respondent Arturo S. Miranda had a revolving credit line with petitioner. He
procured tickets from petitioner on behalf of airline passengers and derived commissions therefrom.

On 14 June 1972, Travel-On filed suit before the Court of First Instance ("CFI") of Manila to collect on six (6) checks
issued by private respondent with a total face amount of P115,000.00. The complaint, with a prayer for the issuance
of a writ of preliminary attachment and attorney's fees, averred that from 5 August 1969 to 16 January 1970, petitioner
sold and delivered various airline tickets to respondent at a total price of P278,201.57; that to settle said account,
private respondent paid various amounts in cash and in kind, and thereafter issued six (6) postdated checks
amounting to P115,000.00 which were all dishonored by the drawee banks. Travel-On further alleged that in March
1972, private respondent made another payment of P10,000.00 reducing his indebtedness to P105,000.00. The writ
of attachment was granted by the court a quo.

In his answer, private respondent admitted having had transactions with Travel-On during the period stipulated in the
complaint. Private respondent, however, claimed that he had already fully paid and even overpaid his obligations
and that refunds were in fact due to him. He argued that he had issued the postdated checks for purposes of
accommodation, as he had in the past accorded similar favors to petitioner. During the proceedings, private
respondent contested several tickets alleged to have been erroneously debited to his account. He claimed
reimbursement of his alleged over payments, plus litigation expenses, and exemplary and moral damages by reason
of the allegedly improper attachment of his properties.

In support of his theory that the checks were issued for accommodation, private respondent testified that he bad
issued the checks in the name of Travel-On in order that its General Manager, Elita Montilla, could show to Travel-
On's Board of Directors that the accounts receivable of the company were still good. He further stated that Elita
Montilla tried to encash the same, but that these were dishonored and were subsequently returned to him after the
accommodation purpose had been attained.

Travel-On's witness, Elita Montilla, on the other hand explained that the "accommodation" extended to Travel-On by
private respondent related to situations where one or more of its passengers needed money in Hongkong, and upon
request of Travel-On respondent would contact his friends in Hongkong to advance Hongkong money to the
passenger. The passenger then paid Travel-On upon his return to Manila and which payment would be credited by
Travel-On to respondent's running account with it.

In its decision dated 31 January 1975, the court a quo ordered Travel-On to pay private respondent the amount of
P8,894.91 representing net overpayments by private respondent, moral damages of P10,000.00 for the wrongful
issuance of the writ of attachment and for the filing of this case, P5,000.00 for attorney's fees and the costs of the
suit.

The trial court ruled that private respondent's indebtedness to petitioner was not satisfactorily established and that
the postdated checks were issued not for the purpose of encashment to pay his indebtedness but to accommodate
the General Manager of Travel-On to enable her to show to the Board of Directors that Travel-On was financially
stable.

110
Petitioner filed a motion for reconsideration that was, however, denied by the trial court, which in fact then increased
the award of moral damages to P50,000.00.

On appeal, the Court of Appeals affirmed the decision of the trial court, but reduced the award of moral damages to
P20,000.00, with interest at the legal rate from the date of the filing of the Answer on 28 August 1972.

Petitioner moved for reconsideration of the Court of Appeal's' decision, without success.

In the instant Petition for Review, it is urged that the postdated checks are per se evidence of liability on the part of
private respondent. Petitioner further argues that even assuming that the checks were for accommodation, private
respondent is still liable thereunder considering that petitioner is a holder for value.

Both the trial and appellate courts had rejected the checks as evidence of indebtedness on the ground that the
various statements of account prepared by petitioner did not show that Private respondent had an outstanding
balance of P115,000.00 which is the total amount of the checks he issued. It was pointed out that while the various
exhibits of petitioner showed various accountabilities of private respondent, they did not satisfactorily establish the
amount of the outstanding indebtedness of private respondent. The appellate court made much of the fact that the
figures representing private respondent's unpaid accounts found in the "Schedule of Outstanding Account" dated 31
January 1970 did not tally with the figures found in the statement which showed private respondent's transactions
with petitioner for the years 1969 and 1970; that there was no satisfactory explanation as to why the total outstanding
amount of P278,432.74 was still used as basis in the accounting of 7 April 1972 considering that according to the
table of transactions for the year 1969 and 1970, the total unpaid account of private respondent amounted
to P239,794.57.

We have, however, examined the record and it shows that the 7 April 1972 Statement of Account had simply not
been updated; that if we use as basis the figure as of 31 January 1970 which is P278,432.74 and from it deduct
P38,638.17 which represents some of the payments subsequently made by private respondent, the figure —
P239,794.57 will be obtained.

Also, the fact alone that the various statements of account had variances in figures, simply did not mean that private
respondent had no more financial obligations to petitioner. It must be stressed that private respondent's account with
petitioner was a running or open one, which explains the varying figures in each of the statements rendered as of a
given date.

The appellate court erred in considering only the statements of account in determining whether private respondent
was indebted to petitioner under the checks. By doing so, it failed to give due importance to the most telling piece of
evidence of private respondent's indebtedness — the checks themselves which he had issued.

Contrary to the view held by the Court of Appeals, this Court finds that the checks are the all important evidence of
petitioner's case; that these checks clearly established private respondent's indebtedness to petitioner; that private
respondent was liable thereunder.

It is important to stress that a check which is regular on its face is deemed prima facie to have been issued for a
valuable consideration and every person whose signature appears thereon is deemed to have become a party thereto
for value. 1 Thus, the mere introduction of the instrument sued on in evidence prima facie entitles the plaintiff to
recovery. Further, the rule is quite settled that a negotiable instrument is presumed to have been given or indorsed
for a sufficient consideration unless otherwise contradicted and overcome by other competent evidence. 2

In the case at bar, the Court of Appeals, contrary to these established rules, placed the burden of proving the
existence of valuable consideration upon petitioner. This cannot be countenanced; it was up to private respondent
to show that he had indeed issued the checks without sufficient consideration. The Court considers that Private
respondent was unable to rebut satisfactorily this legal presumption. It must also be noted that those checks were
issued immediately after a letter demanding payment had been sent to private respondent by petitioner Travel-On.

The fact that all the checks issued by private respondent to petitioner were presented for payment by the latter would
lead to no other conclusion than that these checks were intended for encashment. There is nothing in the checks
themselves (or in any other document for that matter) that states otherwise.

We are unable to accept the Court of Appeals' conclusion that the checks here involved were issued for
"accommodation" and that accordingly private respondent maker of those checks was not liable thereon to petitioner
payee of those checks.

In the first place, while the Negotiable Instruments Law does refer to accommodation transactions, no such
transaction was here shown. Section 29 of the Negotiable Instruments Law provides as follows:

Sec. 29. Liability of accommodation party. — An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the
111
 purpose of lending his name to some other person. Such a person is liable on the instrument to a
holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be
only an accommodation party.

In accommodation transactions recognized by the Negotiable Instruments Law, an accommodating party

lends his credit to the accommodated party, by issuing or indorsing a check which is held by a payee or
indorsee as a holder in due course, who gave full value therefor to the accommodated party. The latter, in
other words, receives or realizes full value which the accommodated party then must repay to the
accommodating party, unless of course the accommodating party intended to make a donation to the
accommodated party. But the accommodating party is bound on the check to the holder in due course who
is necessarily a third party and is not the accommodated party. Having issued or indorsed the check, the
accommodating party has warranted to the holder in due course that he will pay the same according to its
tenor. 3

In the case at bar, Travel-On was payee of all six (6) checks, it presented these checks for payment at the drawee
bank but the checks bounced. Travel-On obviously was not an accommodated party; it realized no value on the
checks which bounced.

Travel-On was entitled to the benefit of the statutory presumption that it was a holder in due course, 4 that the checks
were supported by valuable consideration. 5 Private respondent maker of the checks did not successfully rebut these
presumptions. The only evidence aliunde that private respondent offered was his own self-serving uncorroborated
testimony. He claimed that he had issued the checks to Travel-On as payee to "accommodate" its General Manager
who allegedly wished to show those checks to the Board of Directors of Travel-On to "prove" that Travel-On's account
receivables were somehow "still good." It will be seen that this claim was in fact a claim that the checks were merely
simulated, that private respondent did not intend to bind himself thereon. Only evidence of the clearest and most
convincing kind will suffice for that purpose; 6 no such evidence was submitted by private respondent. The latter's
explanation was denied by Travel-On's General Manager; that explanation, in any case, appears merely contrived
and quite hollow to us. Upon the other hand, the "accommodation" or assistance extended to Travel-On's passengers
abroad as testified by petitioner's General Manager involved, not the accommodation transactions recognized by the
NIL, but rather the circumvention of then existing foreign exchange regulations by passengers booked by Travel-On,
which incidentally involved receipt of full consideration by private respondent.

Thus, we believe and so hold that private respondent must be held liable on the six (6) checks here involved. Those
checks in themselves constituted evidence of indebtedness of private respondent, evidence not successfully
overturned or rebutted by private respondent.

Since the checks constitute the best evidence of private respondent's liability to petitioner Travel-On, the amount of
such liability is the face amount of the checks, reduced only by the P10,000.00 which Travel-On admitted in its
complaint to have been paid by private respondent sometime in March 1992.

The award of moral damages to Private respondent must be set aside, for the reason that Petitioner's application for
the writ of attachment rested on sufficient basis and no bad faith was shown on the part of Travel-On. If anyone was
in bad faith, it was private respondent who issued bad checks and then pretended to have "accommodated"
petitioner's General Manager by assisting her in a supposed scheme to deceive petitioner's Board of Directors and
to misrepresent Travel-On's financial condition.

ACCORDINGLY, the Court Resolved to GRANT due course to the Petition for Review on Certiorari and to REVERSE
and SET ASIDE the Decision dated 22 October 1980 and the Resolution of 23 January 1981 of the Court of Appeals,
as well as the Decision dated 31 January 1975 of the trial court, and to enter a new decision requiring private
respondent Arturo S. Miranda to pay to petitioner Travel-On the amount of P105,000.00 with legal interest thereon
from 14 June 1972, plus ten percent (10%) of the total amount due as attorney's fees. Costs against Private
respondent.

V. LIABILITIES
VI. DEFENSES
VII. HOLDER IN DUE COURSE

i.
SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC., vs. FAR EAST BANK AND TRUST
COMPANY AND CA
G.R. No. 129015 August 13, 2004
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

112
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 Decision dated 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,

113
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
114
 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

115
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.40 She 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
116
negligent, and invoked the doctrines that "where a loss must be borne by one of two innocent person, can be traced
to the neglect or fault of either, it is reasonable that it would be borne by him, even if innocent of any intentional fraud,
through whose means it has succeeded49 or who put into the power of the third person to perpetuate the
wrong."50 Applying these rules, the Court of Appeals determined that it was the negligence of Samsung Construction
that allowed the encashment of the forged check.

In the case at bar, the forgery appears to have been made possible through the acts of one Jose Sempio III,
an assistant accountant employed by the plaintiff Samsung [Construction] Co. Philippines, Inc. who
supposedly stole the blank check and who presumably is responsible for its encashment through a forged
signature of Jong Kyu Lee. Sempio was assistant to the Korean accountant who was in possession of the
blank checks and who through negligence, enabled Sempio to have access to the same. Had the Korean
accountant been more careful and prudent in keeping the blank checks Sempio would not have had the
chance to steal a page thereof and to effect the forgery. Besides, Sempio was an employee who appears to
have had dealings with the defendant Bank in behalf of the plaintiff corporation and on the date the check
was encashed, he was there to certify that it was a genuine check issued to purchase equipment for the
company.51

We recognize that Section 23 of the Negotiable Instruments Law bars a party from setting up the defense of forgery
if it is guilty of negligence.52 Yet, we are unable to conclude that Samsung Construction was guilty of negligence in
this case. The appellate court failed to explain precisely how the Korean accountant was negligent or how more care
and prudence on his part would have prevented the forgery. We cannot sustain this "tar and feathering" resorted to
without any basis.

The bare fact that the forgery was committed by an employee of the party whose signature was forged cannot
necessarily imply that such party’s negligence was the cause for the forgery. Employers do not possess the
preternatural gift of cognition as to the evil that may lurk within the hearts and minds of their employees. The Court’s
pronouncement in PCI Bank v. Court of Appeals53 applies in this case, to wit:

[T]he mere fact that the forgery was committed by a drawer-payor’s confidential employee or agent, who by
virtue of his position had unusual facilities for perpetrating the fraud and imposing the forged paper upon the
bank, does not entitle the bank to shift the loss to the drawer-payor, in the absence of some circumstance
raising estoppel against the drawer.54

Admittedly, the record does not clearly establish what measures Samsung Construction employed to safeguard its
blank checks. Jong did testify that his accountant, Kyu, kept the checks inside a "safety box,"55 and no contrary version
was presented by FEBTC. However, such testimony cannot prove that the checks were indeed kept in a safety box,
as Jong’s testimony on that point is hearsay, since Kyu, and not Jong, would have the personal knowledge as to how
the checks were kept.

Still, in the absence of evidence to the contrary, we can conclude that there was no negligence on Samsung
Construction’s part. The presumption remains that every person takes ordinary care of his concerns,56 and that the
ordinary course of business has been followed.57 Negligence is not presumed, but must be proven by him who alleges
it.58 While the complaint was lodged at the instance of Samsung Construction, the matter it had to prove was the claim
it had alleged - whether the check was forged. It cannot be required as well to prove that it was not negligent, because
the legal presumption remains that ordinary care was employed.

Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact that Samsung Construction was
negligent. While the payee, as in this case, may not have the personal knowledge as to the standard procedures
observed by the drawer, it well has the means of disputing the presumption of regularity. Proving a negative fact may
be "a difficult office,"59 but necessarily so, as it seeks to overcome a presumption in law. FEBTC was unable to dispute
the presumption of ordinary care exercised by Samsung Construction, hence we cannot agree with the Court of
Appeals’ finding of negligence.

The assailed Decision replicated the extensive efforts which FEBTC devoted to establish that there was no
negligence on the part of the bank in its acceptance and payment of the forged check. However, the degree of
diligence exercised by the bank would be irrelevant if the drawer is not precluded from setting up the defense of
forgery under Section 23 by his own negligence. The rule of equity enunciated in PNB v. National City Bank of New
York, 60 as relied upon by the Court of Appeals, deserves careful examination.

The point in issue has sometimes been said to be that of negligence. The drawee who has paid upon the
forged signature is held to bear the loss, because he has been negligent in failing to recognize that
the handwriting is not that of his customer. But it follows obviously that if the payee, holder, or presenter
of the forged paper has himself been in default, if he has himself been guilty of a negligence prior to that of
the banker, or if by any act of his own he has at all contributed to induce the banker's negligence, then he
may lose his right to cast the loss upon the banker.61 (Emphasis supplied)

117
Quite palpably, the general rule remains that the drawee who has paid upon the forged signature bears the loss. The
exception to this rule arises only when negligence can be traced on the part of the drawer whose signature was
forged, and the need arises to weigh the comparative negligence between the drawer and the drawee to determine
who should bear the burden of loss. The Court finds no basis to conclude that Samsung Construction was negligent
in the safekeeping of its checks. For one, the settled rule is that the mere fact that the depositor leaves his check
book lying around does not constitute such negligence as will free the bank from liability to him, where a clerk of the
depositor or other persons, taking advantage of the opportunity, abstract some of the check blanks, forges the
depositor’s signature and collect on the checks from the bank.62 And for another, in point of fact Samsung Construction
was not negligent at all since it reported the forgery almost immediately upon discovery.63

It is also worth noting that the forged signatures in PNB v. National City Bank of New York were not of the drawer,
but of indorsers. The same circumstance attends PNB v. Court of Appeals,64 which was also cited by the Court of
Appeals. It is accepted that a forged signature of the drawer differs in treatment than a forged signature of the
indorser.

The justification for the distinction between forgery of the signature of the drawer and forgery of an
indorsement is that the drawee is in a position to verify the drawer’s signature by comparison with one in his
hands, but has ordinarily no opportunity to verify an indorsement.65

Thus, a drawee bank is generally liable to its depositor in paying a check which bears either a forgery of the
drawer’s signature or a forged indorsement. But the bank may, as a general rule, recover back the money
which it has paid on a check bearing a forged indorsement, whereas it has not this right to the same extent
with reference to a check bearing a forgery of the drawer’s signature.66

The general rule imputing liability on the drawee who paid out on the forgery holds in this case.

Since FEBTC puts into issue the degree of care it exercised before paying out on the forged check, we might as well
comment on the bank’s performance of its duty. It might be so that the bank complied with its own internal rules prior
to paying out on the questionable check. Yet, there are several troubling circumstances that lead us to believe that
the bank itself was remiss in its duty.

The fact that the check was made out in the amount of nearly one million pesos is unusual enough to require a higher
degree of caution on the part of the bank. Indeed, FEBTC confirms this through its own internal procedures. Checks
below twenty-five thousand pesos require only the approval of the teller; those between twenty-five thousand to one
hundred thousand pesos necessitate the approval of one bank officer; and should the amount exceed one hundred
thousand pesos, the concurrence of two bank officers is required.67

In this case, not only did the amount in the check nearly total one million pesos, it was also payable to cash. That
latter circumstance should have aroused the suspicion of the bank, as it is not ordinary business practice for a check
for such large amount to be made payable to cash or to bearer, instead of to the order of a specified
person.68 Moreover, the check was presented for payment by one Roberto Gonzaga, who was not designated as the
payee of the check, and who did not carry with him any written proof that he was authorized by Samsung Construction
to encash the check. Gonzaga, a stranger to FEBTC, was not even an employee of Samsung Construction.69 These
circumstances are already suspicious if taken independently, much more so if they are evaluated in concurrence.
Given the shadiness attending Gonzaga’s presentment of the check, it was not sufficient for FEBTC to have merely
complied with its internal procedures, but mandatory that all earnest efforts be undertaken to ensure the validity of
the check, and of the authority of Gonzaga to collect payment therefor.

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

FEBTC alleges that Sempio was well-known to the bank officers, as he had regularly transacted with the bank in
behalf of Samsung Construction. It was even claimed that everytime FEBTC would contact Jong about problems
with his account, Jong would hand the phone over to Sempio.72 However, the only proof of such allegations is the
testimony of Gemma Velez, who also testified that she did not know Sempio personally,73 and had met Sempio for
the first time only on the day the check was encashed.74 In fact, Velez had to inquire with the other officers of the bank
as to whether Sempio was actually known to the employees of the bank.75 Obviously, Velez had no personal
knowledge as to the past relationship between FEBTC and Sempio, and any averments of her to that effect should
be deemed hearsay evidence. Interestingly, FEBTC did not present as a witness any other employee of their Bel-Air
branch, including those who supposedly had transacted with Sempio before.

118
Even assuming that FEBTC had a standing habit of dealing with Sempio, acting in behalf of Samsung Construction,
the irregular circumstances attending the presentment of the forged check should have put the bank on the highest
degree of alert. The Court recently emphasized that the highest degree of care and diligence is required of banks.

Banks are engaged in a business impressed with public interest, and it is their duty to protect in return their
many clients and depositors who transact business with them. They have the obligation to treat their client’s
account meticulously and with the highest degree of care, considering the fiduciary nature of their
relationship. The diligence required of banks, therefore, is more than that of a good father of a family.76

Given the circumstances, extraordinary diligence dictates that FEBTC should have ascertained from Jong personally
that the signature in the questionable check was his.

Still, even if the bank performed with utmost diligence, the drawer whose signature was forged may still recover from
the bank as long as he or she is not precluded from setting up the defense of forgery. After all, Section 23 of the
Negotiable Instruments Law plainly states that no right to enforce the payment of a check can arise out of a forged
signature. Since the drawer, Samsung Construction, is not precluded by negligence from setting up the forgery, the
general rule should apply. Consequently, if a bank pays a forged check, it must be considered as paying out of its
funds and cannot charge the amount so paid to the account of the depositor.77 A bank is liable, irrespective of its good
faith, in paying a forged check.78

WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 28 November 1996 is
REVERSED, and the Decision of the Regional Trial Court of Manila, Branch 9, dated 25 April 1994 is REINSTATED.
Costs against respondent.

SO ORDERED.

ii.
CONSOLIDATED PLYWOOD INDUSTRIES, INC., WEE and VERGARA vs. IFC LEASING AND
ACCEPTANCE CORP.
G.R. No. 72593 April 30, 1987
GUTIERREZ, JR., J.:

This is a petition for certiorari under Rule 45 of the Rules of Court which assails on questions of law a decision of the
Intermediate Appellate Court in AC-G.R. CV No. 68609 dated July 17, 1985, as well as its resolution dated October
17, 1985, denying the motion for reconsideration.

The antecedent facts culled from the petition are as follows:

The petitioner is a corporation engaged in the logging business. It had for its program of logging activities for the year
1978 the opening of additional roads, and simultaneous logging operations along the route of said roads, in its logging
concession area at Baganga, Manay, and Caraga, Davao Oriental. For this purpose, it needed two (2) additional
units of tractors.

Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific Company of Manila, through its sister
company and marketing arm, Industrial Products Marketing (the "seller-assignor"), a corporation dealing in tractors
and other heavy equipment business, offered to sell to petitioner-corporation two (2) "Used" Allis Crawler Tractors,
one (1) an HDD-21-B and the other an HDD-16-B.

In order to ascertain the extent of work to which the tractors were to be exposed, (t.s.n., May 28, 1980, p. 44) and to
determine the capability of the "Used" tractors being offered, petitioner-corporation requested the seller-assignor to
inspect the job site. After conducting said inspection, the seller-assignor assured petitioner-corporation that the
"Used" Allis Crawler Tractors which were being offered were fit for the job, and gave the corresponding warranty of
ninety (90) days performance of the machines and availability of parts. (t.s.n., May 28, 1980, pp. 59-66).

With said assurance and warranty, and relying on the seller-assignor's skill and judgment, petitioner-corporation
through petitioners Wee and Vergara, president and vice- president, respectively, agreed to purchase on installment
said two (2) units of "Used" Allis Crawler Tractors. It also paid the down payment of Two Hundred Ten Thousand
Pesos (P210,000.00).

On April 5, 1978, the seller-assignor issued the sales invoice for the two 2) units of tractors (Exh. "3-A"). At the same
time, the deed of sale with chattel mortgage with promissory note was executed (Exh. "2").

119
Simultaneously with the execution of the deed of sale with chattel mortgage with promissory note, the seller-assignor,
by means of a deed of assignment (E exh. " 1 "), assigned its rights and interest in the chattel mortgage in favor of
the respondent.

Immediately thereafter, the seller-assignor delivered said two (2) units of "Used" tractors to the petitioner-
corporation's job site and as agreed, the seller-assignor stationed its own mechanics to supervise the operations of
the machines.

Barely fourteen (14) days had elapsed after their delivery when one of the tractors broke down and after another nine
(9) days, the other tractor likewise broke down (t.s.n., May 28, 1980, pp. 68-69).

On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-assignor of the fact that the tractors broke
down and requested for the seller-assignor's usual prompt attention under the warranty (E exh. " 5 ").

In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the seller-assignor sent to the job site
its mechanics to conduct the necessary repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6-E"), but the
tractors did not come out to be what they should be after the repairs were undertaken because the units were no
longer serviceable (t. s. n., May 28, 1980, p. 78).

Because of the breaking down of the tractors, the road building and simultaneous logging operations of petitioner-
corporation were delayed and petitioner Vergara advised the seller-assignor that the payments of the installments as
listed in the promissory note would likewise be delayed until the seller-assignor completely fulfills its obligation under
its warranty (t.s.n, May 28, 1980, p. 79).

Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee asked the seller-assignor to pull out
the units and have them reconditioned, and thereafter to offer them for sale. The proceeds were to be given to the
respondent and the excess, if any, to be divided between the seller-assignor and petitioner-corporation which offered
to bear one-half (1/2) of the reconditioning cost (E exh. " 7 ").

No response to this letter, Exhibit "7," was received by the petitioner-corporation and despite several follow-up calls,
the seller-assignor did nothing with regard to the request, until the complaint in this case was filed by the respondent
against the petitioners, the corporation, Wee, and Vergara.

The complaint was filed by the respondent against the petitioners for the recovery of the principal sum of One Million
Ninety Three Thousand Seven Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71), accrued interest of One
Hundred Fifty One Thousand Six Hundred Eighteen Pesos & 86/100 (P151,618.86) as of August 15, 1979, accruing
interest thereafter at the rate of twelve (12%) percent per annum, attorney's fees of Two Hundred Forty Nine
Thousand Eighty One Pesos & 71/100 (P249,081.7 1) and costs of suit.

The petitioners filed their amended answer praying for the dismissal of the complaint and asking the trial court to
order the respondent to pay the petitioners damages in an amount at the sound discretion of the court, Twenty
Thousand Pesos (P20,000.00) as and for attorney's fees, and Five Thousand Pesos (P5,000.00) for expenses of
litigation. The petitioners likewise prayed for such other and further relief as would be just under the premises.

In a decision dated April 20, 1981, the trial court rendered the following judgment:

WHEREFORE, judgment is hereby rendered:

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

2. ordering defendants to pay jointly and severally attorney's fees equivalent to ten percent (10%) of
the principal and to pay the costs of the suit.

Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)

On June 8, 1981, the trial court issued an order denying the motion for reconsideration filed by the petitioners.

Thus, the petitioners appealed to the Intermediate Appellate Court and assigned therein the following errors:

120
THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC GULF AND PACIFIC COMPANY
OF MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.

II

THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE IS A HOLDER IN DUE COURSE
OF THE PROMISSORY NOTE AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE COURSE.

On July 17, 1985, the Intermediate Appellate Court issued the challenged decision affirming in toto the decision of
the trial court. The pertinent portions of the decision are as follows:

xxx xxx xxx

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

xxx xxx xxx

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

To begin with, it is beyond arguments that the plaintiff-appellee is a financing corporation engaged in
financing and receivable discounting extending credit facilities to consumers and industrial,
commercial or agricultural enterprises by discounting or factoring commercial papers or accounts
receivable duly authorized pursuant to R.A. 5980 otherwise known as the Financing Act.

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

In view of the essential elements found in the questioned promissory note, We opine that the same
is legally and conclusively enforceable against the defendants-appellants.

WHEREFORE, finding the decision appealed from according to law and evidence, We find the appeal
without merit and thus affirm the decision in toto. With costs against the appellants. (pp. 50-55, Rollo)

The petitioners' motion for reconsideration of the decision of July 17, 1985 was denied by the Intermediate Appellate
Court in its resolution dated October 17, 1985, a copy of which was received by the petitioners on October 21, 1985.

Hence, this petition was filed on the following grounds:

I.

ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE INSTRUMENT AS DEFINED UNDER
THE LAW SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO BEARER.

121
II

THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MERE ASSIGNEE OF THE SUBJECT
PROMISSORY NOTE.

III.

SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT AND THE TRANSFER OF RIGHTS
WAS THROUGH A MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST THE RESPONDENT ALL
DEFENSES THAT ARE AVAILABLE TO IT AS AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS
MARKETING.

IV.

THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY NOTE BECAUSE:

A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THE LAW;

B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-ASSIGNOR OF THE
PROMISSORY NOTE.

V.

THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER- ASSIGNOR IN FAVOR OF THE
RESPONDENT DOES NOT CHANGE THE NATURE OF THE TRANSACTION FROM BEING A SALE ON
INSTALLMENTS TO A PURE LOAN.

VI.

THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN ANY COURT BECAUSE THE
REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON OR CANCELLED.

The petitioners prayed that judgment be rendered setting aside the decision dated July 17, 1985, as well as the
resolution dated October 17, 1985 and dismissing the complaint but granting petitioners' counterclaims before the
court of origin.

On the other hand, the respondent corporation in its comment to the petition filed on February 20, 1986, contended
that the petition was filed out of time; that the promissory note is a negotiable instrument and respondent a holder in
due course; that respondent is not liable for any breach of warranty; and finally, that the promissory note is admissible
in evidence.

The core issue herein is whether or not the promissory note in question is a negotiable instrument so as to bar
completely all the available defenses of the petitioner against the respondent-assignee.

Preliminarily, it must be established at the outset that we consider the instant petition to have been filed on time
because the petitioners' motion for reconsideration actually raised new issues. It cannot, therefore, be considered
pro- formal.

The petition is impressed with merit.

First, there is no question that the seller-assignor breached its express 90-day warranty because the findings of the
trial court, adopted by the respondent appellate court, that "14 days after delivery, the first tractor broke down and 9
days, thereafter, the second tractor became inoperable" are sustained by the records. The petitioner was clearly a
victim of a warranty not honored by the maker.

The Civil Code provides that:

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

ART. 1562. In a sale of goods, there is an implied warranty or condition as to the quality or fitness of
the goods, as follows:
122
 (1) Where the buyer, expressly or by implication makes known to the seller the particular purpose for
which the goods are acquired, and it appears that the buyer relies on the sellers skill or judge
judgment (whether he be the grower or manufacturer or not), there is an implied warranty that the
goods shall be reasonably fit for such purpose;

xxx xxx xxx

ART. 1564. An implied warranty or condition as to the quality or fitness for a particular purpose may
be annexed by the usage of trade.

xxx xxx xxx

ART. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the thing sold
even though he was not aware thereof.

This provision shall not apply if the contrary has been stipulated, and the vendor was not aware of
the hidden faults or defects in the thing sold. (Emphasis supplied).

It is patent then, that the seller-assignor is liable for its breach of warranty against the petitioner. This liability as a
general rule, extends to the corporation to whom it assigned its rights and interests unless the assignee is a holder
in due course of the promissory note in question, assuming the note is negotiable, in which case the latter's rights
are based on the negotiable instrument and assuming further that the petitioner's defenses may not prevail against
it.

Secondly, it likewise cannot be denied that as soon as the tractors broke down, the petitioner-corporation notified the
seller-assignor's sister company, AG & P, about the breakdown based on the seller-assignor's express 90-day
warranty, with which the latter complied by sending its mechanics. However, due to the seller-assignor's delay and
its failure to comply with its warranty, the tractors became totally unserviceable and useless for the purpose for which
they were purchased.

Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its contract with the seller-assignor.

Articles 1191 and 1567 of the Civil Code provide that:

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation with the
payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.

xxx xxx xxx

ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the vendee may elect between
withdrawing from the contract and demanding a proportionate reduction of the price, with damages
in either case. (Emphasis supplied)

Petitioner, having unilaterally and extrajudicially rescinded its contract with the seller-assignor, necessarily can no
longer sue the seller-assignor except by way of counterclaim if the seller-assignor sues it because of the rescission.

In the case of the University of the Philippines v. De los Angeles (35 SCRA 102) we held:

In other words, the party who deems the contract violated may consider it resolved or rescinded, and
act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final
judgment of the corresponding court that will conclusively and finally settle whether the action taken
was or was not correct in law. But the law definitely does not require that the contracting party who
believes itself injured must first file suit and wait for adjudgement before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and
watch its damages accumulate during the pendency of the suit until the final judgment of rescission
is rendered when the law itself requires that he should exercise due diligence to minimize its own
damages (Civil Code, Article 2203). (Emphasis supplied)

Going back to the core issue, we rule that the promissory note in question is not a negotiable instrument.

The pertinent portion of the note is as follows:

123
 FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL PRODUCTS
MARKETING, the sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED EIGHTY
NINE PESOS & 71/100 only (P 1,093,789.71), Philippine Currency, the said principal sum, to be
payable in 24 monthly installments starting July 15, 1978 and every 15th of the month thereafter until
fully paid. ...

Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a promissory note "must
be payable to order or bearer, " it cannot be denied that the promissory note in question is not a negotiable instrument.

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

xxx xxx xxx

When instrument is payable to order.

SEC. 8. WHEN PAYABLE TO ORDER. — The instrument is payable to order where it is drawn
payable to the order of a specified person or to him or his order. . . .

xxx xxx xxx

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

Therefore, considering that the subject promissory note is not a negotiable instrument, it follows that the respondent
can never be a holder in due course but remains a mere assignee of the note in question. Thus, the petitioner may
raise against the respondent all defenses available to it as against the seller-assignor Industrial Products Marketing.

This being so, there was no need for the petitioner to implied the seller-assignor when it was sued by the respondent-
assignee because the petitioner's defenses apply to both or either of either of them. Actually, the records show that
even the respondent itself admitted to being a mere assignee of the promissory note in question, to wit:

ATTY. PALACA:

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

COURT:

You confirm his manifestation? You are nodding your head? Do you confirm that?

ATTY. ILAGAN:

The Deed of Sale cannot be assigned. A deed of sale is a transaction between two
persons; what is assigned are rights, the rights of the mortgagee were assigned to
the IFC Leasing & Acceptance Corporation.

COURT:

He puts it in a simple way as one-deed of sale and chattel mortgage were assigned;
. . . you want to make a distinction, one is an assignment of mortgage right and the
other one is indorsement of the promissory note. What counsel for defendants wants
is that you stipulate that it is contained in one single transaction?

ATTY. ILAGAN:
124
 We stipulate it is one single transaction. (pp. 27-29, TSN., February 13, 1980).

Secondly, even conceding for purposes of discussion that the promissory note in question is a negotiable instrument,
the respondent cannot be a holder in due course for a more significant reason.

The evidence presented in the instant case shows that prior to the sale on installment of the tractors, there was an
arrangement between the seller-assignor, Industrial Products Marketing, and the respondent whereby the latter
would pay the seller-assignor the entire purchase price and the seller-assignor, in turn, would assign its rights to the
respondent which acquired the right to collect the price from the buyer, herein petitioner Consolidated Plywood
Industries, Inc.

A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the Deed of Assignment and the
Disclosure of Loan/Credit Transaction shows that said documents evidencing the sale on installment of the tractors
were all executed on the same day by and among the buyer, which is herein petitioner Consolidated Plywood
Industries, Inc.; the seller-assignor which is the Industrial Products Marketing; and the assignee-financing company,
which is the respondent. Therefore, the respondent had actual knowledge of the fact that the seller-assignor's right
to collect the purchase price was not unconditional, and that it was subject to the condition that the tractors -sold
were not defective. The respondent knew that when the tractors turned out to be defective, it would be subject to the
defense of failure of consideration and cannot recover the purchase price from the petitioners. Even assuming for
the sake of argument that the promissory note is negotiable, the respondent, which took the same with actual
knowledge of the foregoing facts so that its action in taking the instrument amounted to bad faith, is not a holder in
due course. As such, the respondent is subject to all defenses which the petitioners may raise against the seller-
assignor. Any other interpretation would be most inequitous to the unfortunate buyer who is not only saddled with
two useless tractors but must also face a lawsuit from the assignee for the entire purchase price and all its incidents
without being able to raise valid defenses available as against the assignor.

Lastly, the respondent failed to present any evidence to prove that it had no knowledge of any fact, which would
justify its act of taking the promissory note as not amounting to bad faith.

Sections 52 and 56 of the Negotiable Instruments Law provide that: negotiating it.

xxx xxx xxx

SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. — A holder in due course is a holder
who has taken the instrument under the following conditions:

xxx xxx xxx

xxx xxx xxx

(c) That he took it in good faith and for value

(d) That the time it was negotiated by him he had no notice of any infirmity in the instrument of deffect
in the title of the person negotiating it

xxx xxx xxx

SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — To constitute notice of an infirmity in the
instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated
must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action
in taking the instrument amounts to bad faith. (Emphasis supplied)

We subscribe to the view of Campos and Campos that a financing company is not a holder in good faith as to the
buyer, to wit:

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

It may be that our holding here will require some changes in business methods and
will impose a greater burden on the finance companies. We think the buyer-Mr. & Mrs.

125
 General Public-should have some protection somewhere along the line. We believe
the finance company is better able to bear the risk of the dealer's insolvency than the
buyer and in a far better position to protect his interests against unscrupulous and
insolvent dealers. . . .

If this opinion imposes great burdens on finance companies it is a potent argument in

favor of a rule which win afford public protection to the general buying public against
unscrupulous dealers in personal property. . . . (Mutual Finance Co. v. Martin, 63 So.
2d 649, 44 ALR 2d 1 [1953]) (Campos and Campos, Notes and Selected Cases on
Negotiable Instruments Law, Third Edition, p. 128).

In the case of Commercial Credit Corporation v. Orange Country Machine Works (34 Cal. 2d 766) involving similar
facts, it was held that in a very real sense, the finance company was a moving force in the transaction from its very
inception and acted as a party to it. When a finance company actively participates in a transaction of this type from
its inception, it cannot be regarded as a holder in due course of the note given in the transaction.

In like manner, therefore, even assuming that the subject promissory note is negotiable, the respondent, a financing
company which actively participated in the sale on installment of the subject two Allis Crawler tractors, cannot be
regarded as a holder in due course of said note. It follows that the respondent's rights under the promissory note
involved in this case are subject to all defenses that the petitioners have against the seller-assignor, Industrial
Products Marketing. For Section 58 of the Negotiable Instruments Law provides that "in the hands of any holder other
than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable. ...
"

Prescinding from the foregoing and setting aside other peripheral issues, we find that both the trial and respondent
appellate court erred in holding the promissory note in question to be negotiable. Such a ruling does not only violate
the law and applicable jurisprudence, but would result in unjust enrichment on the part of both the assigner- assignor
and respondent assignee at the expense of the petitioner-corporation which rightfully rescinded an inequitable
contract. We note, however, that since the seller-assignor has not been impleaded herein, there is no obstacle for
the respondent to file a civil Suit and litigate its claims against the seller- assignor in the rather unlikely possibility that
it so desires,

WHEREFORE, in view of the foregoing, the decision of the respondent appellate court dated July 17, 1985, as well
as its resolution dated October 17, 1986, are hereby ANNULLED and SET ASIDE. The complaint against the
petitioner before the trial court is DISMISSED.

SO ORDERED.

iii
SPS. PEDRO AND FLORENCIA VIOLAGO vs.
BA FINANCE CORPORATION and AVELINO VIOLAGO
G.R. No. 158262 July 21, 2008
VELASCO, JR., J.:

This is a Petition for Review on Certiorari of the August 20, 2002 Decision 1 and May 15, 2003 Resolution2 of the
Court of Appeals (CA) in CA-G.R. CV No. 48489 entitled BA Finance Corporation, Plaintiff-Appellee v. Sps. Pedro
and Florencia Violago, Defendants and Third Party Plaintiffs-Appellants v. Avelino Violago, Third Party Defendant-
Appellant. Petitioners-spouses Pedro and Florencia Violago pray for the reversal of the appellate court’s ruling which
held them liable to respondent BA Finance Corporation (BA Finance) under a promissory note and a chattel
mortgage. Petitioners likewise pray that respondent Avelino Violago be adjudged directly liable to BA Finance.

The Facts

Sometime in 1983, Avelino Violago, President of Violago Motor Sales Corporation (VMSC), offered to sell a car to
his cousin, Pedro F. Violago, and the latter’s wife, Florencia. Avelino explained that he needed to sell a vehicle to
increase the sales quota of VMSC, and that the spouses would just have to pay a down payment of PhP 60,500
while the balance would be financed by respondent BA Finance. The spouses would pay the monthly installments to
BA Finance while Avelino would take care of the documentation and approval of financing of the car. Under these
terms, the spouses then agreed to purchase a Toyota Cressida Model 1983 from VMSC.3

On August 4, 1983, the spouses and Avelino signed a promissory note under which they bound themselves to pay
jointly and severally to the order of VMSC the amount of PhP 209,601 in 36 monthly installments of PhP 5,822.25 a
month, the first installment to be due and payable on September 16, 1983. Avelino prepared a Disclosure Statement
of Loan/Credit Transportation which showed the net purchase price of the vehicle, down payment, balance, and
finance charges. VMSC then issued a sales invoice in favor of the spouses with a detailed description of the Toyota
126
Cressida car. In turn, the spouses executed a chattel mortgage over the car in favor of VMSC as security for the
amount of PhP 209,601. VMSC, through Avelino, endorsed the promissory note to BA Finance without recourse.
After receiving the amount of PhP 209,601, VMSC executed a Deed of Assignment of its rights and interests under
the promissory note and chattel mortgage in favor of BA Finance. Meanwhile, the spouses remitted the amount of
PhP 60,500 to VMSC through Avelino.4

The sales invoice was filed with the Land Transportation Office (LTO)-Baliwag Branch, which issued Certificate of
Registration No. 0137032 in the name of Pedro on August 8, 1983. The spouses were unaware that the same car
had already been sold in 1982 to Esmeraldo Violago, another cousin of Avelino, and registered in Esmeraldo’s name
by the LTO-San Rafael Branch. Despite the spouses’ demand for the car and Avelino’s repeated assurances, there
was no delivery of the vehicle. Since VMSC failed to deliver the car, Pedro did not pay any monthly amortization to
BA Finance. 5

On March 1, 1984, BA Finance filed with the Regional Trial Court (RTC), Branch 116 in Pasay City a complaint for
Replevin with Damages against the spouses. The complaint, docketed as Civil Case No. 1628-P, prayed for the
delivery of the vehicle in favor of BA Finance or, if delivery cannot be effected, for the payment of PhP 199,049.41
plus penalty at the rate of 3% per month from February 15, 1984 until fully paid. BA Finance also asked for the
payment of attorney’s fees, liquidated damages, replevin bond premium, expenses in the seizure of the vehicle, and
costs of suit. The RTC issued an Order of Replevin on March 28, 1984. The Violago spouses, as defendants a quo,
were declared in default for failing to file an answer. Eventually, the RTC rendered on December 3, 1984 a decision
in favor of BA Finance. A writ of execution was thereafter issued on January 11, 1985, followed by an alias writ of
execution.6

In the meantime, Esmeraldo conveyed the vehicle to Jose V. Olvido who was then issued Certificate of Registration
No. 0014830-4 by the LTO-Cebu City Branch on April 29, 1985. On May 8, 1987, Jose executed a Chattel Mortgage
over the vehicle in favor of Generoso Lopez as security for a loan covered by a promissory note in the amount of
PhP 260,664. This promissory note was later endorsed to BA Finance, Cebu City branch.7

On August 21, 1989, the spouses Violago filed a Motion for Reconsideration and Motion to Quash Writ of Execution
on the basis of lack of a valid service of summons on them, among other reasons. The RTC denied the motions;
hence, the spouses filed a petition for certiorari under Rule 65 before the CA, docketed as CA G.R. No. 2002-SP.
On May 31, 1991, the CA nullified the RTC’s order. This CA decision became final and executory.

On January 28, 1992, the spouses filed their Answer before the RTC, alleging the following: they never received the
vehicle from VMSC; the vehicle was previously sold to Esmeraldo; BA Finance was not a holder in due course under
Section 59 of the Negotiable Instruments Law (NIL); and the recourse of BA Finance should be against VMSC. On
February 25, 1995, the Violago spouses, with prior leave of court, filed a Third Party Complaint against Avelino
praying that he be held liable to them in the event that they be held liable to BA Finance, as well as for damages.
VMSC was not impleaded as third party defendant. In his Motion to Dismiss and Answer, Avelino contended that he
was not a party to the transaction personally, but VMSC. Avelino’s motion was denied and the third party complaint
against him was entertained by the trial court. Subsequently, the spouses belabored to prove that they affixed their
signatures on the promissory note and chattel mortgage in favor of VMSC in blank.8

The RTC rendered a Decision on March 5, 1994, finding for BA Finance but against the Violago spouses. The RTC,
however, declared that they are entitled to be indemnified by Avelino. The dispositive portion of the RTC’s decision
reads:

WHEREFORE, defendant-[third]-party plaintiffs spouses Pedro F. Violago and Florencia R. Violago are ordered to
deliver to plaintiff BA Finance Corporation, at its principal office the BAFC Building, Gamboa St., Legaspi Village,
Makati, Metro Manila the Toyota Cressida car, model 1983, bearing Engine No. 21R-02854117, and with Serial No.
RX60-804614, covered by the deed of chattel mortgage dated August 4, 1983; or if such delivery cannot be made,
to pay, jointly and severally, to the plaintiff the sum of P198,003.06 together with the penalty [thereon] at three percent
(3%) a month, from March 1, 1984, until the amount is fully paid.

In either case, the defendant-third-party plaintiffs are required to pay, jointly and severally, to the plaintiff a sum
equivalent to twenty-five percent (25%) of P198,003.06 as attorney’s fees, and another amount also equivalent to
twenty five percent (25%) of the said unpaid balance, as liquidated damages. The defendant-third party-plaintiffs are
also required to shoulder the litigation expenses and costs. 1aw phil

As indemnification, third-party defendant Avelino Violago is ordered to deliver to defendants-third-party plaintiffs

spouses Pedro F. Violago and Florencia R. Violago the aforedescribed motor vehicle; or if such delivery is not
possible, to pay to the said spouses the sum of P198,003.06, together with the penalty thereon at three (3%) a month
from March 1, 1984, until the amount is entirely paid.

In either case, the third-party defendant should pay to the defendant-third-party plaintiffs spouses a sum equivalent
to twenty-five percent (25%) of P198,003.06 as attorney’s fees, and another sum equivalent also to twenty-five
percent (25%) of the said unpaid balance, as liquidated damages.

127
Third-party defendant Avelino Violago is further ordered to return to the third-party plaintiffs the sum of P60,500.00
they paid to him as down payment for the car; and to pay them P15,000.00 as moral damages; P10,000.00 as
exemplary damages; and reimburse them for all the expenses and costs of the suit.

The counterclaims of the defendants and third-party defendant, for lack of merit, are dismissed.9

The Ruling of the CA

Petitioners-spouses and Avelino appealed to the CA. The spouses argued that the promissory note is a negotiable
instrument; hence, the trial court should have applied the NIL and not the Civil Code. The spouses also asserted that
since VMSC was not the owner of the vehicle at the time of sale, the sale was null and void for the failure in the
"cause or consideration" of the promissory note, which in this case was the sale and delivery of the vehicle. The
spouses also alleged that BA Finance was not a holder in due course of the note since it knew, through its Cebu City
branch, that the car was never delivered to the spouses.10 On the other hand, Avelino prayed for the dismissal of the
complaint against him because he was not a party to the transaction, and for an order to the spouses to pay him
moral damages and costs of suit.

The appellate court ruled that the promissory note was a negotiable instrument and that BA Finance was a holder in
due course, applying Secs. 8, 24, and 52 of the NIL. The CA faulted petitioners for failing to implead VMSC, the seller
of the vehicle and creditor in the promissory note, as a party in their Third Party Complaint. Citing Salas v. Court of
Appeals,11 the appellate court reasoned that since VMSC is an indispensable party, any judgment will not bind it or
be enforced against it. The absence of VMSC rendered the proceedings in the RTC and the judgment in the Third
Party Complaint "null and void, not only as to the absent party but also to the present parties, namely the Defendants-
Appellants (petitioners herein) and the Third-Party-Defendant-Appellant (Avelino Violago)." The CA set aside the trial
court’s order holding Avelino liable for damages to the spouses without prejudice to the action of the spouses against
VMSC and Avelino in a separate action.12

The dispositive portion of the August 20, 2002 CA Decision reads:

IN THE LIGHT OF ALL THE FOREGOING, the appeal of the Plaintiffs-Appellants is DISMISSED. The appeal of the
Third-Party-Defendant-Appellant is GRANTED. The Decision of the Court a quo is AFFIRMED, with the modification
that the Third-Party Complaint against the Third-Party-Defendant-appellant is DISMISSED, without prejudice. The
counterclaims of the Third-Party Defendant Appellant against the Defendants-Appellants are DISMISSED, also
without prejudice.13

The spouses Violago sought but were denied reconsideration by the CA per its Resolution of May 15, 2003.

The Issues

Petitioners raise the following issues:

WHETHER OR NOT THE HOLDER OF AN INVALID NEGOTIABLE PROMISSORY NOTE MAY BE

CONSIDERED A HOLDER IN DUE COURSE

WHETHER OR NOT A CHATTEL MORTGAGE SHOULD BE CONSIDERED VALID DESPITE VITIATION

OF CONSENT OF, AND THE FRAUD COMMITTED ON, THE MORTGAGORS BY AVELINO, AND THE
CLEAR ABSENCE OF OBJECT CERTAIN

WHETHER OR NOT THE VEIL OF CORPORATE ENTITY MAY BE INVOKED AND SUSTAINED DESPITE
THE FRAUD AND DECEPTION OF AVELINO

The Court’s Ruling

The ruling of the appellate court is set aside insofar as it dismissed, without prejudice, the third party complaint of
petitioners against Avelino thereby effectively absolving Avelino from any liability under the third party complaint.

In addressing the threshold issue of whether BA Finance is a holder in due course of the promissory note, we must
determine whether the note is a negotiable instrument and, hence, covered by the NIL. In their appeal to the CA,
petitioners argued that the promissory note is a negotiable instrument and that the provisions of the NIL, not the Civil
Code, should be applied. In the present petition, however, petitioners claim that Article 1318 of the Civil Code14 should
be applied since their consent was vitiated by fraud, and, thus, the promissory note does not carry any legal effect
despite its negotiation. Either way, the petitioners’ arguments deserve no merit.

The promissory note is clearly negotiable. The appellate court was correct in finding all the requisites of a negotiable
instrument present. The NIL provides:

128
Section 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.

The promissory note signed by petitioners reads:

209,601.00 Makati, Metro Manila, Philippines, August 4, 1983

For value received, I/we, jointly and severally, promise to pay to the order of VIOLAGO MOTOR SALES
CORPORATION, its office, the principal sum of TWO HUNDRED NINE THOUSAND SIX HUNDRED ONE ONLY
Pesos (P209,601.00), Philippines Currency, with interest at the rate stipulated herein below, in installments as
follows:

Thirty Six (36) successive monthly installments of P5,822.25, the first installment to be paid on 9-16-83, and the
succeeding monthly installments on the 16th day of each and every succeeding month thereafter until the account is
fully paid, provided that the penalty charge of three (3%) per cent per month or a fraction thereof shall be added on
each unpaid installment from maturity thereof until fully paid.

xxxx

Notice of demand, presentment, dishonor and protest are hereby waived.

(Sgd.) (Sgd.)
PEDRO F. VIOLAGO FLORENCIA R. VIOLAGO

763 Constancia St., Sampaloc, Manila same

(Address) (Address)

(Sgd.) (Sgd.)
Marivic Avaria Jesus Tuazon

(WITNESS) (WITNESS)

PAY TO THE ORDER OF BA FINANCE CORPORATION

WITHOUT RECOURSE

VIOLAGO MOTOR SALES CORPORATION

By: (Sgd.)
AVELINO A. VIOLAGO, Pres. 15

The promissory note clearly satisfies the requirements of a negotiable instrument under the NIL. It is in writing; signed
by the Violago spouses; has an unconditional promise to pay a certain amount, i.e., PhP 209,601, on specific dates
in the future which could be determined from the terms of the note; made payable to the order of VMSC; and names
the drawees with certainty. The indorsement by VMSC to BA Finance appears likewise to be valid and regular.

The more important issue now is whether or not BA Finance is a holder in due course. The resolution of this issue
will determine whether petitioners’ defense of fraud and nullity of the sale could validly be raised against respondent
corporation. Sec. 52 of the NIL provides:

129
Section 52. What constitutes a holder in due course.––A holder in due course is a holder who has taken the
instrument under the following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had been previously
dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in
the title of the person negotiating it.

The law presumes that a holder of a negotiable instrument is a holder thereof in due course. 16 In this case, the CA
is correct in finding that BA Finance meets all the foregoing requisites:

In the present recourse, on its face, (a) the "Promissory Note", Exhibit "A", is complete and regular; (b) the
"Promissory Note" was endorsed by the VMSC in favor of the Appellee; (c) the Appellee, when it accepted the Note,
acted in good faith and for value; (d) the Appellee was never informed, before and at the time the "Promissory Note"
was endorsed to the Appellee, that the vehicle sold to the Defendants-Appellants was not delivered to the latter and
that VMSC had already previously sold the vehicle to Esmeraldo Violago. Although Jose Olvido mortgaged the
vehicle to Generoso Lopez, who assigned his rights to the BA Finance Corporation (Cebu Branch), the same
occurred only on May 8, 1987, much later than August 4, 1983, when VMSC assigned its rights over the "Chattel
Mortgage" by the Defendants-Appellants to the Appellee. Hence, Appellee was a holder in due course.17

In the hands of one other than a holder in due course, a negotiable instrument is subject to the same defenses as if
it were non-negotiable.18 A holder in due course, however, holds the instrument free from any defect of title of prior
parties and from defenses available to prior parties among themselves, and may enforce payment of the instrument
for the full amount thereof.19 Since BA Finance is a holder in due course, petitioners cannot raise the defense of non-
delivery of the object and nullity of the sale against the corporation. The NIL considers every negotiable
instrument prima facie to have been issued for a valuable consideration.20 In Salas, we held that a party holding an
instrument may enforce payment of the instrument for the full amount thereof. As such, the maker cannot set up the
defense of nullity of the contract of sale.21 Thus, petitioners are liable to respondent corporation for the payment of
the amount stated in the instrument.

From the third party complaint to the present petition, however, petitioners pray that the veil of corporate fiction be
set aside and Avelino be adjudged directly liable to BA Finance. Petitioners likewise pray for damages for the fraud
committed upon them.

In Concept Builders, Inc. v. NLRC, we held:

It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its
stockholders and from other corporations to which it may be connected. But, this separate and distinct personality of
a corporation is merely a fiction created by law for convenience and to promote justice. So, when the notion of
separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or defend crime, or is
used as a device to defeat the labor laws, this separate personality of the corporation may be disregarded or the veil
of corporate fiction pierced. This is true likewise when the corporation is merely an adjunct, a business conduit or an
alter ego of another corporation.

xxxx

The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows:

1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of
policy and business practice in respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;

2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation
of a statutory or other positive legal duty, or dishonest and unjust acts in contravention of plaintiffs legal rights;
and

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.22

This case meets the foregoing test. VMSC is a family-owned corporation of which Avelino was president. Avelino
committed fraud in selling the vehicle to petitioners, a vehicle that was previously sold to Avelino’s other cousin,
Esmeraldo. Nowhere in the pleadings did Avelino refute the fact that the vehicle in this case was already previously

130
sold to Esmeraldo; he merely insisted that he cannot be held liable because he was not a party to the transaction.
The fact that Avelino and Pedro are cousins, and that Avelino claimed to have a need to increase the sales quota,
was likely among the factors which motivated the spouses to buy the car. Avelino, knowing fully well that the vehicle
was already sold, and with abuse of his relationship with the spouses, still proceeded with the sale and collected the
down payment from petitioners. The trial court found that the vehicle was not delivered to the spouses. Avelino clearly
defrauded petitioners. His actions were the proximate cause of petitioners’ loss. He cannot now hide behind the
separate corporate personality of VMSC to escape from liability for the amount adjudged by the trial court in favor of
petitioners.

The fact that VMSC was not included as defendant in petitioners’ third party complaint does not preclude recovery
by petitioners from Avelino; neither would such non-inclusion constitute a bar to the application of the piercing-of-
the-corporate-veil doctrine. We suggested as much in Arcilla v. Court of Appeals, an appellate proceeding involving
petitioner Arcilla’s bid to avoid the adverse CA decision on the argument that he is not personally liable for the amount
adjudged since the same constitutes a corporate liability which nevertheless cannot even be enforced against the
corporation which has not been impleaded as a party below. In that case, the Court found as well-taken the CA’s act
of disregarding the separate juridical personality of the corporation and holding its president, Arcilla, liable for the
obligations incurred in the name of the corporation although it was not a party to the collection suit before the trial
court. An excerpt from Arcilla:

x x x In short, even if We are to assume arguendo that the obligation was incurred in the name of the corporation,
the petitioner [Arcilla] would still be personally liable therefor because for all legal intents and purposes, he and the
corporation are one and the same. Csar Marine Resources, Inc. is nothing more than his business conduit and alter
ego. The fiction of separate juridical personality conferred upon such corporation by law should be disregarded.
Significantly, petitioner does not seriously challenge the [CA’s] application of the doctrine which permits the piercing
of the corporate veil and the disregarding of the fiction of a separate juridical personality; this is because he knows
only too well that from the beginning, he merely used the corporation for his personal purposes.23

WHEREFORE, the CA’s August 20, 2002 Decision and May 15, 2003 Resolution in CA-G.R. CV No. 48489 are SET
ASIDE insofar as they dismissed without prejudice the third party complaint of petitioners-spouses Pedro and
Florencia Violago against respondent Avelino Violago. The March 5, 1994 Decision of the RTC
is REINSTATED and AFFIRMED. Costs against Avelino Violago.

SO ORDERED.

VIII. DISCHARGE OF NEGOTIABLE INSTRUMENT

METROPOLITAN BANK AND TRUST COMPANY

vs. RENATO D. CABILZO
G.R. No. 154469 December 6, 2006
CHICO-NAZARIO, J.:

Before this Court is a Petition for Review on Certiorari, filed by petitioner Metropolitan Bank and Trust Company
(Metrobank) seeking to reverse and set aside the Decision1 of the Court of Appeals dated 8 March 2002 and its
Resolution dated 26 July 2002 affirming the Decision of the Regional Trial Court (RTC) of Manila, Branch 13 dated
4 September 1998. The dispositive portion of the Court of Appeals Decision reads:

WHEREFORE, the assailed decision dated September 4, 1998 is AFFIRMED with modifications (sic) that
the awards for exemplary damages and attorney’s fees are hereby deleted.

Petitioner Metrobank is a banking institution duly organized and existing as such under Philippine laws.2

Respondent Renato D. Cabilzo (Cabilzo) was one of Metrobank’s clients who maintained a current account with
Metrobank Pasong Tamo Branch.3

On 12 November 1994, Cabilzo issued a Metrobank Check No. 985988, payable to "CASH" and postdated on 24
November 1994 in the amount of One Thousand Pesos (P1,000.00). The check was drawn against Cabilzo’s Account
with Metrobank Pasong Tamo Branch under Current Account No. 618044873-3 and was paid by Cabilzo to a certain
Mr. Marquez, as his sales commission.4

Subsequently, the check was presented to Westmont Bank for payment. Westmont Bank, in turn, indorsed the check
to Metrobank for appropriate clearing. After the entries thereon were examined, including the availability of funds and

131
the authenticity of the signature of the drawer, Metrobank cleared the check for encashment in accordance with the
Philippine Clearing House Corporation (PCHC) Rules.

On 16 November 1994, Cabilzo’s representative was at Metrobank Pasong Tamo Branch to make some transaction
when he was asked by a bank personnel if Cabilzo had issued a check in the amount of P91,000.00 to which the
former replied in the negative. On the afternoon of the same date, Cabilzo himself called Metrobank to reiterate that
he did not issue a check in the amount of P91,000.00 and requested that the questioned check be returned to him
for verification, to which Metrobank complied.5

Upon receipt of the check, Cabilzo discovered that Metrobank Check No. 985988 which he issued on 12 November
1994 in the amount of P1,000.00 was altered to P91,000.00 and the date 24 November 1994 was changed to 14
November 1994.6

Hence, Cabilzo demanded that Metrobank re-credit the amount of P91,000.00 to his account. Metrobank, however,
refused reasoning that it has to refer the matter first to its Legal Division for appropriate action. Repeated verbal
demands followed but Metrobank still failed to re-credit the amount of P91,000.00 to Cabilzo’s account.7

On 30 June 1995, Cabilzo, thru counsel, finally sent a letter-demand8 to Metrobank for the payment of P90,000.00,
after deducting the original value of the check in the amount of P1,000.00. Such written demand notwithstanding,
Metrobank still failed or refused to comply with its obligation.

Consequently, Cabilzo instituted a civil action for damages against Metrobank before the RTC of Manila, Branch 13.
In his Complaint docketed as Civil Case No. 95-75651, Renato D. Cabilzo v. Metropolitan Bank and Trust
Company, Cabilzo prayed that in addition to his claim for reimbursement, actual and moral damages plus costs of
the suit be awarded in his favor.9

For its part, Metrobank countered that upon the receipt of the said check through the PCHC on 14 November 1994,
it examined the genuineness and the authenticity of the drawer’s signature appearing thereon and the technical
entries on the check including the amount in figures and in words to determine if there were alterations, erasures,
superimpositions or intercalations thereon, but none was noted. After verifying the authenticity and propriety of the
aforesaid entries, including the indorsement of the collecting bank located at the dorsal side of the check which stated
that, "all prior indorsements and lack of indorsement guaranteed," Metrobank cleared the check.10

Anent thereto, Metrobank claimed that as a collecting bank and the last indorser, Westmont Bank should be held
liable for the value of the check. Westmont Bank indorsed the check as the an unqualified indorser, by virtue of which
it assumed the liability of a general indorser, and thus, among others, warranted that the instrument is genuine and
in all respect what it purports to be.

In addition, Metrobank, in turn, claimed that Cabilzo was partly responsible in leaving spaces on the check, which,
made the fraudulent insertion of the amount and figures thereon, possible. On account of his negligence in the
preparation and issuance of the check, which according to Metrobank, was the proximate cause of the loss, Cabilzo
cannot thereafter claim indemnity by virtue of the doctrine of equitable estoppel.

Thus, Metrobank demanded from Cabilzo, for payment in the amount of P100,000.00 which represents the cost of
litigation and attorney’s fees, for allegedly bringing a frivolous and baseless suit. 11

On 19 April 1996, Metrobank filed a Third-Party Complaint12 against Westmont Bank on account of its unqualified
indorsement stamped at the dorsal side of the check which the former relied upon in clearing what turned out to be
a materially altered check.

Subsequently, a Motion to Dismiss13 the Third-Party Complaint was then filed by Westmont bank because another
case involving the same cause of action was pending before a different court. The said case arose from an action
for reimbursement filed by Metrobank before the Arbitration Committee of the PCHC against Westmont Bank, and
now the subject of a Petition for Review before the RTC of Manila, Branch 19.

In an Order14 dated 4 February 1997, the trial court granted the Motion to Dismiss the Third-Party Complaint on the
ground of litis pendentia.

On 4 September 1998, the RTC rendered a Decision15 in favor of Cabilzo and thereby ordered Metrobank to pay the
sum of P90,000.00, the amount of the check. In stressing the fiduciary nature of the relationship between the bank
and its clients and the negligence of the drawee bank in failing to detect an apparent alteration on the check, the trial
court ordered for the payment of exemplary damages, attorney’s fees and cost of litigation. The dispositive portion
of the Decision reads:

WHEREFORE, judgment is rendered ordering defendant Metropolitan Bank and Trust Company to pay
plaintiff Renato Cabilzo the sum of P90,000 with legal interest of 6 percent per annum from November 16,

132
 1994 until payment is made plus P20,000 attorney’s fees, exemplary damages of P50,000, and costs of the
suit.16

Aggrieved, Metrobank appealed the adverse decision to the Court of Appeals reiterating its previous argument that
as the last indorser, Westmont Bank shall bear the loss occasioned by the fraudulent alteration of the check.
Elaborating, Metrobank maintained that by reason of its unqualified indorsement, Westmont Bank warranted that the
check in question is genuine, valid and subsisting and that upon presentment the check shall be accepted according
to its tenor.

Even more, Metrobank argued that in clearing the check, it was not remiss in the performance of its duty as the
drawee bank, but rather, it exercised the highest degree of diligence in accordance with the generally accepted
banking practice. It further insisted that the entries in the check were regular and authentic and alteration could not
be determined even upon close examination.

In a Decision17 dated 8 March 2002, the Court of Appeals affirmed with modification the Decision of the court a
quo, similarly finding Metrobank liable for the amount of the check, without prejudice, however, to the outcome of the
case between Metrobank and Westmont Bank which was pending before another tribunal. The decretal portion of
the Decision reads:

WHEREFORE, the assailed decision dated September 4, 1998 is AFFIRMED with the modifications (sic) that
the awards for exemplary damages and attorney’s fees are hereby deleted.18

Similarly ill-fated was Metrobank’s Motion for Reconsideration which was also denied by the appellate court in its
Resolution19 issued on 26 July 2002, for lack of merit.

Metrobank now poses before this Court this sole issue:

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN HOLDING METROBANK, AS DRAWEE

BANK, LIABLE FOR THE ALTERATIONS ON THE SUBJECT CHECK BEARING THE AUTHENTIC
SIGNATURE OF THE DRAWER THEREOF.

We resolve to deny the petition.

An alteration is said to be material if it changes the effect of the instrument. It means that an unauthorized change in
an instrument that purports to modify in any respect the obligation of a party or an unauthorized addition of words or
numbers or other change to an incomplete instrument relating to the obligation of a party.20 In other words, a material
alteration is one which changes the items which are required to be stated under Section 1 of the Negotiable
Instruments Law.

Section 1 of the Negotiable Instruments Law provides:

Section 1. Form of negotiable instruments. - An instrument to be negotiable must conform to the following
requirements:

(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 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.

Also pertinent is the following provision in the Negotiable Instrument Law which states:

Section 125. What constitutes material alteration. – Any alteration which changes:

(a) The date;

(b) The sum payable, either for principal or interest;

(c) The time or place of payment;

133
 (d) The number or the relation of the parties;

(e) The medium or currency in which payment is to be made;

Or which adds a place of payment where no place of payment is specified, or any other change or addition
which alters the effect of the instrument in any respect is a material alteration.

In the case at bar, the check was altered so that the amount was increased from P1,000.00 to P91,000.00 and the
date was changed from 24 November 1994 to 14 November 1994. Apparently, since the entries altered were among
those enumerated under Section 1 and 125, namely, the sum of money payable and the date of the check, the instant
controversy therefore squarely falls within the purview of material alteration.

Now, having laid the premise that the present petition is a case of material alteration, it is now necessary for us to
determine the effect of a materially altered instrument, as well as the rights and obligations of the parties thereunder.
The following provision of the Negotiable Instrument Law will shed us some light in threshing out this issue:

Section 124. Alteration of instrument; effect of. – Where a negotiable instrument is materially altered without
the assent of all parties liable thereon, it is avoided, except as against a party who has
himself made, authorized, and assented to the alteration and subsequent indorsers.

But when the instrument has been materially altered and is in the hands of a holder in due course not a party
to the alteration, he may enforce the payment thereof according to its original tenor. (Emphasis ours.)

Indubitably, Cabilzo was not the one who made nor authorized the alteration. Neither did he assent to the alteration
by his express or implied acts. There is no showing that he failed to exercise such reasonable degree of diligence
required of a prudent man which could have otherwise prevented the loss. As correctly ruled by the appellate court,
Cabilzo was never remiss in the preparation and issuance of the check, and there were no indicia of evidence that
would prove otherwise. Indeed, Cabilzo placed asterisks before and after the amount in words and figures in order
to forewarn the subsequent holders that nothing follows before and after the amount indicated other than the one
specified between the asterisks.

The degree of diligence required of a reasonable man in the exercise of his tasks and the performance of his duties
has been faithfully complied with by Cabilzo. In fact, he was wary enough that he filled with asterisks the spaces
between and after the amounts, not only those stated in words, but also those in numerical figures, in order to prevent
any fraudulent insertion, but unfortunately, the check was still successfully altered, indorsed by the collecting bank,
and cleared by the drawee bank, and encashed by the perpetrator of the fraud, to the damage and prejudice of
Cabilzo.

Verily, Metrobank cannot lightly impute that Cabilzo was negligent and is therefore prevented from asserting his
rights under the doctrine of equitable estoppel when the facts on record are bare of evidence to support such
conclusion. The doctrine of equitable estoppel states that when one of the two innocent persons, each guiltless of
any intentional or moral wrong, must suffer a loss, it must be borne by the one whose erroneous conduct, either by
omission or commission, was the cause of injury.21 Metrobank’s reliance on this dictum, is misplaced. For one,
Metrobank’s representation that it is an innocent party is flimsy and evidently, misleading. At the same time,
Metrobank cannot asseverate that Cabilzo was negligent and this negligence was the proximate cause 22 of the loss
in the absence of even a scintilla proof to buttress such claim. Negligence is not presumed but must be proven by
the one who alleges it.23

Undoubtedly, Cabilzo was an innocent party in this instant controversy. He was just an ordinary businessman who,
in order to facilitate his business transactions, entrusted his money with a bank, not knowing that the latter would
yield a substantial amount of his deposit to fraud, for which Cabilzo can never be faulted.

We never fail to stress the remarkable significance of a banking institution to commercial transactions, in particular,
and to the country’s economy in general. The banking system is an indispensable institution in the modern world and
plays a vital role in the economic life of every civilized nation. Whether as mere passive entities for the safekeeping
and saving of money or as active instruments of business and commerce, banks have become an ubiquitous
presence among the people, who have come to regard them with respect and even gratitude and, most of all,
confidence.24

Thus, even the humble wage-earner does not hesitate to entrust his life's savings to the bank of his choice, knowing
that they will be safe in its custody and will even earn some interest for him. The ordinary person, with equal faith,
usually maintains a modest checking account for security and convenience in the settling of his monthly bills and the
payment of ordinary expenses. As for a businessman like the respondent, the bank is a trusted and active associate
that can help in the running of his affairs, not only in the form of loans when needed but more often in the conduct of
their day-to-day transactions like the issuance or encashment of checks.25

134
In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account
consists only of a few hundred pesos or of millions. The bank must record every single transaction accurately, down
to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time the
amount of money the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to whomever
he directs.26

The point is that as a business affected with public interest and because of the nature of its functions, the bank is
under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary
nature of their relationship. The appropriate degree of diligence required of a bank must be a high degree of diligence,
if not the utmost diligence.27

In the present case, it is obvious that Metrobank was remiss in that duty and violated that relationship. As observed
by the Court of Appeals, there are material alterations on the check that are visible to the naked eye. Thus:

x x x The number "1" in the date is clearly imposed on a white figure in the shape of the number "2". The
appellant’s employees who examined the said check should have likewise been put on guard as to why at
the end of the amount in words, i.e., after the word "ONLY", there are 4 asterisks, while at the beginning of
the line or before said phrase, there is none, even as 4 asterisks have been placed before and after the word
"CASH" in the space for payee. In addition, the 4 asterisks before the words "ONE THOUSAND PESOS
ONLY" have noticeably been erased with typing correction paper, leaving white marks, over which the word
"NINETY" was superimposed. The same can be said of the numeral "9" in the amount "91,000", which is
superimposed over a whitish mark, obviously an erasure, in lieu of the asterisk which was deleted to insert
the said figure. The appellant’s employees should have again noticed why only 2 asterisks were placed before
the amount in figures, while 3 asterisks were placed after such amount. The word "NINETY" is also typed
differently and with a lighter ink, when compared with the words "ONE THOUSAND PESOS ONLY." The
letters of the word "NINETY" are likewise a little bigger when compared with the letters of the words "ONE
THOUSAND PESOS ONLY".28

Surprisingly, however, Metrobank failed to detect the above alterations which could not escape the attention of even
an ordinary person. This negligence was exacerbated by the fact that, as found by the trial court, the check in question
was examined by the cash custodian whose functions do not include the examinations of checks indorsed for
payment against drawer’s accounts.29 Obviously, the employee allowed by Metrobank to examine the check was not
verse and competent to handle such duty. These factual findings of the trial court is conclusive upon this court
especially when such findings was affirmed the appellate court.30

Apropos thereto, we need to reiterate that by the very nature of their work the degree of responsibility, care and
trustworthiness expected of their employees and officials is far better than those of ordinary clerks and employees.
Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees.31

In addition, the bank on which the check is drawn, known as the drawee bank, is under strict liability to pay to the
order of the payee in accordance with the drawer’s instructions as reflected on the face and by the terms of the check.
Payment made under materially altered instrument is not payment done in accordance with the instruction of the
drawer.

When the drawee bank pays a materially altered check, it violates the terms of the check, as well as its duty to charge
its client’s account only for bona fide disbursements he had made. Since the drawee bank, in the instant case, did
not pay according to the original tenor of the instrument, as directed by the drawer, then it has no right to claim
reimbursement from the drawer, much less, the right to deduct the erroneous payment it made from the drawer’s
account which it was expected to treat with utmost fidelity.

Metrobank vigorously asserts that the entries in the check were carefully examined: The date of the instrument, the
amount in words and figures, as well as the drawer’s signature, which after verification, were found to be proper and
authentic and was thus cleared. We are not persuaded. Metrobank’s negligence consisted in the omission of that
degree of diligence required of a bank owing to the fiduciary nature of its relationship with its client. Article 1173 of
the Civil Code provides:

The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature
of the obligation and corresponds with the circumstances of the persons, of the time and of the place. x x x.

Beyond question, Metrobank failed to comply with the degree required by the nature of its business as provided by
law and jurisprudence. If indeed it was not remiss in its obligation, then it would be inconceivable for it not to detect
an evident alteration considering its vast knowledge and technical expertise in the intricacies of the banking business.
This Court is not completely unaware of banks’ practices of employing devices and techniques in order to detect
forgeries, insertions, intercalations, superimpositions and alterations in checks and other negotiable instruments so
as to safeguard their authenticity and negotiability. Metrobank cannot now feign ignorance nor claim diligence; neither
can it point its finger at the collecting bank, in order to evade liability.

135
Metrobank argues that Westmont Bank, as the collecting bank and the last indorser, shall bear the loss. Without
ruling on the matter between the drawee bank and the collecting bank, which is already under the jurisdiction of
another tribunal, we find that Metrobank cannot rely on such indorsement, in clearing the questioned check. The
corollary liability of such indorsement, if any, is separate and independent from the liability of Metrobank to Cabilzo.

The reliance made by Metrobank on Westmont Bank’s indorsement is clearly inconsistent, if not totally offensive to
the dictum that being impressed with public interest, banks should exercise the highest degree of diligence, if not
utmost diligence in dealing with the accounts of its own clients. It owes the highest degree fidelity to its clients and
should not therefore lightly rely on the judgment of other banks on occasions where its clients money were involve,
no matter how small or substantial the amount at stake.

Metrobank’s contention that it relied on the strength of collecting bank’s indorsement may be merely a lame excuse
to evade liability, or may be indeed an actual banking practice. In either case, such act constitutes a deplorable
banking practice and could not be allowed by this Court bearing in mind that the confidence of public in general is of
paramount importance in banking business.

What is even more deplorable is that, having been informed of the alteration, Metrobank did not immediately re-credit
the amount that was erroneously debited from Cabilzo’s account but permitted a full blown litigation to push through,
to the prejudice of its client. Anyway, Metrobank is not left with no recourse for it can still run after the one who made
the alteration or with the collecting bank, which it had already done. It bears repeating that the records are bare of
evidence to prove that Cabilzo was negligent. We find no justifiable reason therefore why Metrobank did not
immediately reimburse his account. Such ineptness comes within the concept of wanton manner contemplated under
the Civil Code which warrants the imposition of exemplary damages, "by way of example or correction for the public
good," in the words of the law. It is expected that this ruling will serve as a stern warning in order to deter the repetition
of similar acts of negligence, lest the confidence of the public in the banking system be further eroded. 32

WHEREFORE, premises considered, the instant Petition is DENIED. The Decision dated 8 March 2002 and the
Resolution dated 26 July 2002 of the Court of Appeals are AFFIRMED with modification that exemplary damages in
the amount of P50,000.00 be awarded. Costs against the petitioner.

SO ORDERED.

Discharge of instrument and persons secondarily liable

IX. BP 22
a.

YU OH vs. CA and PEOPLE

G.R. No. 125297 June 6, 2003
AUSTRIA-MARTINEZ, J.:

Before this Court is a petition for review on certiorari of the decision1 of the Court of Appeals in CA-G.R. No. CR No.
16390, promulgated on January 30, 1996, affirming the conviction of petitioner Elvira Yu Oh by the Regional Trial
Court (RTC), Branch 99, Quezon City and the resolution dated May 30, 1996 which denied her motion for
reconsideration.

The facts as borne by the records are as follows:

Petitioner purchased pieces of jewelry from Solid Gold International Traders, Inc., a company engaged in jewelry
trading. Due to her failure to pay the purchase price, Solid Gold filed civil cases2 against her for specific performance
before the Regional Trial Court of Pasig. On September 17, 1990, petitioner and Solid Gold, through its general
manager Joaquin Novales III, entered into a compromise agreement to settle said civil cases.3 The compromise
agreement, as approved by the trial court, provided that petitioner shall issue a total of ninety-nine post-dated checks
in the amount of P50,000.00 each, dated every 15th and 30th of the month starting October 1, 1990 and the balance
of over P1 million to be paid in lump sum on November 16, 1994 which is also the due date of the 99 th and last
postdated check. Petitioner issued ten checks at P50,000.00 each, for a total of P500,000.00, drawn against her
account at the Equitable Banking Corporation (EBC), Grace Park, Caloocan City Branch. Novales then deposited
each of the ten checks on their respective due dates with the Far East Bank and Trust Company (FEBTC). However,
136
said checks were dishonored by EBC for the reason "Account Closed." Dishonor slips were issued for each check
that was returned to Novales.4

On October 5, 1992, Novales filed ten separate Informations, docketed as Criminal Cases Nos. 92-26243 to 92-
36252 before the RTC of Quezon City charging petitioner with violation of Batas Pambansa Bilang 22, otherwise
known as the Bouncing Checks Law.5 Except for the dates and the check numbers, the Informations uniformly allege:

That on or about the … in Quezon City, Philippines, the said accused did then and there willfully, unlawfully
and feloniously make or draw and issue to JOAQUIN P. LOVALES III to apply on account or for value
Equitable Banking Corp. Grace Park Caloocan Branch Check No. … dated … payable to SOLID GOLD
INTERNATIONAL TRADERS, INC. in the amount of P50,000.00, Philippine Currency, said accused well
knowing that at the time of issue she/he/they did not have sufficient funds in or credit with the drawee bank
for payment of such check in full upon its presentment, which check when presented for payment was
subsequently dishonored by the drawee bank for insufficiency of funds/Account Closed and despite receipt
of notice of such dishonor, said accused failed to pay said SOLID GOLD INTERNATIONAL TRADERS, INC.
the amount of said check or to make arrangement for full payment of the same within five (5) banking days
after receiving said notice.

CONTRARY TO LAW.6

The cases were consolidated and subsequently raffled to Branch 99 of the said RTC. Upon arraignment, accused
pleaded not guilty.7 Trial then ensued. On December 22, 1993, the RTC rendered its decision, the dispositive portion
of which reads:

WHEREFORE, this Court finds the accused GUILTY of ten counts of violation of BP 22 and hereby sentences
her to a penalty of one year imprisonment for each count, or a total of ten years, to be served in accordance
with the limitation prescribed in par. 4, Article 70 of the Revised Penal Code and to indemnify complainant
the amount of the checks in their totality, or in the amount of P500,000.00.

SO ORDERED.8

Petitioner appealed to the Court of Appeals alleging that: the RTC has no jurisdiction over the offense charged in the
ten informations; it overlooked the fact that no notice of dishonor had been given to the appellant as drawer of the
dishonored checks; it failed to consider that the reason of "closed account" for the dishonor of the ten checks in these
cases is not the statutory cause to warrant prosecution, much more a conviction, under B.P. Blg. 22; it failed to
consider that there is only one act which caused the offense, if any, and not ten separate cases; and it disregarded
the definition of what a 'check' is under Sec. 185 of the Negotiable Instruments Law.9

Finding the appeal to be without merit, the Court of Appeals affirmed the decision of the trial court with costs against
appellant.

Hence, herein petition raising the following errors:

THAT THE COURT OF APPEALS ERRED IN NOT RESOLVING THE JURISDICTIONAL ISSUE IN FAVOR
OF THE ACCUSED-APPELLANT BY UNJUSTLY DEPRIVING HER OF THE LEGAL BENEFITS OF GIVING
RETROACTIVE EFFECT TO THE PROVISIONS OF R.A. NO. 7691 EXPANDING THE JURISDICTION OF
THE INFERIOR COURTS TO COVER THE OFFENSES INVOLVED IN THESE CASES PURSUANT TO
ART. 22 OF THE REVISED PENAL CODE, THUS IN EFFECT RENDERING THE JUDGMENT OF
CONVICTION PROMULGATED BY THE TRIAL COURT BELOW AND AFFIRMED BY THE COURT OF
APPEALS PATENTLY NULL AND VOID FOR HAVING BEEN RENDERED WITHOUT OR IN EXCESS OF
JURISDICTION.

II

THAT THE COURT OF APPEALS ERRED IN NOT RESOLVING IN FAVOR OF ACCUSED-APPELLANT

THE FACT THAT NO NOTICE OF DISHONOR HAD BEEN GIVEN HER AS DRAWER OF THE
DISHONORED "CHECKS" PURSUANT TO THE REQUIREMENT EXPRESSLY PROVIDED UNDER
BATAS PAMBANSA BILANG 22.

III

THAT THE COURT OF APPEALS ERRED IN CONSTRUING THE PROVISIONS OF BATAS PAMBANSA
BILANG 22 CONTRARY TO THE WELL-ESTABLISHED RULE OF STATUTORY CONSTRUCTION THAT
"PENAL STATUTES, SUBSTANTIVE AND REMEDIAL OR PROCEDURAL, ARE, BY THE CONSECRATED

137
 RULE, CONSTRUED STRICTLY AGAINST THE STATE, OR LIBERALLY IN FAVOR OF THE ACCUSED"
AND THAT "IT IS ALWAYS THE DUTY OF THE COURT TO RESOLVE THE CIRCUMSTANCES OF
EVIDENCE UPON A THEORY OF INNOCENCE RATHER THAN UPON A THEORY OF GUILT WHERE IT
IS POSSIBLE TO DO SO", AND IN SO DOING THE DECISION APPEALED FROM INDULGED ITSELF IN
"JUDICIAL LEGISLATION" TO FAVOR THE PROSECUTION AND TO WORK GRAVE INJUSTICE TO THE
ACCUSED.

Simply worded, the issues of this case may be stated as follows: (1) whether or not the appellate court erred in not
granting retroactive effect to Republic Act No. 769110 in view of Art. 22 of the Revised Penal Code (RPC); (2) whether
or not notice of dishonor is dispensable in this case; and (3) whether or not the appellate court erred in construing
B.P. Blg. 22.

We will resolve the first and third issues before considering the second issue.

First issue – Whether or not the Court of Appeals erred in not giving retroactive effect to R.A. 7690 in view of Article
22 of the RPC.

Petitioner argues that: the failure of the appellate court to give retroactive application to R.A. 7691 is a violation of
Art. 22 of the Revised Penal Code which provides that penal laws shall have retroactive effect insofar as they favor
the person guilty of the felony; R.A. 7691 is a penal law in the sense that it affects the jurisdiction of the court to take
cognizance of criminal cases; taken separately, the offense covered by each of the ten Informations in this case falls
within the exclusive original jurisdiction of the Municipal Trial Court under Sec. 2 of R.A. 7691; and the Court of
Appeals is guilty of judicial legislation in stating that after the arraignment of petitioner, said cases could no longer be
transferred to the MTC without violating the rules on double jeopardy, because that is not so provided in R.A. 7691.11

The Solicitor General, in its Comment, counters that the arguments of petitioner are baseless contending that: penal
laws are those which define crimes and provides for their punishment; laws defining the jurisdiction of courts are
substantive in nature and not procedural for they do not refer to the manner of trying cases but to the authority of the
courts to hear and decide certain and definite cases in the various instances of which they are susceptible; R.A. No.
7691 is a substantive law and not a penal law as nowhere in its provisions does it define a crime neither does it
provide a penalty of any kind; the purpose of enacting R.A. No. 7691 is laid down in the opening sentence thereof as
"An Act Expanding the Jurisdiction of the Municipal Trial Courts, Municipal Circuit Trial Courts and the Metropolitan
Trial Court" whereby it reapportions the jurisdiction of said courts to cover certain civil and criminal case, erstwhile
tried exclusively by the Regional Trial Courts; consequently, Art. 22 of the RPC finds no application to the case at
bar; jurisdiction is determined by the law in force at the time of the filing of the complaint, and once acquired,
jurisdiction is not affected by subsequent legislative enactments placing jurisdiction in another tribunal; in this case,
the RTC was vested with jurisdiction to try petitioner's cases when the same were filed in October 1992; at that time,
R.A. No. 7691 was not yet effective;12 in so far as the retroactive effect of R.A. No. 7691 is concerned, that same is
limited only to pending civil cases that have not reached pre-trial stage as provided for in Section 7 thereof and as
clarified by this Court in People vs. Yolanda Velasco13, where it was held: "[a] perusal of R.A. No. 7691 will show that
its retroactive provisions apply only to civil cases that have not yet reached the pre-trial stage. Neither from an express
proviso nor by implication can it be understood as having retroactive application to criminal cases pending or decided
by the RTC prior to its effectivity."14

On this point, the Court fully agrees with the Solicitor General and holds that Article 22 of the Revised Penal Code
finds no application to the case at bar.

Said provision reads:

ART. 22. Retroactive effect of penal laws. – Penal laws shall have a retroactive effect insofar as they favor
the person guilty of a felony, who is not a habitual criminal, as this term is defined in Rule 5 of Article 62 of
this Code, although at the time of the publication of such laws a final sentence has been pronounced and the
convict is serving sentence.

A penal law, as defined by this Court, is an act of the legislature that prohibits certain acts and establishes penalties
for its violations. It also defines crime, treats of its nature and provides for its punishment. 15 R.A. No. 7691 does not
prohibit certain acts or provides penalties for its violation; neither does it treat of the nature of crimes and its
punishment. Consequently, R.A. No. 7691 is not a penal law, and therefore, Art. 22 of the RPC does not apply in the
present case.

B. P. Blg. 22, which took effect on April 24, 1979, provides the penalty of imprisonment of not less than thirty days
but not more than one year or by a fine of not less than but not more then double the amount of the check which fine
shall in no case exceed P200,000.00, or both such fine and imprisonment at the discretion of the court.

R.A. No. 7691 which took effect on June 15, 1994, amended B.P. Blg. 129, and vested on the Metropolitan, Municipal
and Municipal Circuit Trial Courts jurisdiction to try cases punishable by imprisonment of not more than six (6)
years.16 Since R.A. No. 7691 vests jurisdiction on courts, it is apparent that said law is substantive.17
138
In the case of Cang vs. Court of Appeals,18 this Court held that "jurisdiction being a matter of substantive law, the
established rule is that the statute in force at the time of the commencement of the action determines the jurisdiction
of the court."19 R.A. No. 7691 was not yet in force at the time of the commencement of the cases in the trial court. It
took effect only during the pendency of the appeal before the Court of Appeals.20 There is therefore no merit in the
claim of petitioner that R.A. No. 7691 should be retroactively applied to this case and the same be remanded to the
MTC. The Court has held that a "law vesting additional jurisdiction in the court cannot be given retroactive effect."21

Third issue – Whether or not the Court of Appeals erroneously construed B.P. Blg. 22.

Petitioner insists that: penal statutes must be strictly construed and where there is any reasonable doubt, it must
always be resolved in favor of the accused;22 the Court of Appeals, in construing that B.P. Blg. 22 embraces cases
of "no funds" or "closed accounts" when the express language of B.P. Blg. 22 penalizes only the issuance of checks
that are subsequently dishonored by the drawee bank for "insufficiency" of funds or credit, has enlarged by implication
the meaning of the statute which amounts to judicial legislation;23 a postdated check, not being drawn payable on
demand, is technically not a special kind of a bill of exchange, called check, but an ordinary bill of exchange payable
at a fixed date, which is the date indicated on the face of the postdated check, hence, the instrument is still valid and
the obligation covered thereby, but only civilly and not criminally;24 the trial court also erroneously cited a portion in
the case of Lozano vs. Martinez25 that the "language of B.P. Blg. 22 is broad enough to cover all kinds of checks,
whether present dated or postdated, or whether issued in payment of pre-existing obligations or given in mutual or
simultaneous exchange for something of value," since the same is mere obiter dictum;26 in the interpretation of the
meaning of a "check", where the law is clear and unambiguous, the law must be taken as it is, devoid of judicial
addition or subtraction.27

The Solicitor General counters that a postdated check is still a check and its being a postdated instrument does not
necessarily make it a bill of exchange "payable at a fixed or determinable future time" since it is still paid on demand
on the date indicated therein or thereafter just like an ordinary check.28 It also points out that the doctrine laid down
in Lozano vs. Martinez was reiterated in People vs. Nitafan,29 hence, it can no longer be argued that the statement
in the case of Lozano regarding the scope of "checks" is mere obiter dictum.

Again, we agree with the Solicitor General and find petitioner's claim to be without merit.

The rationale behind B.P. Blg. 22 was initially explained by the Court in the landmark case of Lozano vs.
Martinez30 where we held that:

The gravamen of the offense punished by B.P. Blg. 22 is the act of making and issuing a worthless check or
a check that is dishonored upon its presentation for payment … The thrust of the law is to prohibit, under pain
of penal sanctions, the making or worthless checks and putting them in circulation. Because of its deleterious
effects on the public interest, the practice is proscribed by law. The law punished the act not as an offense
against property, but an offense against public order.31

...

The effects of the issuance of a worthless check transcend the private interests of the parties directly involved
in the transaction and touches the interests of the community at large. The mischief it creates is not only a
wrong to the payee or holder but also an injury to the public. The harmful practice of putting valueless
commercial papers in circulation, multiplied a thousandfold, can very well pollute the channels of trade and
commerce, injure the banking system and eventually hurt the welfare of society and the public interest.32

The same is reiterated in Cueme vs. People33 where we pronounced that:

. . . B.P. Blg. 22 was purposely enacted to prevent the proliferation of worthless checks in the mainstream of
daily business and to avert not only the undermining of the banking system of the country but also the infliction
of damage and injury upon trade and commerce occasioned by the indiscriminate issuances of such checks.
By its very nature, the offenses defined under B.P. Blg. 22 are against public interest.34

In Recuerdo vs. People, this Court also held that the terms and conditions surrounding the issuance of the checks
are irrelevant since its primordial intention is to ensure the stability and commercial value of checks as being virtual
substitutes for currency.35

Petitioner's claim that cases of "closed accounts" are not included in the coverage of B.P. Blg. 22 has no merit
considering the clear intent of the law, which is to discourage the issuance of worthless checks due to its harmful
effect to the public. This Court, in Lozano vs. Martinez, was explicit in ruling that the language of B.P. Blg. 22 is broad
enough to cover all kinds of checks, whether present dated or postdated, or whether issued in payment of pre-existing
obligations or given in mutual or simultaneous exchange for something of value.36

In People vs. Nitafan,37 the Supreme Court reiterated this point and held that:

139
 B.P. Blg. 22 … does not distinguish but merely provides that "[any person who makes or draws and issues
any check knowing at the time of issue that he does not have sufficient funds in or credit with the drawee
bank … which check is subsequently dishonored … shall be punished by imprisonment … Ubi lex non
distinguit nec nos distinguere debemus.

But even if We retrace the enactment of the "Bouncing Check Law" to determine the parameters of the
concept of "check", we can easily glean that the members of the then Batasang Pambansa intended it to be
comprehensive as to include all checks drawn against banks.38

In this light, it is easy to see that the claim of petitioner that B.P. Blg. 22 does not include 'postdated checks' and
cases of 'closed accounts' has no leg to stand on. The term "closed accounts" is within the meaning of the phrase
"does not have sufficient funds in or credit with the drawee bank".

Anent the second issue: whether or not notice of dishonor is dispensable in the case at bar. Petitioner failed to show
any cogent reason for us to disturb the findings of the RTC and the Court of Appeals.

B.P. Blg. 22 or the Bouncing Check's Law seeks to prevent the act of making and issuing checks with the knowledge
that at the time of issue, the drawer does not have sufficient funds in or credit with the bank for payment and the
checks were subsequently dishonored upon presentment.39 To be convicted thereunder, the following elements must
be proved:

1. The accused makes, draws or issues any check to apply to account or for value;

2. The accused knows at the time of the issuance that he or she does not have sufficient funds in, or credit
with, the drawee bank for the payment of the check in full upon its presentment; and

3. The check is subsequently dishonored by the drawee bank for insufficiency of funds or credit or it would
have been dishonored for the same reason had not the drawer, without any valid reason, ordered the bank
to stop payment.40

For liability to attach under B.P. Blg. 22, it is not enough that the prosecution establishes that checks were issued
and that the same were subsequently dishonored. The prosecution must also prove that the issuer, at the time of the
check's issuance, had knowledge that he did not have enough funds or credit in the bank of payment thereof upon
its presentment.41

Since the second element involves a state of mind which is difficult to establish, Section 2 of B.P. Blg. 22 created
a prima facie presumption of such knowledge, as follows:

SEC. 2. Evidence of knowledge of insufficient funds. – The making, drawing and issuance of a check payment
of which is refused by the drawee because of insufficient funds in or credit with such bank, when presented
within ninety (90) days from the date of the check, shall be prima facie evidence of knowledge of such
insufficiency of funds or credit unless such maker or drawer pays the holder thereof the amount due thereon,
or makes arrangements for payment in full by the drawee of such check within five (5) banking days after
receiving notice that such check has not been paid by the drawee.

Based on this section, the presumption that the issuer had knowledge of the insufficiency of funds is brought into
existence only after it is proved that the issuer had received a notice of dishonor and that within five days from receipt
thereof, he failed to pay the amount of the check or to make arrangement for its payment.42 The presumption or prima
facie evidence as provided in this section cannot arise, if such notice of non-payment by the drawee bank is not sent
to the maker or drawer, or if there is no proof as to when such notice was received by the drawer, since there would
simply be no way of reckoning the crucial 5-day period.43

In this case, it is not disputed that checks were issued by petitioner and said checks were subsequently dishonored.
The question however is, was petitioner furnished a notice of dishonor? If not, is it sufficient justification to exonerate
petitioner from her criminal and civil liabilities for issuing the bouncing checks?

The trial court ruled that the second element is present because:

… the accused knew at the time of issuance of the checks that she did not have sufficient funds in or credit
with her drawee bank for the payment of the checks in full upon their presentment [as admitted by her in the
Counter-Affidavit she executed during the preliminary investigation of these criminal cases (itals. ours), to
wit:

4. That the time of the issuance of the said checks, due notice and information had been so given to
Solid Gold anent the actual status of the checks that the same might not be able to cover the amount
of the said checks so stated therein … (Exhibit "N", "1", underscoring supplied).

140
 This fact became evident again during the cross-examination by the accused's counsel of the prosecution's
witness, Joaquin Novales III:

ATTY. TAGANAS:

Q: And the reason you agreed to the terms and conditions for the issuance of post-dated checks because
you are also aware the particular time the accused Mrs. Elvira Yu Oh did not also have enough funds or
money in the bank within which to cover the amount of the checks?

A: I am not aware, sir.

...

Q: To your knowledge when the accused had already admitted to you that she had not enough money to pay
you?

A: That is the terms and promise and agreed upon, sir.

Q: But inspite of the fact that she already told you about that, that you never suspected that she did not have
enough money to cover the checks agreed upon and issued to you?

A: Yes, sir.

Q: And inspite of the fact she told you you never suspected that she did not have enough money to cover
you . . .

Q: You still believe that although she does not have enough money she still issued checks to you?

A: Yes, sir. (TSN, April 6, 1993, pp. 24-26)

At any rate, there is already prima facie evidence of knowledge of insufficiency of funds on the part of the
accused from her failure to pay the amount due on the checks or to make arrangements for payment in full
by the drawee bank within five banking days after she received notice of their dishonor, each of the checks
having been presented within ninety days from their respective dated (B.P. Blg. 22, Sec. 2). The defense did
not controvert this evidence. (itals. ours)44

Although the trial court in its decision, mentioned that herein petitioner received notices of dishonor, nowhere in the
records is there proof that the prosecution ever presented evidence that petitioner received or was furnished a notice
of dishonor. The notices of dishonor that were presented in court and marked as Exhibits "D-2", "E-2", "F-2", "G-2",
"H-2", "I-2", "J-2", "K-2", "L-2", "C-2"45 were all sent to the private complainant, Solid Gold, and not to petitioner. In
convicting petitioner, the trial court, gave probative weight on the admission of petitioner in her Counter-Affidavit
which she submitted during the preliminary investigation that at the time of issuance of the subject checks, she was
aware and even told private complainant that the checks might not be able to cover the amount stated therein.

The Court of Appeals sustained the RTC, to wit:

. . . Neither can We agree that accused-appellant was still entitled to notice of dishonor of the bouncing
checks as she had no more checking account with the drawee bank at the time of the dishonor of the ten
checks in question. Accused-appellant must have realized that by closing her checking account after issuing
the ten postdated checks, all of said checks would bounce. Knowing that she had already closed her checking
account with the drawee bank, certainly accused-appellant would not have expected, even in her wildest
imagination, that her postdated checks would be honored by the drawee bank. Thus, accused-appellant need
not be notified anymore of the obvious dishonor of her rubber checks. (itals. ours)46

Based on the law and existing jurisprudence, we find that the appellate court erred in convicting petitioner.

In cases for violation of B.P. Blg. 22, it is necessary that the prosecution prove that the issuer had received a notice
of dishonor. Since service of notice is an issue, the person alleging that the notice was served must prove the fact of
service. Basic also is the doctrine that in criminal cases, the quantum of proof required is proof beyond reasonable
doubt. Hence, for cases of B.P. Blg. 22 there should be clear proof of notice.47

Indeed, this requirement cannot be taken lightly because Section 2 provides for an opportunity for the drawer to effect
full payment of the amount appearing on the check, within five banking days from notice of dishonor. The absence
of said notice therefore deprives an accused of an opportunity to preclude criminal prosecution. In other words,
procedural due process demands that a notice of dishonor be actually served on petitioner. In the case at bar,

141
appellant has a right to demand – and the basic postulate of fairness requires – that the notice of dishonor be actually
sent to and received by her to afford her to opportunity to aver prosecution under B.P. Blg. 22.48

The Solicitor General contends that notice of dishonor is dispensable in this case considering that the cause of the
dishonor of the checks was "Account Closed" and therefore, petitioner already knew that the checks will bounce
anyway. This argument has no merit. The Court has decided numerous cases where checks were dishonored for the
reason, "Account Closed"49 and we have explicitly held in said cases that "it is essential for the maker or drawer to
be notified of the dishonor of her check, so she could pay the value thereof or make arrangements for its payment
within the period prescribed by law"50 and omission or neglect on the part of the prosecution to prove that the accused
received such notice of dishonor is fatal to its cause.51

A perusal of the testimony of the prosecution witness Joaquin Novales III, General Manager of complainant Solid
Gold, discloses that no personal demands were made on appellant before the filing of the complaints against
her.52 Thus, absent a clear showing that petitioner actually knew of the dishonor of her checks and was given the
opportunity to make arrangements for payment as provided for under the law, we cannot with moral certainty convict
her of violation of B.P. Blg. 22. The failure of the prosecution to prove that petitioner was given the requisite notice
of dishonor is a clear ground for her acquittal.53

Moreover, as understood by the trial court itself in the herein aforequoted portion of its decision, General Manager
Novales knew of the non-availability of sufficient funds when appellant issued the subject checks to him. This Court
has held that there is no violation of B.P. 22 if complainant was told by the drawer that he has no sufficient funds in
the bank.54

For these reasons, we reverse the ruling of the Court of Appeals affirming the trial court's conviction of petitioner for
violation of B.P. Blg. 22. This is without prejudice, however, to her civil liability towards private complainant Solid
Gold in the amount of P500,000.00 plus interest thereon at the rate of 12% per annum from date of finality of herein
judgment.55

WHEREFORE, the assailed Decision and Resolution of the Court of Appeals are hereby REVERSED and SET
ASIDE. Petitioner Elvira Yu Oh is ACQUITTED of the offense of violation of B.P. Blg. 22 on ten counts for
insufficiency of evidence. However, she is ordered to pay complainant Solid Gold International Traders, Inc. the total
amount of Five Hundred Thousand Pesos (P500,000.00) with 12% interest per annum from date of finality of herein
judgment.

SO ORDERED.

b.
MERIZ vs. PEOPLE
G.R. No. 134498 November 13, 2001
VITUG, J.:

A maxim in statutory construction mandates that penal statutes should be strictly construed against the state
and liberally in favor of the accused. The phrase, truly, may not be a mere cliché but, so also, it is not meant to
wrongly shield an accused from criminal liability.

On appeal to this Court is the decision, dated 06 July 1999, of the Court of Appeals (6th Division), in CA-G.R. No.
18985 affirming in toto the decision of the court a quo in Criminal Case No. 90-5598 to Criminal Case No. 5601,
inclusive, which found Celia M. Meriz, herein petitioner, guilty beyond reasonable doubt of having transgressed Batas
Pambansa ("BP") Bilang 22.

Petitioner was engaged in the business of manufacturing garments for export using the name and style of "Hi-Marc
Needlecraft." During the course of her business undertakings, she obtained a number of loans from Amelia Santos
(Santos) and Summit Financing Corporation. Sometime in 1988, petitioner issued in favor of Santos four Pilipinas
Bank Checks in the aggregate amount of P188,400.00. Santos deposited the checks with her bank. The checks,
however, were later returned, with the notation "Insufficient Funds" tamped on the dorsal portion of each check, 1 by
the depositary bank. 1âwphi1.nêt

On 15 December 1988, Santos, through her counsel, sent a telegram to petitioner, reading –

"Unless your bounced checkes for Two Hundred Twenty-Six Thousand Three Hundred Pesos paid in cash
in three (3) days, [we] shall institute criminal action."2

Despite the warning, petitioner failed to settle her account. On 05 January 1990, another demand letter was sent; it
read:
142
 "Your account with Mr. and Mrs. Leonardo G. Santos as of December 1, 1989 has amounted to P285,773.90.

"In this connection we demand that you settle this account within seven (7) days from receipt hereof. Failing
to do so, we might be constrained to take legal action, including damages and attorney’s fees."3

On 12 January 1990, petitioner acknowledged the letter-demand; she wrote thusly:

"Dear Mr. Santos,

"RE: OUR OUTSTANDING ACCOUNT OF P285,733.90

"With reference to the DEMAND LETTER dated January 5, 1990 [sent] to us by your counsel Vicente P.
Fernando, we would like to request from you to please give us a little more time to settle said account with
you.

"Business has not been good the past year and up to now we haven’t collected yet from our buyer. We’ve
been doing all possible means to generate funds and be able to settle our account. For the meantime, all we
ask from you is give us more time.

"We thank you for the consideration.

"Very truly yours,

"(Sgd.) CELIA M. MERIZ"4

Still, petitioner did not settle the obligation.

In due time, four informations for violation of BP 22 were filed before Branch 147 of the Regional trial Court of Makati
City; to wit:

"Criminal Case No. 90-5598 –

"That on or about the 30th day of September, 1988, in the Municipality of Makati, Metro Manila, Philippines,
and within the jurisdiction of this Honorable Court, the said accused being then the authorized signatory of
Hi-Marc Needle Craft, did then and there willfully, unlawfully and feloniously make or draw and issue to Amelia
A. Santos, to apply on account or for value the check described below:

Check No. 01587894

Drawn Against Pilipinas Bank
- 135 Sen. Gil Puyal Ave.,
Makati, Metro Manila
In the amount of P47,100.00
Dated September 30, 1988
Payable to Amelia Santos

said accused well knowing fully that at the time of issue Hi-Marc Needlecraft had no sufficient funds in or
credit with the drawee bank for the payment in full of the face amount of such check upon its presentment
which check when presented for payment within ninety (90) days from the date thereof was subsequently
dishonored by the drawee bank for the reason ‘Drawn against insufficient funds/Account Closed’ and despite
receipt of notice of dishonor, the accused and or Hi-Marc Needlecraft failed to pay said payee the face amount
of said check or to make arrangement for full payment thereof, within five (5) banking days after receiving
notice."5

Criminal Case No. 90-5599 –

"That on or about the 31st day of October, 1988, in the Municipality of Makati, Metro Manila, Philippines, and
within the jurisdiction of this Honorable Court, the said accused being then the authorized signatory of Hi-
Marc Needle Craft, did then and there willfully, unlawfully and feloniously make or draw and issue to Amelia
A. Santos, to apply on account or for value the check described below:

Check No. 01587895

Drawn Against Pilipinas Bank
- 135 Sen. Gil Puyal Ave.
Makati, Metro Manila
In the amount of P47,100.00

143
 Dated October 31, 1988
Payable to Amelia Santos

said accused well knowing fully that at the time of issue Hi-Marc Needlecraft had no sufficient funds in or
credit with the drawee bank for the payment in full of the face amount of such check upon its presentment
which check when presented for payment within ninety (90) days from the date thereof was subsequently
dishonored by the drawee bank for the reason ‘Drawn against insufficient funds/Account Closed’ and despite
receipt of notice of dishonor, the accused and or Hi-Marc Needlecraft failed to pay said payee the face amount
of said check or to make arrangement for full payment thereof, within five (5) banking days after receiving
notice."6

Criminal Case No. 90-5600 –

"That on or about the 30th day of November, 1988, in the Municipality of Makati, Metro Manila, Philippines,
and within the jurisdiction of this Honorable Court, the said accused being then the authorized signatory of
Hi-Marc Needle Craft, did then and there willfully, unlawfully and feloniously make or draw and issue to Amelia
A. Santos, to apply on account or for value the check described below:

Check No. 01587896

Drawn Against Pilipinas Bank
- 135 Sen. Gil Puyal Ave.
Makati, Metro Manila
In the amount of P47,100.00
Dated November 30, 1988
Payable to Amelia Santos

said accused well knowing fully that at the time of issue Hi-Marc Needlecraft had no sufficient funds in or
credit with the drawee bank for the payment in full of the face amount of such check upon its presentment
which check when presented for payment within ninety (90) days from the date thereof was subsequently
dishonored by the drawee bank for the reason ‘Drawn against insufficient funds’ and despite receipt of notice
of dishonor, the accused and or Hi-Marc Needlecraft failed to pay said payee the face amount of said check
or to make arrangement for full payment thereof, within five (5) banking days after receiving notice."7

Criminal Case No. 90-5601 –

"That on or about the 15th day of December, 1988, in the Municipality of Makati, Metro Manila, Philippines,
and within the jurisdiction of this Honorable Court, the said accused being then the authorized signatory of
Hi-Marc Needle Craft, did then and there willfully, unlawfully and feloniously make or draw and issue to Amelia
A. Santos, to apply on account or for value the check described below:

Check No. 01587897

Drawn Against Pilipinas Bank
- 135 Sen. Gil Puyal Ave.
Makati, Metro Manila
In the amount of P47,100.00
Dated December 15, 1988
Payable to Amelia Santos

said accused well knowing fully that at the time of issue Hi-Marc Needlecraft had no sufficient funds in or
credit with the drawee bank for the payment in full of the face amount of such check upon its presentment
which check when presented for payment within ninety (90) days from the date thereof was subsequently
dishonored by the drawee bank for the reason ‘Drawn against insufficient funds’ and despite receipt of notice
of dishonor, the accused and or Hi-Marc Needlecraft failed to pay said payee the face amount of said check
or to make arrangement for full payment thereof, within five (5) banking days after receiving notice."8

Pleas of "not guilty" were entered by the accused at the arraignment. Trial ensued with both parties submitting their
respective cases. On 16 March 1994, the trial court, following the reception of evidence, rendered its judgment
convicting petitioner of all the charges; it held:

"WHEREFORE, in view of the foregoing, the Court, finding the accused guilty beyond reasonable doubt of
the crimes charged, hereby sentences her to suffer an imprisonment of one (1) year in each of these cases,
and to indemnify the complainant the sum of P47,100.00 in each case. With costs."9

Aggrieved, petitioner elevated the case, docketed CA-G.R. CR No. 18985, to the Court of Appeals. In its decision of
06 July 1998, the appellate court affirmed in toto the decision of the trial court.

144
Petitioner, in the instant appeal, would have it that there was an absolute lack of consideration for the subject checks
which were issued only as a condition for the grant of loan in her favor and that the requisite element of notice was
not complied with.

The petition is bereft of merit.

The essential elements of the offense penalized under BP 22 are "(1) the making, drawing and issuance of any check
to apply to account or for value; (2) the knowledge of the maker, drawer or issuer that at the time of issue he does
not have sufficient funds in or credit with the drawee bank for the payment of such check in full upon its presentment;
and (3) subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit or dishonor for the
same reason had not the drawer, without any valid cause, ordered the bank to stop payment."10

The Court has consistently declared that the cause or reason for the issuance of the check is inconsequential in
determining criminal culpability under BP 22. The Court has since said11 that a "check issued as an evidence of debt,
although not intended for encashment, has the same effect like any other check" and must thus be held to be "within
the contemplation of BP 22." Once a check is presented for payment, the drawee bank gives it the usual course
whether issued in payment of an obligation or just as a guaranty of an obligation.12 BP 22 does not appear to concern
itself with what might actually be envisioned by the parties,13 its primordial intention being to instead ensure the
stability and commercial value of checks as being virtual substitutes for currency. It is a policy that can easily be
eroded if one has yet to determine the reason for which checks are issued, or the terms and conditions for their
issuance, before an appropriate application of the legislative enactment can be made. The gravamen of the offense
under BP 22 is the act of making or issuing a worthless check or a check that is dishonored upon presentment for
payment. The act effectively declares the offense to be one of malum prohibitum. The only valid query then is whether
the law has been breached, i.e., by the mere act of issuing a bad check, without so much regard as to the criminal
intent of the issuer.14

The element of "knowledge" involves a state of mind that obviously would be difficult to establish; hence, the statute
itself creates a prima facie presumption of knowledge on the insufficiency of funds or credit coincidental with the
attendance of the two other elements. Section 2 of the Act provides:

"Sec. 2. Evidence of knowledge of insufficient funds. – The making, drawing and issuance of a check payment
of which is refused by the drawee bank because of insufficient funds in or credit with such bank, when
presented within ninety (90) days from the date of the check, shall be prima facie evidence of knowledge of
such insufficiency of funds or credit unless such maker or drawer pays the holder thereof the amount due
thereon, or makes arrangements for payment in full by the drawee of such check within five (5) banking days
after receiving notice that such check has not been paid by the drawee."

The Court has elucidated in one case15 thusly –

"The begin with, the second element involves knowledge on the part of the issuer at the time of the check’s
issuance that he did not have enough funds or credit in the bank for payment thereof upon its presentment.
B.P. No. 22 creates a presumption juris tantum that the second element prima facie exists when the first and
third elements of the offense are present (Magno vs. Court of Appeals, 210 SCRA 471). But such evidence
may be rebutted. If not rebutted or contradicted, it will suffice to sustain a judgment in favor of the issue,
which it supports (People vs. Nuque, 58 O.G. 844). As pointed out by the Solicitor General, such knowledge
of the insufficiency of petitioner’s funds ‘is legally presumed from the dishonor of his checks for insufficiency
of funds.’"

The prima facie presumption that the drawer has knowledge of the insufficiency of funds or credit at the time of the
issuance, or on the presentment for payment, of the check might be rebutted by payment of the value of the check
either by the drawer or by the drawee bank within five banking days from notice of the dishonor given to the drawer.
The payment could thus be a complete defense that would lie regardless of the strength of the evidence offered by
the prosecution.16 It must be presupposed then that the issuer receives a notice of dishonor and that, within five days
from receipt thereof, he would have failed to pay the amount of the check or to make arrangement for its payment.

Anent the notice of dishonor, petitioner bewails the inaccuracy thereof. She underscores the fact that the questioned
checks have not been sufficiently identified. There is nothing in the law, however, that prescribes the contents of a
notice of dishonor except that the same be in writing as opposed to a mere oral notice.17

Both the Court of Appeals and the trial court found that a telegram, dated 15 December 1988, and a demand letter,
dated 05 January 1990, were sent to petitioner. The latter, in reply to the 05 January 1990 letter, acknowledged her
liability and indeed sought an extension within which to satisfy her account. A review of the findings of facts of the
Court of Appeals is not a function that the Supreme Court undertakes, and there is here no cogent reason to depart
from the rule.

145
All told, the judgment of conviction must be upheld. Given the circumstances, however, the Court deems it
appropriate to modify the sentence of the trial court by deleting the prison sentence of one (1) year and, in its stead,
imposing a fine of P94,200.00 in each of the cases.

WHEREFORE, the assailed decision is MODIFIED by deleting the prison sentence of one year and, in its stead,
imposing, as the Court so hereby imposes, a fine of P94,200.00 in each of the cases, herein involved, on petitioner
Celia M. Meriz. The award of civil indemnity made by the trial court in favor of private complainant is AFFIRMED.
Costs against petitioner.1âw phi 1.nêt

SO ORDERED.

c.
NAGRAMPA vs. PEOPLE
G.R. No. 146211 August 6, 2002
DAVIDE, JR., J.:

In this petition for review on certiorari, petitioner assails his conviction for estafa in Criminal Case No. Q-90-15797
and for two counts of violation of Batas Pambansa Blg. 22 (Bouncing Checks Law) in Criminal Cases Nos. Q-90-
15798 and Q-90-15799.

The accusatory portion of the information in Criminal Case No. Q-90-15797 for estafa reads as follows:

That on or about the 28th day of July 1989 in Quezon City, Philippines and within the jurisdiction of this Honorable
Court, the above-named accused, with intent to gain by means of false pretenses or fraudulent acts executed prior
to or simultaneously with the commission of the fraud, did then and there, wilfully, unlawfully and feloniously defraud
FEDCOR TRADING CORPORATION represented by FEDERICO A. SANTANDER by then and there making,
drawing and issuing in favor of the latter the following checks, to wit:

CHECK NOS. AMOUNT POSTDATED

473477 P75,000.00 August 31, 1989

473478 P75,000.00 September 30, 1989

drawn against the SECURITY BANK AND TRUST COMPANY in payment of an obligation, knowing fully well at the
time of issue that he did not have any funds in the bank or his funds deposited therein was not sufficient to cover the
amount of the checks that upon presentation of said checks to the said bank for payment, the same were dishonored
for the reason that the drawer thereof, accused MANUEL NAGRAMPA did not have any funds therein and despite
notice of dishonor thereof, accused failed and refused and still fails and refuses to redeem or make good said checks,
to the damage and prejudice of the said FEDCOR TRADING CORPORATION in such amount as may be awarded
under the provisions of the Civil Code.

CONTRARY TO LAW.1

The accusatory portion of the information in Criminal Case No. Q-90-15798 for violation of B.P. Blg. 22 reads as
follows:

That on or about the 28th day of July, 1989 in Quezon City, Philippines, and within the jurisdiction of this Honorable
Court, the above-named accused, did then and there, willfully, unlawfully and feloniously make, draw and issue in
favor of FEDCOR TRADING CORPORATION represented by FEDERICO A. SANTANDER a check numbered
473478 drawn against the SECURITY BANK AND TRUST COMPANY, Escolta Branch, a duly established domestic
banking institution, in the amount of P75,000.00, Philippine Currency, postdated September 30, 1989 in payment of
an obligation, knowing fully well that at the time of issue that she/he did not have ANY funds in the drawee bank for
the payment of such check; that upon presentation of said check to said bank for payment, the same was dishonored
for the reason that the drawee bank of accused MANUEL NAGRAMPA did not have ANY funds therein and despite
notice of dishonor thereof, accused failed and refused and still fails and refuses to redeem or make good said check,
to the damage and prejudice of the said FEDCOR TRADING CORPORATION in the amount aforementioned and in
such other amount as may be awarded under the provisions of the Civil Code.

Contrary to law.2

146
The information in Criminal Case No. Q-90-15799 is similarly worded as in Criminal Case No. Q-90-15798 except as
to the date and number of the check.

Upon his arraignment, petitioner entered a plea of not guilty in each case.

At the trial on the merits, the prosecution presented Federico Santander, President of Fedcor Trading Corporation
(hereafter FEDCOR), and Felix Mirano, signature verifier of the Escolta Branch of the Security Bank and Trust
Company.

Federico Santander testified that on 28 July 1989, Corseno Bote, FEDCOR’s Sales Manager, brought to FEDCOR
petitioner Manuel Nagrampa (hereafter NAGRAMPA), General Manager of the Nagrampa Asphalt Plant in
Montalban, Rizal. NAGRAMPA purchased a Yutani Poclain Backhoe Excavator Equipment for P200,000 from
FEDCOR and paid in cash the down payment of P50,000. To cover the balance of P150,000, he issued Check No.
4734773 postdated 31 August 1989 and Check No. 4734784 postdated 30 September 1989 in the amount of P75,000
each. The checks were drawn against the Security Bank and Trust Company. Upon the assurance of FEDCOR’s
salesman that the checks were good, FEDCOR delivered to petitioner the equipment.5

Santander further testified that FEDCOR presented the checks for payment on 22 February 1990; however, they
were dishonored on the ground that petitioner’s account with the drawee bank, Security Bank, had already been
closed. In a letter6 dated 19 March 1990, sent through registered mail, FEDCOR demanded payment from petitioner;
but the latter failed to pay. Hence, the above cases were filed against petitioner with the trial court.7 During his cross-
examination, Santander denied that the equipment was returned to FEDCOR. Ronnie Bote, son of Corseno Bote,
was not an employee of FEDCOR but was merely its sales agent with no authority to receive returned equipment.8

Felix Mirano, the second prosecution witness, testified that he had been a signature verifier of Security Bank for
twelve years. His duty was to verify the signatures of the clients of the bank. He brought with him the signature card
for Account No. 0110-4048-19, petitioner’s account against which the subject checks were drawn. He identified the
signatures appearing on Checks Nos. 473477 and 473478 to be those of the petitioner. When asked about the status
of said account, he answered that the account had been closed in May 1985 yet.9

For his part, petitioner testified that on 28 July 1989, he bought from Corseno Bote a backhoe and paid P50,000
cash, as evidenced by an acknowledgment receipt10 signed by Corseno Bote. In addition, he issued and handed to
Corseno Bote two checks in the amount of P75,000 each, dated 31 August 1989 11 and 30 September 1989.12 The
agreement with Corseno Bote was that petitioner would replace the two checks with cash if the backhoe would be in
good running condition. The backhoe was delivered at petitioner’s jobsite on 29 July 1989. After five to seven days
of use, the backhoe broke down. Such fact was reported to Ronnie Bote, and the backhoe was thus repaired. After
one day of using it, the backhoe broke down again. Petitioner again reported the matter to Ronnie Bote, who told him
that the equipment should be brought to the latter’s office for repair. As evidence of the return of the equipment,
petitioner presented a letter dated 3 October 198913 addressed to Electrobus Consolidated, Inc., requesting the
release of the backhoe to Ronnie Bote for repair, with the alleged signature14 of Ronnie Bote appearing at the bottom
thereof to attest to his receipt of the equipment. After a week, petitioner demanded from Ronnie Bote the return of
the backhoe, the P50,000 cash and the two postdated checks, but to no avail.15 On cross-examination, he admitted
that during the pendency of the case he paid, upon the advice of his counsel, the amount of P15,000, which he
handed to FEDCOR’s counsel Atty. Orlando Paray.16

On 30 September 1993, the trial court rendered a decision17 finding petitioner guilty of two counts of violation of the
Bouncing Checks Law and sentencing him to suffer imprisonment for two years and pay FEDCOR P150,000, with
legal interest thereon from 9 October 1990 up to the time of full payment.

Petitioner appealed the decision to the Court of Appeals. The appeal was docketed as CA-G.R. CR. No. 18082. Upon
noticing that the 30 September 1993 Decision of the trial court did not resolve the issue of petitioner’s liability for
estafa, the Court of Appeals issued on 19 May 1998 a resolution18 ordering the return of the entire records of the case
to the trial court for the latter to decide the estafa case against petitioner.

On 8 February 1999, the trial court rendered a decision19 finding petitioner guilty beyond reasonable doubt of estafa
and sentencing him to suffer imprisonment of seven years and four months of prision mayor as minimum to twelve
years and six months of reclusion temporal as maximum. As might be expected, petitioner also appealed said
decision to the Court of Appeals.

On 21 July 2000, the Court of Appeals rendered a decision20 affirming in toto the decision of the trial court finding
petitioner guilty of estafa and violations of the Bouncing Checks Law. It also denied petitioner’s motion for
reconsideration of the decision.21 Hence, this petition.

Petitioner claims that he is not guilty of estafa because no damage was caused to FEDCOR, considering that the
backhoe became unserviceable a few days after delivery and was eventually returned to FEDCOR through the latter’s
sales agent Ronnie Bote. He also asserts that he did not violate B.P. Blg. 22 either. The two checks issued by him
were presented for payment only on 22 February 1990, or after more than five months from the date of the checks.
147
Under Sections 1 and 2 of B.P. Blg. 22 FEDCOR, as payee, had the duty or obligation to encash or deposit the
checks issued in its favor within ninety days from the date of issue. Since FEDCOR deposited the checks after this
period, he cannot be faulted for their subsequent dishonor.

Alternatively, petitioner prays that in the event that his conviction for violations of B.P. Blg. 22 is sustained, the rulings
in Vaca v. Court of Appeals22 and Lim v. People23 should be given retroactive effect in his favor so that only a fine may
be imposed on him as penalty.

In arguing that petitioner’s conviction for two counts of violation of B.P. Blg. 22 is correct, the Office of the Solicitor
General relies heavily on the testimony of Felix Mirano that the account of petitioner had been closed way back in
May 1985, or four years prior to the issuance of the subject checks to FEDCOR. The date when the checks were
encashed or deposited is immaterial because there was no more existing bank account against which they were
drawn, and their dishonor was therefore certain even if the checks were presented for payment within the 90-day
period from their issuance. With respect to petitioner’s plea to impose on him the penalty of fine in the event that his
conviction is affirmed, the OSG maintains that the penalty of imprisonment is appropriate considering petitioner’s act
of issuing worthless checks which showed his culpable violation of B.P. Blg. 22.

Petitioner’s argument that the element of damage to private complainant FEDCOR is lacking is disputed by the OSG
by pointing out petitioner’s failure to prove the return of the backhoe to FEDCOR. Ronnie Bote, the person to whom
the backhoe was allegedly returned, was not presented as a witness to corroborate petitioner’s testimony. But even
granting arguendo that the backhoe was indeed received by Ronnie Bote, there is no showing that he acted for, and
on behalf of, FEDCOR in doing so considering that he was not an employee of FEDCOR.

The petition is without merit.

Section 1 of B.P. Blg. 22 provides:

SECTION 1. Checks without sufficient funds. -- Any person who makes or draws and issues any check to apply on
account or for value, knowing at the time of issue that he does not have sufficient funds in or credit with the drawee
bank for the payment of such check in full upon its presentment, which check is subsequently dishonored by the
drawee bank for insufficiency of funds or credit or would have been dishonored for the same reason had not the
drawer, without any valid reason, ordered the bank to stop payment, shall be punished by imprisonment of not less
than thirty days but not more than one (1) year or by a fine of not less than but not more than double the amount of
the check which fine shall in no case exceed Two Hundred Thousand Pesos, or both such fine and imprisonment at
the discretion of the court.

The same penalty shall be imposed upon any person who, having sufficient funds in or credit with the drawee bank
when he makes or draws and issues a check, shall fail to keep sufficient funds or to maintain a credit or to cover the
full amount of the check if presented within a period of ninety (90) days from the date appearing thereon, for which
reason it is dishonored by the drawee bank.

Two distinct acts are punished under the above-quoted provision:

(1)The making or drawing and issuance of any check to apply on account or for value, knowing at the time
of issue that the drawer does not have sufficient funds in, or credit with, the drawee bank; and

(2)The failure to keep sufficient funds or to maintain a credit to cover the full amount of the check if presented
within a period of ninety days from the date appearing thereon, for which reason it is dishonored by the
drawee bank.24

In the first situation, the drawer knows of the insufficiency of funds to cover the check at the time of its issuance;
while in the second situation, the drawer has sufficient funds at the time of issuance but fails to keep sufficient funds
or maintain credit within ninety days from the date appearing on the check. The check involved in the first offense is
worthless at the time of issuance, since the drawer has neither sufficient funds in, nor credit with, the drawee bank
at the time; while that involved in the second offense is good when issued, as the drawer has sufficient funds in, or
credit with, the drawee bank when issued. In both instances, the offense is consummated by the dishonor of the
check for insufficiency of funds or credit.25

It can be gleaned from the allegations in the information that petitioner is charged with the first type of offense under
B.P. Blg. 22.

The elements of the first type of offense are as follows:

(1) The making, drawing and issuance of any check to apply for account or for value;

148
 (2) The knowledge of the maker, drawer, or issuer that at the time of issue he does not have sufficient funds
in or credit with the drawee bank for the payment of such check in full upon its presentment; and

(3) The subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit or dishonor
for the same reason had not the drawer, without any valid cause, ordered the bank to stop payment.26

Petitioner admitted that he issued the two postdated checks worth P75,000 each. He did not deny that the same
were dishonored on the ground that the account from which they were to be drawn was already closed at the time
the checks were presented for payment. Neither did he rebut the prosecution’s evidence that the account against
which he drew his two postdated checks had been closed in May 1985 yet, or more than four years prior to the
drawing and delivery of the checks.

The fact that the checks were presented beyond the 90-day period provided in Section 2 of B.P. Blg. 22 is of no
moment. We held in Wong v. Court of Appeals27 that the 90-day period is not an element of the offense but merely a
condition for the prima facie presumption of knowledge of the insufficiency of funds; thus:

That the check must be deposited within ninety (90) days is simply one of the conditions for the prima facie
presumption of knowledge of lack of funds to arise. It is not an element of the offense. Neither does it discharge
petitioner from his duty to maintain sufficient funds in the account within a reasonable time thereof. Under Section
186 of the Negotiable Instruments Law, "a check must be presented for payment within a reasonable time after its
issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay." By current
banking practice, a check becomes stale after more than six (6) months, or 180 days.

In Bautista v. Court of Appeals,28 we ruled that such prima facie presumption is intended to facilitate proof of
knowledge, and not to foreclose admissibility of other evidence that may also prove such knowledge; thus, the only
consequence of the failure to present the check for payment within the 90-day period is that there arises no prima
facie presumption of knowledge of insufficiency of funds.29 The prosecution may still prove such knowledge through
other evidence.

In this case, FEDCOR presented the checks for encashment on 22 February 1990, or within the six-month period
from the date of issuance of the checks, and would not therefore have been considered stale had petitioner’s account
been existing. Although the presumption of knowledge of insufficiency of funds did not arise, such knowledge was
sufficiently proved by the unrebutted testimony of Mirano to the effect that petitioner’s account with the Security Bank
was closed as early as May 1985, or more than four years prior to the issuance of the two checks in question.

Thus, we find no error in the Court of Appeals’ affirmation of the trial court’s decision convicting petitioner of violations
of B.P. Blg. 22.

Petitioner’s alternative prayer for the modification of penalty by retroactively applying Vaca v. Court of
Appeals30 and Lim v. People31 must likewise be denied. We quote Administrative Circular No. 13-2001 clarifying
Administrative Circular No. 12-2000; thus:

The clear tenor and intention of Administrative Circular No. 12-2000 is not to remove imprisonment as an alternative
penalty, but to lay down a rule of preference in the application of the penalties provided for in B.P. Blg. 22.

The pursuit of this purpose clearly does not foreclose the possibility of imprisonment for violators of B.P. Blg. 22.
Neither does it defeat the legislative intent behind the law.

Thus, Administrative Circular No. 12-2000 establishes a rule of preference in the application of the penal provisions
of B.P. Blg. 22 such that where the circumstances of both the offense and the offender clearly indicate good faith or
a clear mistake of fact without taint of negligence, the imposition of a fine alone should be considered as the more
appropriate penalty. Needless to say, the determination of whether the circumstances warrant the imposition of a
fine alone rests solely upon the Judge. Should the Judge decide that imprisonment is the more appropriate penalty,
Administrative Circular No. 12-2000 ought not be deemed a hindrance.

In this case, when petitioner issued the subject postdated checks even though he had no more account with the
drawee bank, having closed it more than four years before he drew and delivered the checks, he manifested utter
lack of good faith or wanton bad faith. Hence, he cannot avail himself of the benefits under Administrative Circular
No. 12-2000.

We likewise sustain petitioner’s conviction for the crime of estafa.

The crime of estafa under paragraph 2(d) of Article 315 of the Revised Penal Code, as amended, has the following
elements: (1) postdating or issuance of a check in payment of an obligation contracted at the time the check was
issued; (2) lack or insufficiency of funds to cover the check; and (3) damage to the payee thereof.32

149
Settled is the rule that, to constitute estafa, the act of postdating or issuing a check in payment of an obligation must
be the efficient cause of defraudation and, as such, it should be either prior to, or simultaneous with, the act of fraud.
The offender must be able to obtain money or property from the offended party because of the issuance of the check,
or the person to whom the check was delivered would not have parted with his money or property had there been no
check issued to him. Stated otherwise, the check should have been issued as an inducement for the surrender by
the party deceived of his money or property, and not in payment of a pre-existing obligation.33

The existence of the first two elements in the case at bar is not disputed. Petitioner maintains that the third element
is not present.

Damage as an element of estafa may consist in (1) the offended party being deprived of his money or property as a
result of the defraudation; (2) disturbance in property right; or (3) temporary prejudice.34

In this case, the deprivation of the property of FEDCOR is apparent. Undoubtedly, the reason why FEDCOR
1âwphi 1

delivered the backhoe to petitioner was that the latter paid the P50,000 down payment and issued two postdated
checks in the amount of P75,000 each.

Petitioner’s claim that he returned the equipment was not duly proved; he never presented as witness the agent who
allegedly received the equipment from him. Moreover, he admitted that he never wrote FEDCOR about the return of
the allegedly defective backhoe to Ronnie Bote; neither did he go to FEDCOR to claim the return of the equipment
or of the cash down payment and the two checks.35 Such admissions belie his allegation that he returned the
equipment to FEDCOR. Besides, on cross-examination he admitted that during the pendency of the case, he paid
Santander, through FEDCOR’s lawyer, on two separate occasions in the total amount of P15,000 upon the advice
of his own lawyer that he had to pay because he was guilty; thus:

Q During the pendency of this case you paid Engr. Santander cash, is that correct?

A I paid the amount of P10,000.00 and then another P5,000.00 because according to my first lawyer I have to pay
this because I am guilty and this is B.P. case [sic].

Q You delivered the money to Engr. Federico Santander?

A To you Atty. Paray.

Q And I was the lawyer of Engr. Federico Santander?

A Yes, sir.36

If indeed petitioner returned the backhoe to Ronnie Bote and yet the latter did not heed his demands for the return
of his cash payment and the checks, he (petitioner) should have, at the very least, gone to or written FEDCOR itself
about the matter. Instead, he again paid FEDCOR the amount of P15,000 during the pendency of the case. Such
payment to FEDCOR negates his claim that he returned the backhoe; it may even be tantamount to an offer of
compromise. Under Section 27 of Rule 130 of the Rules on Evidence, an offer of compromise in criminal cases is an
implied admission of guilt.

Finally, by appealing his conviction, petitioner has thrown the whole case open for review. It becomes the duty of
1âwphi1

this Court to correct any error as may be found in the appealed judgment, even though it was not made the subject
of assignment of errors.37 This Court finds to be erroneous the penalty imposed by the trial court for the crime of
estafa, as affirmed by the Court of Appeals, which is seven years and four months of prision mayor as minimum to
twelve years and six months of reclusion temporal as maximum. The penalty for estafa committed by means of
bouncing checks has been increased by Presidential Decree No. 818, which took effect on 22 October 1975. Section
1 thereof provides in part as follows:

SECTION 1. Any person who shall defraud another by means of false pretenses or fraudulent acts as defined in
paragraph 2(d) of Article 315 of the Revised Penal Code, as amended by Republic Act No. 4885, shall be punished
by:

1st. The penalty of reclusion temporal if the amount of the fraud is over 12,000 pesos but does not exceed 22,000
pesos, and if such amount exceeds the latter sum, the penalty provided in this paragraph shall be imposed in its
maximum period, adding one year for each additional 10,000 pesos but the total penalty which may be imposed shall
in no case exceed thirty years. In such cases, and in connection with the accessory penalties which may be imposed
under the Revised Penal Code, the penalty shall be termed reclusion perpetua….

Petitioner NAGRAMPA defrauded FEDCOR in the amount of P135,000 (P150,000 [value of the checks] minus
P15,000 [payment made by petitioner during the pendency of these cases]). Applying P.D. No. 818 and the
Indeterminate Sentence Law, the maximum penalty shall be reclusion temporal in its maximum period, plus one year

150
for each additional P10,000 of the amount of the fraud; and the minimum shall be prision mayor, which is the penalty
next lower to that prescribed for the offense without first considering any modifying circumstances or the incremental
penalty for the amount of fraud in excess of P22,000.38

WHEREFORE, the instant petition is DENIED. The decision of the Court of Appeals upholding the decisions of the
Regional Trial Court of Quezon City, Branch 80, in Criminal Cases Nos. Q-90-15797, Q-90-15798 and Q-90-15799
is hereby AFFIRMED, with the modification that petitioner Manuel Nagrampa is hereby sentenced to suffer (1) an
imprisonment of one year for each of the two counts of violation of B. P. Blg. 22, and (2) an indeterminate penalty of
eight years and one day of prision mayor as minimum to twenty-eight years, four months and one day of reclusion
perpetua as maximum for the crime of estafa; and to pay private complainant Fedcor Trading Corporation the amount
of P135,000, plus legal interest thereon from 9 October 1990 up to the time of full payment.

SO ORDERED.

151