Republic of the Philippines It is to be noted in this connection that some of the restrictions imposed upon money orders by

SUPREME COURT postal laws and regulations are inconsistent with the character of negotiable instruments. For
Manila instance, such laws and regulations usually provide for not more than one endorsement;
EN BANC payment of money orders may be withheld under a variety of circumstances (49 C.J. 1153).

G.R. No. L-22405 June 30, 1971

PHILIPPINE EDUCATION CO., INC., plaintiff-appellant, Of particular application to the postal money order in question are the conditions laid down in
vs. the letter of the Director of Posts of October 26, 1948 (Exhibit 3) to the Bank of America for the
MAURICIO A. SORIANO, ET AL., defendant-appellees. redemption of postal money orders received by it from its depositors. Among others, the
Marcial Esposo for plaintiff-appellant. condition is imposed that "in cases of adverse claim, the money order or money orders
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Antonio G. Ibarra involved will be returned to you (the bank) and the, corresponding amount will have to be
and Attorney Concepcion Torrijos-Agapinan for defendants-appellees. 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
DIZON, J.: 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
An appeal from a decision of the Court of First Instance of Manila dismissing the complaint money order in question had been deducted from its clearing account with the Manila Post
filed by the Philippine Education Co., Inc. against Mauricio A. Soriano, Enrico Palomar and Office, it did not file any protest against such action.
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.
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
On April 23, 1958 one of the above-mentioned money orders numbered 124688 was received affirmed with costs.
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. Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Fernando, Teehankee, Barredo and
Villamor, JJ., concur.
Castro and Makasiar, JJ., took no part.
On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order Division of Republic of the Philippines
the Manila Post Office, acting for and in behalf of his co-appellee, Postmaster Enrico Palomar, SUPREME COURT
notified the Bank of America that money order No. 124688 attached to his letter had been Manila
found to have been irregularly issued and that, in view thereof, the amount it represented had THIRD DIVISION
been deducted from the bank's clearing account. For its part, on August 2 of the same year, G.R. No. 176664 July 21, 2008
the Bank of America debited appellant's account with the same amount and gave it advice BANK OF THE PHILIPPINE ISLANDS, Petitioner,
thereof by means of a debit memo. vs.
SPOUSES REYNALDO AND VICTORIA ROYECA, Respondents.
DECISION
On October 12, 1961 appellant requested the Postmaster General to reconsider the action NACHURA, J.:
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 Bank of the Philippine Islands (BPI) seeks a review of the Court of Appeals (CA)
the Secretary of Public Works and Communications, but the latter sustained the actions taken Decision1 dated July 12, 2006, and Resolution2 dated February 13, 2007, which dismissed its
by the postal officers. complaint for replevin and damages and granted the respondents’ counterclaim for damages.

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:
The case stems from the following undisputed facts:
On August 23, 1993, spouses Reynaldo and Victoria Royeca (respondents) executed and
delivered to Toyota Shaw, Inc. a Promissory Note 3 for ₱577,008.00 payable in 48 equal
monthly installments of ₱12,021.00, with a maturity date of August 18, 1997. The Promissory
Note provides for a penalty of 3% for every month or fraction of a month that an installment
remains unpaid.

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.
To secure the payment of said Promissory Note, respondents executed a Chattel Mortgage 4 in
favor of Toyota over a certain motor vehicle, more particularly described as follows:
<
p>Make and Type 1993 Toyota Corolla 1.3 XL
Motor No. 2E-2649879
Serial No. EE100-9512571
Color D.B. Gray Met.
Toyota, with notice to respondents, executed a Deed of Assignment 5 transferring all its rights,
title, and interest in the Chattel Mortgage to Far East Bank and Trust Company (FEBTC).
Claiming that the respondents failed to pay four (4) monthly amortizations covering the period
from May 18, 1997 to August 18, 1997, FEBTC sent a formal demand to respondents on
March 14, 2000 asking for the payment thereof, plus penalty.6 The respondents refused to pay
on the ground that they had already paid their obligation to FEBTC.

Plaintiff also prays for such other and further relief as may be deemed just and equitable. On April 19, 2000, FEBTC filed a Complaint for Replevin and Damages against the
respondents with the Metropolitan Trial Court (MeTC) of Manila praying for the delivery of the
vehicle, with an alternative prayer for the payment of ₱48,084.00 plus interest and/or late
On November 17, 1962, after the parties had submitted the stipulation of facts reproduced at payment charges at the rate of 36% per annum from May 18, 1997 until fully paid. The
pages 12 to 15 of the Record on Appeal, the above-named court rendered judgment as complaint likewise prayed for the payment of ₱24,462.73 as attorney’s fees, liquidated
follows: damages, bonding fees and other expenses incurred in the seizure of the vehicle. The
complaint was later amended to substitute BPI as plaintiff when it merged with and absorbed
FEBTC.7
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. In their Answer, respondents alleged that on May 20, 1997, they delivered to the Auto
124688, or in the alternative, to indemnify the plaintiff in the said sum of P200.00 with interest Financing Department of FEBTC eight (8) postdated checks in different amounts totaling
thereon at the rate of 8-½% per annum from September 27, 1961 until fully paid; without any ₱97,281.78. The Acknowledgment Receipt,8 which they attached to the Answer, showed that
pronouncement as to cost and attorney's fees. FEBTC received the following checks:
DATE BANK CHECK NO. AMOUNT
The case was appealed to the Court of First Instance of Manila where, after the parties had
26 May 97 Landbank #610945 ₱13,824.15
resubmitted the same stipulation of facts, the appealed decision dismissing the complaint, with
costs, was rendered.
6 June 97 Head Office #610946 12,381.63

The first, second and fifth assignments of error discussed in appellant's brief are related to the 30 May 97 FEBTC #17A00-11550P 12,021.00
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 15 June 97 Shaw Blvd. #17A00-11549P 12,021.00
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 30 June 97 " #17A00-11551P 12,021.00
a contractual relationship of debtor and creditor, respectively, between the government, on the
one hand, and the remitters payees or endorses, on the other. 18 June 97 Landbank #610947 11,671.00

18 July 97 Head Office #610948 11,671.00

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.
18 August 97 #610949 11,671.00
The respondents further averred that they did not receive any notice from the drawee banks or
from FEBTC that these checks were dishonored. They explained that, considering this and the
fact that the checks were issued three years ago, they believed in good faith that their
obligation had already been fully paid. They alleged that the complaint is frivolous and plainly
vexatious. They then prayed that they be awarded moral and exemplary damages, attorney’s
fees and costs of suit.9
During trial, Mr. Vicente Magpusao testified that he had been connected with FEBTC since
1994 and had assumed the position of Account Analyst since its merger with BPI. He admitted
that they had, in fact, received the eight checks from the respondents. However, two of these
checks (Landbank Check No. 0610947 and FEBTC Check No. 17A00-11551P) amounting to
₱23,692.00 were dishonored. He recalled that the remaining two checks were not deposited
anymore due to the previous dishonor of the two checks. He said that after deducting these
payments, the total outstanding balance of the obligation was ₱48,084.00, which represented
the last four monthly installments.
On February 23, 2005, the MeTC dismissed the case and granted the respondents’
counterclaim for damages, thus:
WHEREFORE, judgment is hereby rendered dismissing the complaint for lack of cause of
action, and on the counterclaim, plaintiff is ordered to indemnify the defendants as follows:
a) The sum of PhP30,000.00 as and by way of moral damages;
b) The sum of PhP30,000.00 as and by way of exemplary damages;
c) The sum of PhP20,000.00 as and by way of attorney’s fees; and
d) To pay the costs of the suit.
SO ORDERED.10
On appeal, the Regional Trial Court (RTC) set aside the MeTC Decision and ordered the
respondents to pay the amount claimed by the petitioner. The dispositive portion of its
Decision11 dated August 11, 2005 reads:
WHEREFORE, premises considered, the Decision of the Metropolitan Trial Court, Branch 9
dated February 23, 2005 is REVERSED and a new one entered directing the defendants-
appellees to pay the plaintiff-appellant, jointly and severally,
1. The sum of ₱48,084.00 plus interest and/or late payment charges thereon at
the rate of 36% per annum from May 18, 1997 until fully paid;
2. The sum of ₱10,000.00 as attorney’s fees; and
3. The costs of suit.
SO ORDERED. 12
The RTC denied the respondents’ motion for reconsideration. 13
The respondents elevated the case to the Court of Appeals (CA) through a petition for review.
They succeeded in obtaining a favorable judgment when the CA set aside the RTC’s Decision
and reinstated the MeTC’s Decision on July 12, 2006. 14 On February 13, 2007, the CA denied
the petitioner’s motion for reconsideration.15
The issues submitted for resolution in this petition for review are as follows:
I. WHETHER OR NOT RESPONDENTS WERE ABLE TO PROVE FULL PAYMENT OF
THEIR OBLIGATION AS ONE OF THEIR AFFIRMATIVE DEFENSES.
II. WHETHER OR NOT TENDER OF CHECKS CONSTITUTES PAYMENT.
III. WHETHER OR NOT RESPONDENTS ARE ENTITLED TO MORAL AND EXEMPLARY
DAMAGES AND ATTORNEY’S FEES.16
The petitioner insists that the respondents did not sufficiently prove the alleged payment. It
avers that, under the law and existing jurisprudence, delivery of checks does not constitute
payment. It points out that this principle stands despite the fact that there was no notice of
dishonor of the two checks and the demand to pay was made three years after default.
On the other hand, the respondents postulate that they have established payment of the
amount being claimed by the petitioner and, unless the petitioner proves that the checks have
been dishonored, they should not be made liable to pay the obligation again. 17
The petition is partly meritorious.
In civil cases, the party having the burden of proof must establish his case by a preponderance
of evidence, or evidence which is more convincing to the court as worthy of belief than that
which is offered in opposition thereto.18 Thus, the party, whether plaintiff or defendant, who
asserts the affirmative of an issue has the onus to prove his assertion in order to obtain a
favorable judgment. For the plaintiff, the burden to prove its positive assertions never parts.
For the defendant, an affirmative defense is one which is not a denial of an essential ingredient
in the plaintiff’s cause of action, but one which, if established, will be a good defense – i.e. an
"avoidance" of the claim.19
In Jimenez v. NLRC,20 cited by both the RTC and the CA, the Court elucidated on who,
between the plaintiff and defendant, has the burden to prove the affirmative defense of
payment:
As a general rule, one who pleads payment has the burden of proving it. Even where the
plaintiff must allege non-payment, the general rule is that the burden rests on the defendant to
prove payment, rather than on the plaintiff to prove non-payment. The debtor has the burden of
showing with legal certainty that the obligation has been discharged by payment.
When the existence of a debt is fully established by the evidence contained in the record, the
burden of proving that it has been extinguished by payment devolves upon the debtor who
offers such a defense to the claim of the creditor. Where the debtor introduces some evidence
of payment, the burden of going forward with the evidence - as distinct from the general
burden of proof - shifts to the creditor, who is then under a duty of producing some evidence to
show non-payment.21
In applying these principles, the CA and the RTC, however, arrived at different conclusions.
While both agreed that the respondents had the burden of proof to establish payment, the two
courts did not agree on whether the respondents were able to present sufficient evidence of
payment — enough to shift the burden of evidence to the petitioner. The RTC found that the
respondents failed to discharge this burden because they did not introduce evidence of
payment, considering that mere delivery of checks does not constitute payment.22 On the other
hand, the CA concluded that the respondents introduced sufficient evidence of payment, as
opposed to the petitioner, which failed to produce evidence that the checks were in fact
dishonored. It noted that the petitioner could have easily presented the dishonored checks or
the advice of dishonor and required respondents to replace the dishonored checks but none
was presented. Further, the CA remarked that it is absurd for a bank, such as petitioner, to
demand payment of a failed amortization only after three years from the due date.
The divergence in this conflict of opinions can be narrowed down to the issue of whether the
Acknowledgment Receipt was sufficient proof of payment. As correctly observed by the RTC,
this is only proof that respondents delivered eight checks in payment of the amount due.
Apparently, this will not suffice to establish actual payment.
Settled is the rule that payment must be made in legal tender. A check is not legal tender and,
therefore, cannot constitute a valid tender of payment. 23 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. 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.24
To establish their defense, the respondents therefore had to present proof, not only that they
delivered the checks to the petitioner, but also that the checks were encashed. The
respondents failed to do so. Had the checks been actually encashed, the respondents could
have easily produced the cancelled checks as evidence to prove the same. Instead, they
merely averred that they believed in good faith that the checks were encashed because they
were not notified of the dishonor of the checks and three years had already lapsed since they
issued the checks.1avvphi1
Because of this failure of the respondents to present sufficient proof of payment, it was no
longer necessary for the petitioner to prove non-payment, particularly proof that the checks
were dishonored. The burden of evidence is shifted only if the party upon whom it is lodged
was able to adduce preponderant evidence to prove its claim. 25
To stress, the obligation to prove that the checks were not dishonored, but were in fact
encashed, fell upon the respondents who would benefit from such fact. That payment was
effected through the eight checks was the respondents’ affirmative allegation that they had to
establish with legal certainty. If the petitioner were seeking to enforce liability upon the check,
the burden to prove that a notice of dishonor was properly given would have devolved upon
it.26 The fact is that the petitioner’s cause of action was based on the original obligation as
evidenced by the Promissory Note and the Chattel Mortgage, and not on the checks issued in
payment thereof.
Further, it should be noted that the petitioner, as payee, did not have a legal obligation to
inform the respondents of the dishonor of the checks. A notice of dishonor is required only to
preserve the right of the payee to recover on the check. It preserves the liability of the drawer
and the indorsers on the check. Otherwise, if the payee fails to give notice to them, they are
discharged from their liability thereon, and the payee is precluded from enforcing payment on
the check. The respondents, therefore, cannot fault the petitioner for not notifying them of the
non-payment of the checks because whatever rights were transgressed by such omission
belonged only to the petitioner.
In all, we find that the evidence at hand preponderates in favor of the petitioner. The
petitioner’s possession of the documents pertaining to the obligation strongly buttresses its
claim that the obligation has not been extinguished. The creditor’s possession of the evidence
of debt is proof that the debt has not been discharged by payment. 27 A promissory note in the
hands of the creditor is a proof of indebtedness rather than proof of payment. 28 In an action for
replevin by a mortgagee, it is prima facie evidence that the promissory note has not been
paid.29 Likewise, an uncanceled mortgage in the possession of the mortgagee gives rise to the
presumption that the mortgage debt is unpaid.30
Finally, the respondents posit that the petitioner’s claim is barred by laches since it has been
three years since the checks were issued. We do not agree. Laches is a recourse in equity.
Equity, however, is applied only in the absence, never in contravention, of statutory law. Thus,
laches cannot, as a rule, abate a collection suit filed within the prescriptive period mandated by
the New Civil Code.31 The petitioner’s action was filed within the ten-year prescriptive period
provided under Article 1144 of the New Civil Code. Hence, there is no room for the application
of laches.
Nonetheless, the Court cannot ignore what the respondents have consistently raised — that
they were not notified of the non-payment of the checks. Reasonable banking practice and
prudence dictates that, when a check given to a creditor bank in payment of an obligation is
dishonored, the bank should immediately return it to the debtor and demand its replacement or
payment lest it causes any prejudice to the drawer. In light of this and the fact that the
obligation has been partially paid, we deem it just and equitable to reduce the 3% per month
penalty charge as stipulated in the Promissory Note to 12% per annum. 32 Although a court is
not at liberty to ignore the freedom of the parties to agree on such terms and conditions as
they see fit, as long as they contravene no law, morals, good customs, public order or public
policy, a stipulated penalty, nevertheless, may be equitably reduced by the courts if it is
iniquitous or unconscionable, or if the principal obligation has been partly or irregularly
complied with.33
WHEREFORE, premises considered, the petition is PARTIALLY GRANTED. The Court of
Appeals Decision dated July 12, 2006, and Resolution dated February 13, 2007, are
REVERSED and SET ASIDE. The Decision of the Regional Trial Court, dated August 11,
2005, is REINSTATED with the MODIFICATION that respondents are ordered to deliver the
possession of the subject vehicle, or in the alternative, pay the petitioner ₱48,084.00 plus late
penalty charges/interest thereon at the rate of 12% per annum from May 18, 1997 until fully
paid.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 170325 September 26, 2008
PHILIPPINE NATIONAL BANK, Petitioner,
vs.
ERLANDO T. RODRIGUEZ and NORMA RODRIGUEZ, Respondents.
DECISION
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
Decision1 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.
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.
5
In its Answer, 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;
(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.
Hence, the present recourse under Rule 45.
Issues
The issues may be compressed to whether the subject checks are payable to order or to
bearer and who bears the loss?
PNB argues anew that when the spouses Rodriguez issued the disputed checks, they did not
intend for the named payees to receive the proceeds. Thus, they are bearer instruments that
could be validly negotiated by mere delivery. Further, testimonial and documentary evidence
presented during trial amply proved that spouses Rodriguez and the officers of PEMSLA
conspired with each other to defraud the bank.
 Our Ruling
Prefatorily, amendment of decisions is more acceptable than an erroneous judgment attaining
finality to the prejudice of innocent parties. A court discovering an erroneous judgment before it
becomes final may, motu proprio or upon motion of the parties, correct its judgment with the
singular objective of achieving justice for the litigants. 10
However, a word of caution to lower courts, the CA in Cebu in this particular case, is in order.
The Court does not sanction careless disposition of cases by courts of justice. The highest
degree of diligence must go into the study of every controversy submitted for decision by
litigants. Every issue and factual detail must be closely scrutinized and analyzed, and all the
applicable laws judiciously studied, before the promulgation of every judgment by the court.
Only in this manner will errors in judgments be avoided.
Now to the core of the petition.
As a rule, when the payee is fictitious or not intended to be the true recipient of the proceeds,
the check is considered as a bearer instrument. A check is "a bill of exchange drawn on a bank
payable on demand."11 It is either an order or a bearer instrument. Sections 8 and 9 of the NIL
states:
SEC. 8. When payable to order. – The instrument is payable to order where it is drawn payable
to the order of a specified person or to him or his order. It may be drawn payable to the order
of –
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named or otherwise indicated
therein with reasonable certainty.
SEC. 9. When payable to bearer. – The instrument is payable to bearer –
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer; or
(c) When it is payable to the order of a fictitious or non-existing person, and such
fact is known to the person making it so payable; or
(d) When the name of the payee does not purport to be the name of any person;
or
(e) Where the only or last indorsement is an indorsement in
blank.12 (Underscoring supplied)
The distinction between bearer and order instruments lies in their manner of negotiation. Under
Section 30 of the NIL, an order instrument requires an indorsement from the payee or holder
before it may be validly negotiated. A bearer instrument, on the other hand, does not require
an indorsement to be validly negotiated. It is negotiable by mere delivery. The provision reads:
SEC. 30. What constitutes negotiation. – An instrument is negotiated when it is transferred
from one person to another in such manner as to constitute the transferee the holder thereof. If
payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the
indorsement of the holder completed by delivery.
A check that is payable to a specified payee is an order instrument. However, under Section
9(c) of the NIL, a check payable to a specified payee may nevertheless be considered as a
bearer instrument if it is payable to the order of a fictitious or non-existing person, and such
fact is known to the person making it so payable. Thus, checks issued to "Prinsipe Abante" or
"Si Malakas at si Maganda," who are well-known characters in Philippine mythology, are
bearer instruments because the named payees are fictitious and non-existent.
We have yet to discuss a broader meaning of the term "fictitious" as used in the NIL. It is for
this reason that We look elsewhere for guidance. Court rulings in the United States are a
logical starting point since our law 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.
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. 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.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 92244 February 9, 1993
NATIVIDAD GEMPESAW, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.
L.B. Camins for petitioner.
Angara, Abello, Concepcion, Regals & Cruz for private respondent
CAMPOS, JR., J.:
From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447), petitioner,
Natividad Gempesaw, appealed to this Court in a Petition for Review, on the issue of the right
of the drawer to recover from the drawee bank who pays a check with a forged indorsement of
the payee, debiting the same against the drawer's account.
The records show that on January 23, 1985, petitioner filed a Complaint against the private
respondent Philippine Bank of Communications (respondent drawee Bank) for recovery of the
money value of eighty-two (82) checks charged against the petitioner's account with the
respondent drawee Bank on the ground that the payees' indorsements were forgeries. The
Regional Trial Court, Branch CXXVIII of Caloocan City, which tried the case, rendered a
decision on November 17, 1987 dismissing the complaint as well as the respondent drawee
Bank's counterclaim. On appeal, the Court of Appeals in a decision rendered on February 22,
1990, affirmed the decision of the RTC on two grounds, namely (1) that the plaintiff's (petitioner
herein) gross negligence in issuing the checks was the proximate cause of the loss and (2)
assuming that the bank was also negligent, the loss must nevertheless be borne by the party
whose negligence was the proximate cause of the loss. On March 5, 1990, the petitioner filed
this petition under Rule 45 of the Rules of Court setting forth the following as the alleged errors
of the respondent Court:1
I not established on the record, but the respective payees admitted that they did not receive
THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE NEGLIGENCE
OF THE DRAWER IS THE PROXIMATE CAUSE OF THE RESULTING INJURY TO THE
DRAWEE BANK, AND THE DRAWER IS PRECLUDED FROM SETTING UP THE FORGERY
OR WANT OF AUTHORITY.
II
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT FINDING AND RULING
THAT IT IS THE GROSS AND INEXCUSABLE NEGLIGENCE AND FRAUDULENT ACTS OF
THE OFFICIALS AND EMPLOYEES OF THE RESPONDENT BANK IN FORGING THE
SIGNATURE OF THE PAYEES AND THE WRONG AND/OR ILLEGAL PAYMENTS MADE
TO PERSONS, OTHER THAN TO THE INTENDED PAYEES SPECIFIED IN THE CHECKS,
IS THE DIRECT AND PROXIMATE CAUSE OF THE DAMAGE TO PETITIONER WHOSE
SAVING (SIC) ACCOUNT WAS DEBITED.
III
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT ORDERING THE
RESPONDENT BANK TO RESTORE OR RE-CREDIT THE CHECKING ACCOUNT OF THE
PETITIONER IN THE CALOOCAN CITY BRANCH BY THE VALUE OF THE EIGHTY-TWO
(82) CHECKS WHICH IS IN THE AMOUNT OF P1,208,606.89 WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery stores located
at Rizal Avenue Extension and at Second Avenue, Caloocan City. Among these groceries are
D.G. Shopper's Mart and D.G. Whole Sale Mart. Petitioner maintains a checking account
numbered 13-00038-1 with the Caloocan City Branch of the respondent drawee Bank. To
facilitate payment of debts to her suppliers, petitioner draws checks against her checking
account with the respondent bank as drawee. Her customary practice of issuing checks in
payment of her suppliers was as follows: the checks were prepared and filled up as to all
material particulars by her trusted bookkeeper, Alicia Galang, an employee for more than eight
(8) years. After the bookkeeper prepared the checks, the completed checks were submitted to
the petitioner for her signature, together with the corresponding invoice receipts which indicate
the correct obligations due and payable to her suppliers. Petitioner signed each and every
check without bothering to verify the accuracy of the checks against the corresponding
invoices because she reposed full and implicit trust and confidence on her bookkeeper. The
issuance and delivery of the checks to the payees named therein were left to the bookkeeper.
Petitioner admitted that she did not make any verification as to whether or not the checks were
delivered to their respective payees. Although the respondent drawee Bank notified her of all
checks presented to and paid by the bank, petitioner did not verify he correctness of the
returned checks, much less check if the payees actually received the checks in payment for
the supplies she received. In the course of her business operations covering a period of two
years, petitioner issued, following her usual practice stated above, a total of eighty-two (82)
checks in favor of several suppliers. These checks were all presented by the indorsees as
holders thereof to, and honored by, the respondent drawee Bank. Respondent drawee Bank
correspondingly debited the amounts thereof against petitioner's checking account numbered
30-00038-1. Most of the aforementioned checks were for amounts in excess of her actual
obligations to the various payees as shown in their corresponding invoices. To mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of P11,895.23 in favor of
Kawsek Inc. (Exh. A-60), appellant's actual obligation to said payee was only P895.33 (Exh. A-
83); (2) in Check No. 652282 issued on September 18, 1984 in favor of Senson Enterprises in
the amount of P11,041.20 (Exh. A-67) appellant's actual obligation to said payee was only
P1,041.20 (Exh. 7); (3) in Check No. 589092 dated April 7, 1984 for the amount of P11,672.47
in favor of Marchem (Exh. A-61) appellant's obligation was only P1,672.47 (Exh. B); (4) in
Check No. 620450 dated May 10, 1984 in favor of Knotberry for P11,677.10 (Exh. A-31) her
actual obligation was only P677.10 (Exhs. C and C-1); (5) in Check No. 651862 dated August
9, 1984 in favor of Malinta Exchange Mart for P11,107.16 (Exh. A-62), her obligation was only
P1,107.16 (Exh. D-2); (6) in Check No. 651863 dated August 11, 1984 in favor of Grocer's
International Food Corp. in the amount of P11,335.60 (Exh. A-66), her obligation was only
P1,335.60 (Exh. E and E-1); (7) in Check No. 589019 dated March 17, 1984 in favor of Sophy
Products in the amount of P11,648.00 (Exh. A-78), her obligation was only P648.00 (Exh. G);
(8) in Check No. 589028 dated March 10, 1984 for the amount of P11,520.00 in favor of the
Yakult Philippines (Exh. A-73), the latter's invoice was only P520.00 (Exh. H-2); (9) in Check
No. 62033 dated May 23, 1984 in the amount of P11,504.00 in favor of Monde Denmark
Biscuit (Exh. A-34), her obligation was only P504.00 (Exhs. I-1 and I-2).2
Practically, all the checks issued and honored by the respondent drawee bank were crossed
checks.3 Aside from the daily notice given to the petitioner by the respondent drawee Bank, the
latter also furnished her with a monthly statement of her transactions, attaching thereto all the
cancelled checks she had issued and which were debited against her current account. It was
only after the lapse of more two (2) years that petitioner found out about the fraudulent
manipulations of her bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees were brought to Ernest L.
Boon, Chief Accountant of respondent drawee Bank at the Buendia branch, who, without
authority therefor, accepted them all for deposit at the Buendia branch to the credit and/or in
the accounts of Alfredo Y. Romero and Benito Lam. Ernest L. Boon was a very close friend of
Alfredo Y. Romero. Sixty-three (63) out of the eighty-two (82) checks were deposited in
Savings Account No. 00844-5 of Alfredo Y. Romero at the respondent drawee Bank's Buendia
branch, and four (4) checks in his Savings Account No. 32-81-9 at its Ongpin branch. The rest
of the checks were deposited in Account No. 0443-4, under the name of Benito Lam at the
Elcaño branch of the respondent drawee Bank.
About thirty (30) of the payees whose names were specifically written on the checks testified
that they did not receive nor even see the subject checks and that the indorsements appearing
at the back of the checks were not theirs.
The team of auditors from the main office of the respondent drawee Bank which conducted
periodic inspection of the branches' operations failed to discover, check or stop the
unauthorized acts of Ernest L. Boon. Under the rules of the respondent drawee Bank, only a
Branch Manager and no other official of the respondent drawee bank, may accept a second
indorsement on a check for deposit. In the case at bar, all the deposit slips of the eighty-two
(82) checks in question were initialed and/or approved for deposit by Ernest L. Boon. The
Branch Managers of the Ongpin and Elcaño branches accepted the deposits made in the
Buendia branch and credited the accounts of Alfredo Y. Romero and Benito Lam in their
respective branches.
On November 7, 1984, petitioner made a written demand on respondent drawee Bank to credit
her account with the money value of the eighty-two (82) checks totalling P1,208.606.89 for
having been wrongfully charged against her account. Respondent drawee Bank refused to
grant petitioner's demand. On January 23, 1985, petitioner filed the complaint with the
Regional Trial Court.
This is not a suit by the party whose signature was forged on a check drawn against the
drawee bank. The payees are not parties to the case. Rather, it is the drawer, whose signature
is genuine, who instituted this action to recover from the drawee bank the money value of
eighty-two (82) checks paid out by the drawee bank to holders of those checks where the
indorsements of the payees were forged. How and by whom the forgeries were committed are
those checks and therefore never indorsed the same. The applicable law is the Negotiable
Instruments Law4 (heretofore referred to as the NIL). Section 23 of the NIL provides:
When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative,
and no right to retain the instrument, or to give a discharge therefor,
or to enforce payment thereof against any party thereto, can be
acquired through or under such signature, unless the party against
whom it is sought to enforce such right is precluded from setting up
the forgery or want of authority.
Under the aforecited provision, forgery is a real or absolute defense by the party
whose signature is forged. A party whose signature to an instrument was forged
was never a party and never gave his consent to the contract which gave rise to
the instrument. Since his signature does not appear in the instrument, he cannot
be held liable thereon by anyone, not even by a holder in due course. Thus, if a
person's signature is forged as a maker of a promissory note, he cannot be made
to pay because he never made the promise to pay. Or where a person's
signature as a drawer of a check is forged, the drawee bank cannot charge the
amount thereof against the drawer's account because he never gave the bank
the order to pay. And said section does not refer only to the forged signature of
the maker of a promissory note and of the drawer of a check. It covers also a
forged indorsement, i.e., the forged signature of the payee or indorsee of a note
or check. Since under said provision a forged signature is "wholly inoperative",
no one can gain title to the instrument through such forged indorsement. Such an
indorsement prevents any subsequent party from acquiring any right as against
any party whose name appears prior to the forgery. Although rights may exist
between and among parties subsequent to the forged indorsement, not one of
them can acquire rights against parties prior to the forgery. Such forged
indorsement cuts off the rights of all subsequent parties as against parties prior
to the forgery. However, the law makes an exception to these rules where a party
is precluded from setting up forgery as a defense.
As a matter of practical significance, problems arising from forged indorsements of checks may
generally be broken into two types of cases: (1) where forgery was accomplished by a person
not associated with the drawer — for example a mail robbery; and (2) where the indorsement
was forged by an agent of the drawer. This difference in situations would determine the effect
of the drawer's negligence with respect to forged indorsements. While there is no duty resting
on the depositor to look for forged indorsements on his cancelled checks in contrast to a duty
imposed upon him to look for forgeries of his own name, a depositor is under a duty to set up
an accounting system and a business procedure as are reasonably calculated to prevent or
render difficult the forgery of indorsements, particularly by the depositor's own employees. And
if the drawer (depositor) learns that a check drawn by him has been paid under a forged
indorsement, the drawer is under duty promptly to report such fact to the drawee bank. 5 For his
negligence or failure either to discover or to report promptly the fact of such forgery to the
drawee, the drawer loses his right against the drawee who has debited his account under a
forged indorsement.6 In other words, he is precluded from using forgery as a basis for his claim
for re-crediting of his account.
In the case at bar, petitioner admitted that the checks were filled up and completed by her
trusted employee, Alicia Galang, and were given to her for her signature. Her signing the
checks made the negotiable instrument complete. Prior to signing the checks, there was no
valid contract yet.
Every contract on a negotiable instrument is incomplete and revocable until delivery of the
instrument to the payee for the purpose of giving effect thereto.7 The first delivery of the
instrument, complete in form, to the payee who takes it as a holder, is called issuance of the
instrument.8 Without the initial delivery of the instrument from the drawer of the check to the
payee, there can be no valid and binding contract and no liability on the instrument.
Petitioner completed the checks by signing them as drawer and thereafter authorized her
employee Alicia Galang to deliver the eighty-two (82) checks to their respective payees.
Instead of issuing the checks to the payees as named in the checks, Alicia Galang delivered
them to the Chief Accountant of the Buendia branch of the respondent drawee Bank, a certain
Ernest L. Boon. It was established that the signatures of the payees as first indorsers were
forged. The record fails to show the identity of the party who made the forged signatures. The
checks were then indorsed for the second time with the names of Alfredo Y. Romero and
Benito Lam, and were deposited in the latter's accounts as earlier noted. The second
indorsements were all genuine signatures of the alleged holders. All the eighty-two (82) checks
bearing the forged indorsements of the payees and the genuine second indorsements of
Alfredo Y. Romero and Benito Lam were accepted for deposit at the Buendia branch of
respondent drawee Bank to the credit of their respective savings accounts in the Buendia,
Ongpin and Elcaño branches of the same bank. The total amount of P1,208,606.89,
represented by eighty-two (82) checks, were credited and paid out by respondent drawee
Bank to Alfredo Y. Romero and Benito Lam, and debited against petitioner's checking account
No. 13-00038-1, Caloocan branch.
As a rule, a drawee bank who has paid a check on which an indorsement has been forged
cannot charge the drawer's account for the amount of said check. An exception to this rule is
where the drawer is guilty of such negligence which causes the bank to honor such a check or
checks. If a check is stolen from the payee, it is quite obvious that the drawer cannot possibly
discover the forged indorsement by mere examination of his cancelled check. This accounts
for the rule that although a depositor owes a duty to his drawee bank to examine his cancelled
checks for forgery of his own signature, he has no similar duty as to forged indorsements. A
different situation arises where the indorsement was forged by an employee or agent of the
drawer, or done with the active participation of the latter. Most of the cases involving forgery by
an agent or employee deal with the payee's indorsement. The drawer and the payee often time
shave business relations of long standing. The continued occurrence of business transactions
of the same nature provides the opportunity for the agent/employee to commit the fraud after
having developed familiarity with the signatures of the parties. However, sooner or later, some
leak will show on the drawer's books. It will then be just a question of time until the fraud is
discovered. This is specially true when the agent perpetrates a series of forgeries as in the
case at bar.
The negligence of a depositor which will prevent recovery of an unauthorized payment is
based on failure of the depositor to act as a prudent businessman would under the
circumstances. In the case at bar, the petitioner relied implicitly upon the honesty and loyalty of
her bookkeeper, and did not even verify the accuracy of amounts of the checks she signed
against the invoices attached thereto. Furthermore, although she regularly received her bank
statements, she apparently did not carefully examine the same nor the check stubs and the
returned checks, and did not compare them with the same invoices. Otherwise, she could have
easily discovered the discrepancies between the checks and the documents serving as bases
for the checks. With such discovery, the subsequent forgeries would not have been
accomplished. It was not until two years after the bookkeeper commenced her fraudulent
scheme that petitioner discovered that eighty-two (82) checks were wrongfully charged to her
account, at which she notified the respondent drawee bank.
It is highly improbable that in a period of two years, not one of Petitioner's suppliers
complained of non-payment. Assuming that even one single complaint had been made,
petitioner would have been duty-bound, as far as the respondent drawee Bank was concerned,
to make an adequate investigation on the matter. Had this been done, the discrepancies would
have been discovered, sooner or later. Petitioner's failure to make such adequate inquiry
constituted negligence which resulted in the bank's honoring of the subsequent checks with
forged indorsements. On the other hand, since the record mentions nothing about such a
complaint, the possibility exists that the checks in question covered inexistent sales. But even
in such a case, considering the length of a period of two (2) years, it is hard to believe that
petitioner did not know or realize that she was paying more than she should for the supplies
she was actually getting. A depositor may not sit idly by, after knowledge has come to her that
her funds seem to be disappearing or that there may be a leak in her business, and refrain
from taking the steps that a careful and prudent businessman would take in such
circumstances and if taken, would result in stopping the continuance of the fraudulent scheme.
If she fails to take steps, the facts may establish her negligence, and in that event, she would
be estopped from recovering from the bank. 9
One thing is clear from the records — that the petitioner failed to examine her records with
reasonable diligence whether before she signed the checks or after receiving her bank
statements. Had the petitioner examined her records more carefully, particularly the invoice
receipts, cancelled checks, check book stubs, and had she compared the sums written as
amounts payable in the eighty-two (82) checks with the pertinent sales invoices, she would
have easily discovered that in some checks, the amounts did not tally with those appearing in
the sales invoices. Had she noticed these discrepancies, she should not have signed those
checks, and should have conducted an inquiry as to the reason for the irregular entries.
Likewise had petitioner been more vigilant in going over her current account by taking careful
note of the daily reports made by respondent drawee Bank in her issued checks, or at least
made random scrutiny of cancelled checks returned by respondent drawee Bank at the close
of each month, she could have easily discovered the fraud being perpetrated by Alicia Galang,
and could have reported the matter to the respondent drawee Bank. The respondent drawee
Bank then could have taken immediate steps to prevent further commission of such fraud.
Thus, petitioner's negligence was the proximate cause of her loss. And since it was her
negligence which caused the respondent drawee Bank to honor the forged checks or
prevented it from recovering the amount it had already paid on the checks, petitioner cannot
now complain should the bank refuse to recredit her account with the amount of such
checks. 10 Under Section 23 of the NIL, she is now precluded from using the forgery to prevent
the bank's debiting of her account.
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong & Shanghai
Bank 11 is not applicable to the case at bar because in said case, the check was fraudulently
taken and the signature of the payee was forged not by an agent or employee of the drawer.
The drawer was not found to be negligent in the handling of its business affairs and the theft of
the check by a total stranger was not attributable to negligence of the drawer; neither was the
forging of the payee's indorsement due to the drawer's negligence. Since the drawer was not
negligent, the drawee was duty-bound to restore to the drawer's account the amount
theretofore paid under the check with a forged payee's indorsement because the drawee did
not pay as ordered by the drawer.
Petitioner argues that respondent drawee Bank should not have honored the checks because
they were crossed checks. Issuing a crossed check imposes no legal obligation on the drawee
not to honor such a check. It is more of a warning to the holder that the check cannot be
presented to the drawee bank for payment in cash. Instead, the check can only be deposited
with the payee's bank which in turn must present it for payment against the drawee bank in the
course of normal banking transactions between banks. The crossed check cannot be
presented for payment but it can only be deposited and the drawee bank may only pay to
another bank in the payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank from having checks
with more than one indorsement. The banking rule banning acceptance of checks for deposit
or cash payment with more than one indorsement unless cleared by some bank officials does
not invalidate the instrument; neither does it invalidate the negotiation or transfer of the said
check. In effect, this rule destroys the negotiability of bills/checks by limiting their negotiation
by indorsement of only the payee. Under the NIL, the only kind of indorsement which stops the
further negotiation of an instrument is a restrictive indorsement which prohibits the further
negotiation thereof.
Sec. 36. When indorsement restrictive. — An indorsement is
restrictive which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written in
express words at the back of the instrument, so that any subsequent party may be forewarned
that ceases to be negotiable. However, the restrictive indorsee acquires the right to receive
payment and bring any action thereon as any indorser, but he can no longer transfer his rights
as such indorsee where the form of the indorsement does not authorize him to do so. 12
Although the holder of a check cannot compel a drawee bank to honor it because there is no
privity between them, as far as the drawer-depositor is concerned, such bank may not legally
refuse to honor a negotiable bill of exchange or a check drawn against it with more than one
indorsement if there is nothing irregular with the bill or check and the drawer has sufficient
funds. The drawee cannot be compelled to accept or pay the check by the drawer or any
holder because as a drawee, he incurs no liability on the check unless he accepts it. But the
drawee will make itself liable to a suit for damages at the instance of the drawer for wrongful
dishonor of the bill or check.
Thus, it is clear that under the NIL, petitioner is precluded from raising the defense of forgery
by reason of her gross negligence. But under Section 196 of the NIL, any case not provided for
in the Act shall be governed by the provisions of existing legislation. Under the laws of quasi-
delict, she cannot point to the negligence of the respondent drawee Bank in the selection and
supervision of its employees as being the cause of the loss because negligence is the
proximate cause thereof and under Article 2179 of the Civil Code, she may not be awarded
damages. However, under Article 1170 of the same Code the respondent drawee Bank may
be held liable for damages. The article provides —
Those who in the performance of their obligations are guilty of
fraud, negligence or delay, and those who in any manner
contravene the tenor thereof, are liable for damages.
There is no question that there is a contractual relation between petitioner as depositor
(obligee) and the respondent drawee bank as the obligor. In the performance of its obligation,
the drawee bank is bound by its internal banking rules and regulations which form part of any
contract it enters into with any of its depositors. When it violated its internal rules that second
endorsements are not to be accepted without the approval of its branch managers and it did
accept the same upon the mere approval of Boon, a chief accountant, it contravened the tenor
of its obligation at the very least, if it were not actually guilty of fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not discover the irregularity with
respect to the acceptance of checks with second indorsement for deposit even without the
approval of the branch manager despite periodic inspection conducted by a team of auditors
from the main office constitutes negligence on the part of the bank in carrying out its
obligations to its depositors. Article 1173 provides —
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 circumstance of the persons, of the time and
of the place. . . .
We hold that banking business is so impressed with public interest where the trust and
confidence of the public in general is of paramount importance such that the appropriate
standard of diligence must be a high degree of diligence, if not the utmost diligence. Surely,
respondent drawee Bank cannot claim it exercised such a degree of diligence that is required
of it. There is no way We can allow it now to escape liability for such negligence. Its liability as
obligor is not merely vicarious but primary wherein the defense of exercise of due diligence in
the selection and supervision of its employees is of no moment.
Premises considered, respondent drawee Bank is adjudged liable to share the loss with the
petitioner on a fifty-fifty ratio in accordance with Article 172 which provides:
Responsibility arising from negligence in the performance of every
kind of obligation is also demandable, but such liability may be
regulated by the courts according to the circumstances.
With the foregoing provisions of the Civil Code being relied upon, it is being made clear that
the decision to hold the drawee bank liable is based on law and substantial justice and not on
mere equity. And although the case was brought before the court not on breach of contractual
obligations, the courts are not precluded from applying to the circumstances of the case the
laws pertinent thereto. Thus, the fact that petitioner's negligence was found to be the proximate
cause of her loss does not preclude her from recovering damages. The reason why the
decision dealt on a discussion on proximate cause is due to the error pointed out by petitioner
as allegedly committed by the respondent court. And in breaches of contract under Article
1173, due diligence on the part of the defendant is not a defense.
PREMISES CONSIDERED, the case is hereby ordered REMANDED to the trial court for the
reception of evidence to determine the exact amount of loss suffered by the petitioner,
considering that she partly benefited from the issuance of the questioned checks since the
obligation for which she issued them were apparently extinguished, such that only the excess
amount over and above the total of these actual obligations must be considered as loss of
which one half must be paid by respondent drawee bank to herein petitioner.
SO ORDERED. Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-39641 February 28, 1983
METROPOL (BACOLOD) FINANCING & INVESTMENT CORPORATION, plaintiff-appellee,
vs.
SAMBOK MOTORS COMPANY and NG SAMBOK SONS MOTORS CO., LTD., defendants-
appellants.
Rizal Quimpo & Cornelio P. Revena for plaintiff-appellee.
Diosdado Garingalao for defendants-appellants.
DE CASTRO, J.:
The former Court of Appeals, by its resolution dated October 16, 1974 certified this case to this
Court the issue issued therein being one purely of law.
On April 15, 1969 Dr. Javier Villaruel executed a promissory note in favor of Ng Sambok Sons
Motors Co., Ltd., in the amount of P15,939.00 payable in twelve (12) equal monthly
installments, beginning May 18, 1969, with interest at the rate of one percent per month. It is
further provided that in case on non-payment of any of the installments, the total principal sum
then remaining unpaid shall become due and payable with an additional interest equal to
twenty-five percent of the total amount due.
On the same date, Sambok Motors Company (hereinafter referred to as Sambok), a sister
company of Ng Sambok Sons Motors Co., Ltd., and under the same management as the
former, negotiated and indorsed the note in favor of plaintiff Metropol Financing & Investment
Corporation with the following indorsement:
Pay to the order of Metropol Bacolod Financing & Investment
Corporation with recourse. Notice of Demand; Dishonor; Protest;
and Presentment are hereby waived.
By:
RODOLFO G. NONILLO Asst. General Manager
The maker, Dr. Villaruel defaulted in the payment of his installments when they became due,
so on October 30, 1969 plaintiff formally presented the promissory note for payment to the
maker. Dr. Villaruel failed to pay the promissory note as demanded, hence plaintiff notified
Sambok as indorsee of said note of the fact that the same has been dishonored and
demanded payment.
Sambok failed to pay, so on November 26, 1969 plaintiff filed a complaint for collection of a
sum of money before the Court of First Instance of Iloilo, Branch I. Sambok did not deny its
liability but contended that it could not be obliged to pay until after its co-defendant Dr. Villaruel
has been declared insolvent.
During the pendency of the case in the trial court, defendant Dr. Villaruel died, hence, on
October 24, 1972 the lower court, on motion, dismissed the case against Dr. Villaruel pursuant
to Section 21, Rule 3 of the Rules of Court. 1
On plaintiff's motion for summary judgment, the trial court rendered its decision dated
September 12, 1973, the dispositive portion of which reads as follows:
WHEREFORE, judgment is rendered:
(a) Ordering Sambok Motors Company to pay to the plaintiff the sum of P15,939.00 plus the
legal rate of interest from October 30, 1969;
(b) Ordering same defendant to pay to plaintiff the sum equivalent to 25% of P15,939.00 plus
interest thereon until fully paid; and
(c) To pay the cost of suit.
Not satisfied with the decision, the present appeal was instituted, appellant Sambok raising a
lone assignment of error as follows:
The trial court erred in not dismissing the complaint by finding
defendant appellant Sambok Motors Company as assignor and a
qualified indorsee of the subject promissory note and in not holding
it as only secondarily liable thereof.
Appellant Sambok argues that by adding the words "with recourse" in the indorsement of the
note, it becomes a qualified indorser that being a qualified indorser, it does not warrant that if
said note is dishonored by the maker on presentment, it will pay the amount to the holder; that
it only warrants the following pursuant to Section 65 of the Negotiable Instruments Law: (a)
that the instrument is genuine and in all respects what it purports to be; (b) that he has a good
title to it; (c) that all prior parties had capacity to contract; (d) that he has no knowledge of any
fact which would impair the validity of the instrument or render it valueless.
The appeal is without merit.
A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It
may be made by adding to the indorser's signature the words "without recourse" or any words
of similar import. 2 Such an indorsement relieves the indorser of the general obligation to pay if
the instrument is dishonored but not of the liability arising from warranties on the instrument as
provided in Section 65 of the Negotiable Instruments Law already mentioned herein. However,
appellant Sambok indorsed the note "with recourse" and even waived the notice of demand,
dishonor, protest and presentment.
"Recourse" means resort to a person who is secondarily liable after the default of the person
who is primarily liable. 3 Appellant, by indorsing the note "with recourse" does not make itself a
qualified indorser but a general indorser who is secondarily liable, because by such
indorsement, it agreed that if Dr. Villaruel fails to pay the note, plaintiff-appellee can go after
said appellant. The effect of such indorsement is that the note was indorsed without
qualification. A person who indorses without qualification engages that on due presentment,
the note shall be accepted or paid, or both as the case may be, and that if it be dishonored, he
will pay the amount thereof to the holder. 4 Appellant Sambok's intention of indorsing the note
without qualification is made even more apparent by the fact that the notice of demand,
dishonor, protest and presentment were an waived. The words added by said appellant do not
limit his liability, but rather confirm his obligation as a general indorser.
Lastly, the lower court did not err in not declaring appellant as only secondarily liable because
after an instrument is dishonored by non-payment, the person secondarily liable thereon
ceases to be such and becomes a principal debtor. 5 His liabiliy becomes the same as that of
the original obligor. 6 Consequently, the holder need not even proceed against the maker
before suing the indorser.
WHEREFORE, the decision of the lower court is hereby affirmed. No costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R.
S No. 150228 July 30, 2009
BANK
A OF AMERICA NT & SA, Petitioner,
M
vs.
PHILIPPINE
B RACING CLUB, Respondent.
O DECISION
LEONARDO-DE
K CASTRO, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court from the
1
M
Decision promulgated on July 16, 2001 by the former Second Division of the Court of Appeals
O
(CA), in CA-G.R. CV No. 45371 entitled "Philippine Racing Club, Inc. v. Bank of America NT &
T
SA," affirming the Decision2 dated March 17, 1994 of the Regional Trial Court (RTC) of Makati,
O
Branch 135 in Civil Case No. 89-5650, in favor of the respondent. Likewise, the present
R
petition assails the Resolution3 promulgated on September 28, 2001, denying the Motion for
S
Reconsideration of the CA Decision.
C
O facts of this case as narrated in the assailed CA Decision are as follows:
The
.
(Plaintiff-appellee PRCI is a domestic corporation which maintains several accounts with
B
different banks in the Metro Manila area. Among the accounts maintained was Current
A
Account No. 58891-012 with defendant-appellant BA (Paseo de Roxas Branch). The
C
authorized joint signatories with respect to said Current Account were plaintiff-appellee’s
O
President (Antonia Reyes) and Vice President for Finance (Gregorio Reyes).
L
O
D
On or about the 2nd week of December 1988, the President and Vice President of plaintiff-
)
appellee corporation were scheduled to go out of the country in connection with the
corporation’s business. In order not to disrupt operations in their absence, they pre-signed
several checks relating to Current Account No. 58891-012. The intention was to insure
continuity of plaintiff-appellee’s operations by making available cash/money especially to settle
obligations that might become due. These checks were entrusted to the accountant with
instruction to make use of the same as the need arose. The internal arrangement was, in the
event there was need to make use of the checks, the accountant would prepare the
corresponding voucher and thereafter complete the entries on the pre-signed checks.
It turned out that on December 16, 1988, a John Doe presented to defendant-appellant bank
for encashment a couple of plaintiff-appellee corporation’s checks (Nos. 401116 and 401117)
with the indicated value of P110,000.00 each. It is admitted that these 2 checks were among
those presigned by plaintiff-appellee corporation’s authorized signatories.
The two (2) checks had similar entries with similar infirmities and irregularities. On the space
where the name of the payee should be indicated (Pay To The Order Of) the following 2-line
entries were instead typewritten: on the upper line was the word "CASH" while the lower line
had the following typewritten words, viz: "ONE HUNDRED TEN THOUSAND PESOS ONLY."
Despite the highly irregular entries on the face of the checks, defendant-appellant bank,
without as much as verifying and/or confirming the legitimacy of the checks considering the
substantial amount involved and the obvious infirmity/defect of the checks on their faces,
encashed said checks. A verification process, even by was of a telephone call to PRCI office,
would have taken less than ten (10) minutes. But this was not done by BA. Investigation
conducted by plaintiff-appellee corporation yielded the fact that there was no transaction
involving PRCI that call for the payment of P220,000.00 to anyone. The checks appeared to
have come into the hands of an employee of PRCI (one Clarita Mesina who was subsequently
criminally charged for qualified theft) who eventually completed without authority the entries on
the pre-signed checks. PRCI’s demand for defendant-appellant to pay fell on deaf ears.
Hence, the complaint.4
After due proceedings, the trial court rendered a Decision in favor of respondent, the
dispositive portion of which reads:
PREMISES CONSIDERED, judgment is hereby rendered in favor of plaintiff and against the
defendant, and the latter is ordered to pay plaintiff:
(1) The sum of Two Hundred Twenty Thousand (₱220,000.00) Pesos, with legal
interest to be computed from date of the filing of the herein complaint;
(2) The sum of Twenty Thousand (₱20,000.00) Pesos by way of attorney’s fees;
(3) The sum of Ten Thousand (₱10,000.00) Pesos for litigation expenses, and
(4) To pay the costs of suit.
SO ORDERED.5
Petitioner appealed the aforesaid trial court Decision to the CA which, however, affirmed said
decision in toto in its July 16, 2001 Decision. Petitioner’s Motion for Reconsideration of the CA
Decision was subsequently denied on September 28, 2001.
Petitioner now comes before this Court arguing that:
I. The Court of Appeals gravely erred in holding that the proximate cause of respondent’s loss
was petitioner’s encashment of the checks.
A. The Court of Appeals gravely erred in holding that petitioner was liable for the
amount of the checks despite the fact that petitioner was merely fulfilling its
obligation under law and contract.
B. The Court of Appeals gravely erred in holding that petitioner had a duty to
verify the encashment, despite the absence of any obligation to do so.
C. The Court of Appeals gravely erred in not applying Section 14 of the
Negotiable Instruments Law, despite its clear applicability to this case;
II. The Court of Appeals gravely erred in not holding that the proximate cause of respondent’s
loss was its own grossly negligent practice of pre-signing checks without payees and amounts
and delivering these pre-signed checks to its employees (other than their signatories).
III. The Court of Appeals gravely erred in affirming the trial court’s award of attorney’s fees
despite the absence of any applicable ground under Article 2208 of the Civil Code.
IV. The Court of Appeals gravely erred in not awarding attorney’s fees, moral and exemplary
damages, and costs of suit in favor of petitioner, who clearly deserves them. 6
From the discussions of both parties in their pleadings, the key issue to be resolved in the
present case is whether the proximate cause of the wrongful encashment of the checks in
question was due to (a) petitioner’s failure to make a verification regarding the said checks with
the respondent in view of the misplacement of entries on the face of the checks or (b) the
practice of the respondent of pre-signing blank checks and leaving the same with its
employees.
Petitioner insists that it merely fulfilled its obligation under law and contract when it encashed
the aforesaid checks. Invoking Sections 1267 and 1858 of the Negotiable Instruments Law
(NIL), petitioner claims that its duty as a drawee bank to a drawer-client maintaining a checking
account with it is to pay orders for checks bearing the drawer-client’s genuine signatures. The
genuine signatures of the client’s duly authorized signatories affixed on the checks signify the
order for payment. Thus, pursuant to the said obligation, the drawee bank has the duty to
determine whether the signatures appearing on the check are the drawer-client’s or its duly
authorized signatories. If the signatures are genuine, the bank has the unavoidable legal and
contractual duty to pay. If the signatures are forged and falsified, the drawee bank has the
corollary, but equally unavoidable legal and contractual, duty not to pay. 9
Furthermore, petitioner maintains that there exists a duty on the drawee bank to inquire from
the drawer before encashing a check only when the check bears a material alteration. A
material alteration is defined in Section 125 of the NIL to be one which changes the date, the
sum payable, the time or place of payment, the number or relations of the parties, the currency
in which payment is to be made or one which adds a place of payment where no place of
payment is specified, or any other change or addition which alters the effect of the instrument
in any respect. With respect to the checks at issue, petitioner points out that they do not
contain any material alteration.10 This is a fact which was affirmed by the trial court itself. 11
There is no dispute that the signatures appearing on the subject checks were genuine
signatures of the respondent’s authorized joint signatories; namely, Antonia Reyes and
Gregorio Reyes who were respondent’s President and Vice-President for Finance,
respectively. Both pre-signed the said checks since they were both scheduled to go abroad
and it was apparently their practice to leave with the company accountant checks signed in
black to answer for company obligations that might fall due during the signatories’ absence. It
is likewise admitted that neither of the subject checks contains any material alteration or
erasure.
However, on the blank space of each check reserved for the payee, the following typewritten
words appear: "ONE HUNDRED TEN THOUSAND PESOS ONLY." Above the same is the
typewritten word, "CASH." On the blank reserved for the amount, the same amount of One
Hundred Ten Thousand Pesos was indicated with the use of a check writer. The presence of
these irregularities in each check should have alerted the petitioner to be cautious before
proceeding to encash them which it did not do.
It is well-settled that banks are engaged in a business impressed with public interest, and it is
their duty to protect in return their many clients and depositors who transact business with
them. They have the obligation to treat their client’s account meticulously and with the highest
degree of care, considering the fiduciary nature of their relationship. The diligence required of
banks, therefore, is more than that of a good father of a family.12
Petitioner asserts that it was not duty-bound to verify with the respondent since the amount
below the typewritten word "CASH," expressed in words, is the very same amount indicated in
figures by means of a check writer on the amount portion of the check. The amount stated in
words is, therefore, a mere reiteration of the amount stated in figures. Petitioner emphasizes
that a reiteration of the amount in words is merely a repetition and that a repetition is not an
alteration which if present and material would have enjoined it to commence verification with
respondent.13
We do not agree with petitioner’s myopic view and carefully crafted defense. Although not in
the strict sense "material alterations," the misplacement of the typewritten entries for the payee
and the amount on the same blank and the repetition of the amount using a check writer were
glaringly obvious irregularities on the face of the check. Clearly, someone made a mistake in
filling up the checks and the repetition of the entries was possibly an attempt to rectify the
mistake. Also, if the check had been filled up by the person who customarily accomplishes the
checks of respondent, it should have occurred to petitioner’s employees that it would be
unlikely such mistakes would be made. All these circumstances should have alerted the bank
to the possibility that the holder or the person who is attempting to encash the checks did not
have proper title to the checks or did not have authority to fill up and encash the same. As
noted by the CA, petitioner could have made a simple phone call to its client to clarify the
irregularities and the loss to respondent due to the encashment of the stolen checks would
have been prevented.
In the case at bar, extraordinary diligence demands that petitioner should have ascertained
from respondent the authenticity of the subject checks or the accuracy of the entries therein
not only because of the presence of highly irregular entries on the face of the checks but also
of the decidedly unusual circumstances surrounding their encashment. Respondent’s witness
testified that for checks in amounts greater than Twenty Thousand Pesos (₱20,000.00) it is the
company’s practice to ensure that the payee is indicated by name in the check. 14 This was not
rebutted by petitioner. Indeed, it is highly uncommon for a corporation to make out checks
payable to "CASH" for substantial amounts such as in this case. If each irregular circumstance
in this case were taken singly or isolated, the bank’s employees might have been justified in
ignoring them. However, the confluence of the irregularities on the face of the checks and
circumstances that depart from the usual banking practice of respondent should have put
petitioner’s employees on guard that the checks were possibly not issued by the respondent in
due course of its business. Petitioner’s subtle sophistry cannot exculpate it from behavior that
fell extremely short of the highest degree of care and diligence required of it as a banking
institution.
Indeed, taking this with the testimony of petitioner’s operations manager that in case of an
irregularity on the face of the check (such as when blanks were not properly filled out) the bank
may or may not call the client depending on how busy the bank is on a particular day,15 we are
even more convinced that petitioner’s safeguards to protect clients from check fraud are
arbitrary and subjective. Every client should be treated equally by a banking institution
regardless of the amount of his deposits and each client has the right to expect that every
centavo he entrusts to a bank would be handled with the same degree of care as the accounts
of other clients. Perforce, we find that petitioner plainly failed to adhere to the high standard of
diligence expected of it as a banking institution.
In defense of its cashier/teller’s questionable action, petitioner insists that pursuant to Sections
1416 and 1617 of the NIL, it could validly presume, upon presentation of the checks, that the
party who filled up the blanks had authority and that a valid and intentional delivery to the party
presenting the checks had taken place. Thus, in petitioner’s view, the sole blame for this
debacle should be shifted to respondent for having its signatories pre-sign and deliver the
subject checks.18 Petitioner argues that there was indeed delivery in this case because,
following American jurisprudence, the gross negligence of respondent’s accountant in
safekeeping the subject checks which resulted in their theft should be treated as a voluntary
delivery by the maker who is estopped from claiming non-delivery of the instrument.19
Petitioner’s contention would have been correct if the subject checks were correctly and
properly filled out by the thief and presented to the bank in good order. In that instance, there
would be nothing to give notice to the bank of any infirmity in the title of the holder of the
checks and it could validly presume that there was proper delivery to the holder. The bank
could not be faulted if it encashed the checks under those circumstances. However, the
undisputed facts plainly show that there were circumstances that should have alerted the bank
to the likelihood that the checks were not properly delivered to the person who encashed the
same. In all, we see no reason to depart from the finding in the assailed CA Decision that the
subject checks are properly characterized as incomplete and undelivered instruments thus
making Section 1520 of the NIL applicable in this case.
However, we do agree with petitioner that respondent’s officers’ practice of pre-signing of
blank checks should be deemed seriously negligent behavior and a highly risky means of
purportedly ensuring the efficient operation of businesses. It should have occurred to
respondent’s officers and managers that the pre-signed blank checks could fall into the wrong
hands as they did in this case where the said checks were stolen from the company
accountant to whom the checks were entrusted.
Nevertheless, even if we assume that both parties were guilty of negligent acts that led to the
loss, petitioner will still emerge as the party foremost liable in this case. In instances where
both parties are at fault, this Court has consistently applied the doctrine of last clear chance in
order to assign liability.
In Westmont Bank v. Ong,21 we ruled:
…[I]t is petitioner [bank] which had the last clear chance to stop the fraudulent encashment of
the subject checks had it exercised due diligence and followed the proper and regular banking
procedures in clearing checks. As we had earlier ruled, the one who had a last clear
opportunity to avoid the impending harm but failed to do so is chargeable with the
consequences thereof.22 (emphasis ours)
In the case at bar, petitioner cannot evade responsibility for the loss by attributing negligence
on the part of respondent because, even if we concur that the latter was indeed negligent in
pre-signing blank checks, the former had the last clear chance to avoid the loss. To reiterate,
petitioner’s own operations manager admitted that they could have called up the client for
verification or confirmation before honoring the dubious checks. Verily, petitioner had the final
opportunity to avert the injury that befell the respondent. Failing to make the necessary
verification due to the volume of banking transactions on that particular day is a flimsy and
unacceptable excuse, considering that the "banking business is so impressed with public
interest where the trust and confidence of the public in general is of paramount importance
such that the appropriate standard of diligence must be a high degree of diligence, if not the
utmost diligence."23 Petitioner’s negligence has been undoubtedly established and, thus,
pursuant to Art. 1170 of the NCC,24 it must suffer the consequence of said negligence.
In the interest of fairness, however, we believe it is proper to consider respondent’s own
negligence to mitigate petitioner’s liability. Article 2179 of the Civil Code provides:
Art. 2179. When the plaintiff’s own negligence was the immediate and proximate cause of his
injury, he cannot recover damages. But if his negligence was only contributory, the immediate
and proximate cause of the injury being the defendant’s lack of due care, the plaintiff may
recover damages, but the courts shall mitigate the damages to be awarded.1avvph!1
Explaining this provision in Lambert v. Heirs of Ray Castillon, 25 the Court held:
The underlying precept on contributory negligence is that a plaintiff who is partly responsible
for his own injury should not be entitled to recover damages in full but must bear the
consequences of his own negligence. The defendant must thus be held liable only for the
damages actually caused by his negligence. xxx xxx xxx
As we previously stated, respondent’s practice of signing checks in blank whenever its
authorized bank signatories would travel abroad was a dangerous policy, especially
considering the lack of evidence on record that respondent had appropriate safeguards or
internal controls to prevent the pre-signed blank checks from falling into the hands of
unscrupulous individuals and being used to commit a fraud against the company. We cannot
believe that there was no other secure and reasonable way to guarantee the non-disruption of
respondent’s business. As testified to by petitioner’s expert witness, other corporations would
ordinarily have another set of authorized bank signatories who would be able to sign checks in
the absence of the preferred signatories.26 Indeed, if not for the fortunate happenstance that
the thief failed to properly fill up the subject checks, respondent would expectedly take the
blame for the entire loss since the defense of forgery of a drawer’s signature(s) would be
unavailable to it. Considering that respondent knowingly took the risk that the pre-signed blank
checks might fall into the hands of wrongdoers, it is but just that respondent shares in the
responsibility for the loss.
We also cannot ignore the fact that the person who stole the pre-signed checks subject of this
case from respondent’s accountant turned out to be another employee, purportedly a clerk in
respondent’s accounting department. As the employer of the "thief," respondent supposedly
had control and supervision over its own employee. This gives the Court more reason to
allocate part of the loss to respondent.
Following established jurisprudential precedents, 27 we believe the allocation of sixty percent
(60%) of the actual damages involved in this case (represented by the amount of the checks
with legal interest) to petitioner is proper under the premises. Respondent should, in light of its
contributory negligence, bear forty percent (40%) of its own loss.
Finally, we find that the awards of attorney’s fees and litigation expenses in favor of
respondent are not justified under the circumstances and, thus, must be deleted. The power of
the court to award attorney’s fees and litigation expenses under Article 2208 of the
NCC28 demands factual, legal, and equitable justification.
An adverse decision does not ipso facto justify an award of attorney’s fees to the winning
party.29 Even when a claimant is compelled to litigate with third persons or to incur expenses to
protect his rights, still attorney’s fees may not be awarded where no sufficient showing of bad
faith could be reflected in a party’s persistence in a case other than an erroneous conviction of
the righteousness of his cause.30
WHEREFORE, the Decision of the Court of Appeals dated July 16, 2001 and its Resolution
dated September 28, 2001 are AFFIRMED with the following MODIFICATIONS: (a) petitioner
Bank of America NT & SA shall pay to respondent Philippine Racing Club sixty percent (60%)
of the sum of Two Hundred Twenty Thousand Pesos (₱220,000.00) with legal interest as
awarded by the trial court and (b) the awards of attorney’s fees and litigation expenses in favor
of respondent are deleted.
Proportionate costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 187769 June 4, 2014
ALVIN PATRIMONIO, Petitioner,
vs.
NAPOLEON GUTIERREZ and OCTAVIO MARASIGAN III, Respondents.
DECISION
BRION, J.:
Assailed in this petition for review on certiorari1 under Rule 45 of the Revised Rules of Court is
the decision2 dated September 24, 2008 and the resolution 3 dated April 30, 2009 of the Court
of Appeals (CA) in CA-G.R. CV No. 82301. The appellate court affirmed the decision of the
Regional Trial Court (RTC) of Quezon City, Branch 77, dismissing the complaint for declaration
of nullity of loan filed by petitioner Alvin Patrimonio and ordering him to pay respondent
Octavio Marasigan III (Marasigan) the sum of ₱200,000.00.
The Factual Background
The facts of the case, as shown by the records, are briefly summarized below.
The petitioner and the respondent Napoleon Gutierrez (Gutierrez) entered into a business
venture under the name of Slam Dunk Corporation (Slum Dunk), a production outfit that
produced mini-concerts and shows related to basketball. Petitioner was already then a
decorated professional basketball player while Gutierrez was a well-known sports columnist.
In the course of their business, the petitioner pre-signed several checks to answer for the
expenses of Slam Dunk. Although signed, these checks had no payee’s name, date or
amount. The blank checks were entrusted to Gutierrez with the specific instruction not to fill
them out without previous notification to and approval by the petitioner. According to petitioner,
the arrangement was made so that he could verify the validity of the payment and make the
proper arrangements to fund the account.
In the middle of 1993, without the petitioner’s knowledge and consent, Gutierrez went to
Marasigan (the petitioner’s former teammate), to secure a loan in the amount of ₱200,000.00
on the excuse that the petitioner needed the money for the construction of his house. In
addition to the payment of the principal, Gutierrez assured Marasigan that he would be paid an
interest of 5% per month from March to May 1994.
After much contemplation and taking into account his relationship with the petitioner and
Gutierrez, Marasigan acceded to Gutierrez’ request and gave him ₱200,000.00 sometime in
February 1994. Gutierrez simultaneously delivered to Marasigan one of the blank checks the
petitioner pre-signed with Pilipinas Bank, Greenhills Branch, Check No. 21001764 with the
blank portions filled out with the words "Cash" "Two Hundred Thousand Pesos Only", and the
amount of "₱200,000.00". The upper right portion of the check corresponding to the date was
also filled out with the words "May 23, 1994" but the petitioner contended that the same was
not written by Gutierrez.
On May 24, 1994, Marasigan deposited the check but it was dishonored for the reason
"ACCOUNT CLOSED." It was later revealed that petitioner’s account with the bank had been
closed since May 28, 1993.
Marasigan sought recovery from Gutierrez, to no avail. He thereafter sent several demand
letters to the petitioner asking for the payment of ₱200,000.00, but his demands likewise went
unheeded. Consequently, he filed a criminal case for violation of B.P. 22 against the petitioner,
docketed as Criminal Case No. 42816.
On September 10, 1997, the petitioner filed before the Regional Trial Court (RTC) a Complaint
for Declaration of Nullity of Loan and Recovery of Damages against Gutierrez and co-
respondent Marasigan. He completely denied authorizing the loan or the check’s negotiation,
and asserted that he was not privy to the parties’ loan agreement.
Only Marasigan filed his answer to the complaint. In the RTC’s order dated December 22,
1997,Gutierrez was declared in default.
The Ruling of the RTC
The RTC ruled on February 3,2003 in favor of Marasigan. 4 It found that the petitioner, in
issuing the pre-signed blank checks, had the intention of issuing a negotiable instrument, albeit
with specific instructions to Gutierrez not to negotiate or issue the check without his approval.
While under Section 14 of the Negotiable Instruments Law Gutierrez had the prima facie
authority to complete the checks by filling up the blanks therein, the RTC ruled that he
deliberately violated petitioner’s specific instructions and took advantage of the trust reposed in
him by the latter.
Nonetheless, the RTC declared Marasigan as a holder in due course and accordingly
dismissed the petitioner’s complaint for declaration of nullity of the loan. It ordered the
petitioner to pay Marasigan the face value of the check with a right to claim reimbursement
from Gutierrez.
The petitioner elevated the case to the Court of Appeals (CA), insisting that Marasigan is not a
holder in due course. He contended that when Marasigan received the check, he knew that the
same was without a date, and hence, incomplete. He also alleged that the loan was actually
between Marasigan and Gutierrez with his check being used only as a security.
The Ruling of the CA
On September 24, 2008, the CA affirmed the RTC ruling, although premised on different
factual findings. After careful analysis, the CA agreed with the petitioner that Marasigan is not
a holder in due course as he did not receive the check in good faith.
The CA also concluded that the check had been strictly filled out by Gutierrez in accordance
with the petitioner’s authority. It held that the loan may not be nullified since it is grounded on
an obligation arising from law and ruled that the petitioner is still liable to pay Marasigan the
sum of ₱200,000.00.
After the CA denied the subsequent motion for reconsideration that followed, the petitioner
filed the present petition for review on certiorari under Rule 45 of the Revised Rules of Court.
The Petition
The petitioner argues that: (1) there was no loan between him and Marasigan since he never
authorized the borrowing of money nor the check’s negotiation to the latter; (2) under Article
1878 of the Civil Code, a special power of attorney is necessary for an individual to make a
loan or borrow money in behalf of another; (3) the loan transaction was between Gutierrez and
Marasigan, with his check being used only as a security; (4) the check had not been
completely and strictly filled out in accordance with his authority since the condition that the
subject check can only be used provided there is prior approval from him, was not complied
with; (5) even if the check was strictly filled up as instructed by the petitioner, Marasigan is still
not entitled to claim the check’s value as he was not a holder in due course; and (6) by reason
of the bad faith in the dealings between the respondents, he is entitled to claim for damages.
The Issues
Reduced to its basics, the case presents to us the following issues:
1. Whether the contract of loan in the amount of ₱200,000.00 granted by
respondent Marasigan to petitioner, through respondent Gutierrez, may be
nullified for being void;
2. Whether there is basis to hold the petitioner liable for the payment of the
₱200,000.00 loan;
3. Whether respondent Gutierrez has completely filled out the subject check
strictly under the authority given by the petitioner; and
4. Whether Marasigan is a holder in due course.
The Court’s Ruling
The petition is impressed with merit.
We note at the outset that the issues raised in this petition are essentially factual in nature. The
main point of inquiry of whether the contract of loan may be nullified, hinges on the very
existence of the contract of loan – a question that, as presented, is essentially, one of fact.
Whether the petitioner authorized the borrowing; whether Gutierrez completely filled out the
subject check strictly under the petitioner’s authority; and whether Marasigan is a holder in due
course are also questions of fact, that, as a general rule, are beyond the scope of a Rule 45
petition.
The rule that questions of fact are not the proper subject of an appeal by certiorari, as a
petition for review under Rule 45 is limited only to questions of law, is not an absolute rule that
admits of no exceptions. One notable exception is when the findings off act of both the trial
court and the CA are conflicting, making their review necessary. 5 In the present case, the
tribunals below arrived at two conflicting factual findings, albeit with the same conclusion, i.e.,
dismissal of the complaint for nullity of the loan. Accordingly, we will examine the parties’
evidence presented.
I. Liability Under the Contract of Loan
The petitioner seeks to nullify the contract of loan on the ground that he never authorized the
borrowing of money. He points to Article 1878, paragraph 7 of the Civil Code, which explicitly
requires a written authority when the loan is contracted through an agent. The petitioner
contends that absent such authority in writing, he should not be held liable for the face value of
the check because he was not a party or privy to the agreement.
Contracts of Agency May be Oral Unless The Law Requires a Specific Form
Article 1868 of the Civil Code defines a contract of agency as a contract whereby a person
"binds himself to render some service or to do something in representation or on behalf of
another, with the consent or authority of the latter." Agency may be express, or implied from
the acts of the principal, from his silence or lack of action, or his failure to repudiate the
agency, knowing that another person is acting on his behalf without authority.
As a general rule, a contract of agency may be oral. 6 However, it must be written when the law
requires a specific form, for example, in a sale of a piece of land or any interest therein through
an agent.
Article 1878 paragraph 7 of the Civil Code expressly requires a special power of authority
before an agent can loan or borrow money in behalf of the principal, to wit:
Art. 1878. Special powers of attorney are necessary in the following cases:
xxxx
(7) To loan or borrow money, unless the latter act be urgent and indispensable for the
preservation of the things which are under administration. (emphasis supplied)
Article 1878 does not state that the authority be in writing. As long as the mandate is express,
such authority may be either oral or written. We unequivocably declared in Lim Pin v. Liao
Tian, et al.,7 that the requirement under Article 1878 of the Civil Code refers to the nature of
the authorization and not to its form. Be that as it may, the authority must be duly established
by competent and convincing evidence other than the self serving assertion of the party
claiming that such authority was verbally given, thus:
The requirements of a special power of attorney in Article 1878 of the Civil Code and of a
special authority in Rule 138 of the Rules of Court refer to the nature of the authorization and
not its form. The requirements are met if there is a clear mandate from the principal specifically
authorizing the performance of the act. As early as 1906, this Court in Strong v. Gutierrez-
Repide (6 Phil. 680) stated that such a mandate may be either oral or written, the one vital
thing being that it shall be express. And more recently, We stated that, if the special authority
is not written, then it must be duly established by evidence:
x x x the Rules require, for attorneys to compromise the litigation of their clients, a special
authority. And while the same does not state that the special authority be in writing the Court
has every reason to expect that, if not in writing, the same be duly established by evidence
other than the self-serving assertion of counsel himself that such authority was verbally given
him.(Home Insurance Company vs. United States lines Company, et al., 21 SCRA 863; 866:
Vicente vs. Geraldez, 52 SCRA 210; 225). (emphasis supplied).
The Contract of Loan Entered Into by Gutierrez in Behalf of the Petitioner Should be Nullified
for Being Void; Petitioner is Not Bound by the Contract of Loan.
A review of the records reveals that Gutierrez did not have any authority to borrow money in
behalf of the petitioner.1âwphi1 Records do not show that the petitioner executed any special
power of attorney (SPA) in favor of Gutierrez. In fact, the petitioner’s testimony confirmed that
he never authorized Gutierrez (or anyone for that matter), whether verbally or in writing, to
borrow money in his behalf, nor was he aware of any such transaction:
ALVIN PATRIMONIO (witness)
ATTY. DE VERA: Did you give Nap Gutierrez any Special Power of Attorney in writing
authorizing him to borrow using your money?
WITNESS: No, sir. (T.S.N., Alvin Patrimonio, Nov. 11, 1999, p. 105) 8
xxxx
Marasigan however submits that the petitioner’s acts of pre-signing the blank checks and
releasing them to Gutierrez suffice to establish that the petitioner had authorized Gutierrez to
fill them out and contract the loan in his behalf.
Marasigan’s submission fails to persuade us.
In the absence of any authorization, Gutierrez could not enter into a contract of loan in behalf
of the petitioner. As held in Yasuma v. Heirs of De Villa, 9 involving a loan contracted by de Villa
secured by real estate mortgages in the name of East Cordillera Mining Corporation, in the
absence of an SPA conferring authority on de Villa, there is no basis to hold the corporation
liable, to wit:
The power to borrow money is one of those cases where corporate officers as agents of the
corporation need a special power of attorney. In the case at bar, no special power of attorney
conferring authority on de Villa was ever presented. x x x There was no showing that
respondent corporation ever authorized de Villa to obtain the loans on its behalf.
xxxx
Therefore, on the first issue, the loan was personal to de Villa. There was no basis to hold the
corporation liable since there was no authority, express, implied or apparent, given to de Villa
to borrow money from petitioner. Neither was there any subsequent ratification of his act.
xxxx
The liability arising from the loan was the sole indebtedness of de Villa (or of his estate after
his death). (citations omitted; emphasis supplied).
This principle was also reiterated in the case of Gozun v. Mercado,10 where this court held:
Petitioner submits that his following testimony suffices to establish that respondent had
authorized Lilian to obtain a loan from him.
xxxx
Petitioner’s testimony failed to categorically state, however, whether the loan was made on
behalf of respondent or of his wife. While petitioner claims that Lilian was authorized by
respondent, the statement of account marked as Exhibit "A" states that the amount was
received by Lilian "in behalf of Mrs. Annie Mercado.
It bears noting that Lilian signed in the receipt in her name alone, without indicating therein that
she was acting for and in behalf of respondent. She thus bound herself in her personal
capacity and not as an agent of respondent or anyone for that matter.
It is a general rule in the law of agency that, in order to bind the principal by a mortgage on real
property executed by an agent, it must upon its face purport to be made, signed and sealed in
the name of the principal, otherwise, it will bind the agent only. It is not enough merely that the
agent was in fact authorized to make the mortgage, if he has not acted in the name of the
principal. x x x (emphasis supplied).
In the absence of any showing of any agency relations or special authority to act for and in
behalf of the petitioner, the loan agreement Gutierrez entered into with Marasigan is null and
void. Thus, the petitioner is not bound by the parties’ loan agreement.
Furthermore, that the petitioner entrusted the blank pre-signed checks to Gutierrez is not
legally sufficient because the authority to enter into a loan can never be presumed. The
contract of agency and the special fiduciary relationship inherent in this contract must exist as
a matter of fact. The person alleging it has the burden of proof to show, not only the fact of
agency, but also its nature and extent.11 As we held in People v. Yabut:12
Modesto Yambao's receipt of the bad checks from Cecilia Que Yabut or Geminiano Yabut, Jr.,
in Caloocan City cannot, contrary to the holding of the respondent Judges, be licitly taken as
delivery of the checks to the complainant Alicia P. Andan at Caloocan City to fix the venue
there. He did not take delivery of the checks as holder, i.e., as "payee" or "indorsee." And there
appears to beno contract of agency between Yambao and Andan so as to bind the latter for
the acts of the former. Alicia P. Andan declared in that sworn testimony before the
investigating fiscal that Yambao is but her "messenger" or "part-time employee." There was no
special fiduciary relationship that permeated their dealings. For a contract of agency to exist,
the consent of both parties is essential, the principal consents that the other party, the agent,
shall act on his behalf, and the agent consents so to act. It must exist as a fact. The law makes
no presumption thereof. The person alleging it has the burden of proof to show, not only the
fact of its existence, but also its nature and extent. This is more imperative when it is
considered that the transaction dealt with involves checks, which are not legal tender, and the
creditor may validly refuse the same as payment of obligation.(at p. 630). (emphasis supplied)
The records show that Marasigan merely relied on the words of Gutierrez without securing a
copy of the SPA in favor of the latter and without verifying from the petitioner whether he had
authorized the borrowing of money or release of the check. He was thus bound by the risk
accompanying his trust on the mere assurances of Gutierrez.
No Contract of Loan Was Perfected Between Marasigan And Petitioner, as The Latter’s
Consent Was Not Obtained.
Another significant point that the lower courts failed to consider is that a contract of loan, like
any other contract, is subject to the rules governing the requisites and validity of contracts in
general.13 Article 1318 of the Civil Code14 enumerates the essential requisites for a valid
contract, namely:
1. consent of the contracting parties;
2. object certain which is the subject matter of the contract; and
3. cause of the obligation which is established.
In this case, the petitioner denied liability on the ground that the contract lacked the essential
element of consent. We agree with the petitioner. As we explained above, Gutierrez did not
have the petitioner’s written/verbal authority to enter into a contract of loan. While there may be
a meeting of the minds between Gutierrez and Marasigan, such agreement cannot bind the
petitioner whose consent was not obtained and who was not privy to the loan agreement.
Hence, only Gutierrez is bound by the contract of loan.
True, the petitioner had issued several pre-signed checks to Gutierrez, one of which fell into
the hands of Marasigan. This act, however, does not constitute sufficient authority to borrow
money in his behalf and neither should it be construed as petitioner’s grant of consent to the
parties’ loan agreement. Without any evidence to prove Gutierrez’ authority, the petitioner’s
signature in the check cannot be taken, even remotely, as sufficient authorization, much less,
consent to the contract of loan. Without the consent given by one party in a purported contract,
such contract could not have been perfected; there simply was no contract to speak of. 15
With the loan issue out of the way, we now proceed to determine whether the petitioner can be
made liable under the check he signed.
II. Liability Under the Instrument
The answer is supplied by the applicable statutory provision found in Section 14 of the
Negotiable Instruments Law (NIL) which states:
Sec. 14. Blanks; when may be filled.- Where the instrument is wanting in any material
particular, the person in possession thereof has a prima facie authority to complete it by filling
up the blanks therein. And a signature on a blank paper delivered by the person making the
signature in order that the paper may be converted into a negotiable instrument operates as a
prima facie authority to fill it up as such for any amount. In order, however, that any such
instrument when completed may be enforced against any person who became a party thereto
prior to its completion, it must be filled up strictly in accordance with the authority given and
within a reasonable time. But if any such instrument, after completion, is negotiated to a holder
in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if
it had been filled up strictly in accordance with the authority given and within a reasonable
time.
This provision applies to an incomplete but delivered instrument. Under this rule, if the maker
or drawer delivers a pre-signed blank paper to another person for the purpose of converting it
into a negotiable instrument, that person is deemed to have prima facie authority to fill it up. It
merely requires that the instrument be in the possession of a person other than the drawer or
maker and from such possession, together with the fact that the instrument is wanting in a
material particular, the law presumes agency to fill up the blanks. 16
In order however that one who is not a holder in due course can enforce the instrument against
a party prior to the instrument’s completion, two requisites must exist: (1) that the blank must
be filled strictly in accordance with the authority given; and (2) it must be filled up within a
reasonable time. If it was proven that the instrument had not been filled up strictly in
accordance with the authority given and within a reasonable time, the maker can set this up as
a personal defense and avoid liability. However, if the holder is a holder in due course, there is
a conclusive presumption that authority to fill it up had been given and that the same was not
in excess of authority.17
In the present case, the petitioner contends that there is no legal basis to hold him liable both
under the contract and loan and under the check because: first, the subject check was not
completely filled out strictly under the authority he has given and second, Marasigan was not a
holder in due course.
Marasigan is Not a Holder in Due Course
The Negotiable Instruments Law (NIL) defines a holder in due course, thus:
Sec. 52 — 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.(emphasis
supplied)
Section 52(c) of the NIL states that a holder in due course is one who takes the instrument "in
good faith and for value." It also provides in Section 52(d) that in order that one may be a
holder in due course, it is necessary 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.
Acquisition in good faith means taking without knowledge or notice of equities of any sort
which could beset up against a prior holder of the instrument. 18 It means that he does not have
any knowledge of fact which would render it dishonest for him to take a negotiable paper. The
absence of the defense, when the instrument was taken, is the essential element of good
faith.19
As held in De Ocampo v. Gatchalian:20
In order to show that the defendant had "knowledge of such facts that his action in taking the
instrument amounted to bad faith," it is not necessary to prove that the defendant knew the
exact fraud that was practiced upon the plaintiff by the defendant's assignor, it being sufficient
to show that the defendant had notice that there was something wrong about his assignor's
acquisition of title, although he did not have notice of the particular wrong that was committed.
It is sufficient that the buyer of a note had notice or knowledge that the note was in some way
tainted with fraud. It is not necessary that he should know the particulars or even the nature of
the fraud, since all that is required is knowledge of such facts that his action in taking the note
amounted bad faith.
The term ‘bad faith’ does not necessarily involve furtive motives, but means bad faith in a
commercial sense. The manner in which the defendants conducted their Liberty Loan
department provided an easy way for thieves to dispose of their plunder. It was a case of "no
questions asked." Although gross negligence does not of itself constitute bad faith, it is
evidence from which bad faith may be inferred. The circumstances thrust the duty upon the
defendants to make further inquiries and they had no right to shut their eyes deliberately to
obvious facts. (emphasis supplied).
In the present case, Marasigan’s knowledge that the petitioner is not a party or a privy to the
contract of loan, and correspondingly had no obligation or liability to him, renders him
dishonest, hence, in bad faith. The following exchange is significant on this point:
WITNESS: AMBET NABUS
Q: Now, I refer to the second call… after your birthday. Tell us what you talked about?
A: Since I celebrated my birthday in that place where Nap and I live together with the other
crew, there were several visitors that included Danny Espiritu. So a week after my birthday,
Bong Marasigan called me up again and he was fuming mad. Nagmumura na siya. Hinahanap
niya si… hinahanap niya si Nap, dahil pinagtataguan na siya at sinabi na niya na kailangan I-
settle na niya yung utang ni Nap, dahil…
xxxx
WITNESS: Yes. Sinabi niya sa akin na kailangan ayusin na bago pa mauwi sa kung saan ang
tsekeng tumalbog… (He told me that we have to fix it up before it…) mauwi pa kung saan…
xxxx
Q: What was your reply, if any?
A: I actually asked him. Kanino ba ang tseke na sinasabi mo?
(Whose check is it that you are referring to or talking about?)
Q: What was his answer?
A: It was Alvin’s check.
Q: What was your reply, if any?
A: I told him do you know that it is not really Alvin who borrowed money from you or what you
want to appear…
xxxx
Q: What was his reply?
A: Yes, it was Nap, pero tseke pa rin ni Alvin ang hawak ko at si Alvin ang maiipit dito.(T.S.N.,
Ambet Nabus, July 27, 2000; pp.65-71; emphasis supplied)21
Since he knew that the underlying obligation was not actually for the petitioner, the rule that a
possessor of the instrument is prima facie a holder in due course is inapplicable. As correctly
noted by the CA, his inaction and failure to verify, despite knowledge of that the petitioner was
not a party to the loan, may be construed as gross negligence amounting to bad faith.
Yet, it does not follow that simply because he is not a holder in due course, Marasigan is
already totally barred from recovery. The NIL does not provide that a holder who is not a
holder in due course may not in any case recover on the instrument. 22 The only disadvantage
of a holder who is not in due course is that the negotiable instrument is subject to defenses as
if it were non-negotiable.23 Among such defenses is the filling up blank not within the authority.
On this point, the petitioner argues that the subject check was not filled up strictly on the basis
of the authority he gave. He points to his instruction not to use the check without his prior
approval and argues that the check was filled up in violation of said instruction.
Check Was Not Completed Strictly Under The Authority Given by The Petitioner
Our own examination of the records tells us that Gutierrez has exceeded the authority to fill up
the blanks and use the check.1âwphi1 To repeat, petitioner gave Gutierrez pre-signed checks
to be used in their business provided that he could only use them upon his approval. His
instruction could not be any clearer as Gutierrez’ authority was limited to the use of the checks
for the operation of their business, and on the condition that the petitioner’s prior approval be
first secured.
While under the law, Gutierrez had a prima facie authority to complete the check, such prima
facie authority does not extend to its use (i.e., subsequent transfer or negotiation)once the
check is completed. In other words, only the authority to complete the check is presumed.
Further, the law used the term "prima facie" to underscore the fact that the authority which the
law accords to a holder is a presumption juris tantumonly; hence, subject to subject to contrary
proof. Thus, evidence that there was no authority or that the authority granted has been
exceeded may be presented by the maker in order to avoid liability under the instrument.
In the present case, no evidence is on record that Gutierrez ever secured prior approval from
the petitioner to fill up the blank or to use the check. In his testimony, petitioner asserted that
he never authorized nor approved the filling up of the blank checks, thus:
ATTY. DE VERA: Did you authorize anyone including Nap Gutierrez to write the date, May 23,
1994?
WITNESS: No, sir.
Q: Did you authorize anyone including Nap Gutierrez to put the word cash? In the check?
A: No, sir.
Q: Did you authorize anyone including Nap Gutierrez to write the figure ₱200,000 in this
check?
A: No, sir.
Q: And lastly, did you authorize anyone including Nap Gutierrez to write the words ₱200,000
only xx in this check?
24
A: No, sir. (T.S.N., Alvin Patrimonio, November 11, 1999).
Notably, Gutierrez was only authorized to use the check for business expenses; thus, he
exceeded the authority when he used the check to pay the loan he supposedly contracted for
the construction of petitioner's house. This is a clear violation of the petitioner's instruction to
use the checks for the expenses of Slam Dunk. It cannot therefore be validly concluded that
the check was completed strictly in accordance with the authority given by the petitioner.
Considering that Marasigan is not a holder in due course, the petitioner can validly set up the
personal defense that the blanks were not filled up in accordance with the authority he gave.
Consequently, Marasigan has no right to enforce payment against the petitioner and the latter
cannot be obliged to pay the face value of the check.
WHEREFORE, in view of the foregoing, judgment is hereby rendered GRANTING the
petitioner Alvin Patrimonio's petition for review on certiorari. The appealed Decision dated
September 24, 2008 and the Resolution dated April 30, 2009 of the Court of Appeals are
consequently ANNULLED AND SET ASIDE. Costs against the respondents.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 167567 September 22, 2010
SAN MIGUEL CORPORATION, Petitioner,
vs.
BARTOLOME PUZON, JR., Respondent.
DECISION
DEL CASTILLO, J.:
This petition for review assails the December 21, 2004 Decision 1 and March 28, 2005
Resolution2 of the Court of Appeals (CA) in CA-G.R. SP No. 83905, which dismissed the
petition before it and denied reconsideration, respectively.
Factual Antecedents
Respondent Bartolome V. Puzon, Jr., (Puzon) owner of Bartenmyk Enterprises, was a dealer
of beer products of petitioner San Miguel Corporation (SMC) for Parañaque City. Puzon
purchased SMC products on credit. To ensure payment and as a business practice, SMC
required him to issue postdated checks equivalent to the value of the products purchased on
credit before the same were released to him. Said checks were returned to Puzon when the
transactions covered by these checks were paid or settled in full.
On December 31, 2000, Puzon purchased products on credit amounting to ₱11,820,327 for
which he issued, and gave to SMC, Bank of the Philippine Islands (BPI) Check Nos. 27904 (for
₱309,500.00) and 27903 (for ₱11,510,827.00) to cover the said transaction.
On January 23, 2001, Puzon, together with his accountant, visited the SMC Sales Office in
Parañaque City to reconcile his account with SMC. During that visit Puzon allegedly requested
to see BPI Check No. 17657. However, when he got hold of BPI Check No. 27903 which was
attached to a bond paper together with BPI Check No. 17657 he allegedly immediately left the
office with his accountant, bringing the checks with them.
SMC sent a letter to Puzon on March 6, 2001 demanding the return of the said checks. Puzon
ignored the demand hence SMC filed a complaint against him for theft with the City
Prosecutor’s Office of Parañaque City.
Rulings of the Prosecutor and the Secretary of Department of Justice (DOJ)
The investigating prosecutor, Elizabeth Yu Guray found that the "relationship between [SMC]
and [Puzon] appears to be one of credit or creditor-debtor relationship. The problem lies in the
reconciliation of accounts and the non-payment of beer empties which cannot give rise to a
criminal prosecution for theft."3 Thus, in her July 31, 2001 Resolution,4 she recommended the
dismissal of
the case for lack of evidence. SMC appealed.
On June 4, 2003, the DOJ issued its resolution5 affirming the prosecutor’s Resolution
dismissing the case. Its motion for reconsideration having been denied in the April 23, 2004
DOJ Resolution,6 SMC filed a petition for certiorari with the CA.
Ruling of the Court of Appeals
The CA found that the postdated checks were issued by Puzon merely as a security for the
payment of his purchases and that these were not intended to be encashed. It thus concluded
that SMC did not acquire ownership of the checks as it was duty bound to return the same
checks to Puzon after the transactions covering them were settled. The CA agreed with the
prosecutor that there was no theft, considering that a person cannot be charged with theft for
taking personal property that belongs to himself. It disposed of the appeal as follows:
WHEREFORE, finding no grave abuse of discretion committed by public respondent, the
instant petition is hereby DISMISSED. The assailed Resolutions of public respondent, dated
04 June 2003 and 23 April 2004, are AFFIRMED. No costs at this instance.
SO ORDERED.7
The motion for reconsideration of SMC was denied. Hence, the present petition.
Issues
Petitioner now raises the following issues:
I
WHETHER X X X PUZON HAD STOLEN FROM SMC ON JANUARY 23, 2001, AMONG
OTHERS BPI CHECK NO. 27903 DATED MARCH 30, 2001 IN THE AMOUNT OF PESOS:
ELEVEN MILLION FIVE HUNDRED TEN THOUSAND EIGHT HUNDRED TWENTY SEVEN
(Php11,510,827.00)
II
WHETHER X X X THE POSTDATED CHECKS ISSUED BY PUZON, PARTICULARLY BPI
CHECK NO. 27903 DATED MARCH 30, 2001 IN THE AMOUNT OF PESOS: ELEVEN
MILLION FIVE HUNDRED TEN THOUSAND EIGHT HUNDRED TWENTY SEVEN
(Php11,510,827.00), WERE ISSUED IN PAYMENT OF HIS BEER PURCHASES OR WERE
USED MERELY AS SECURITY TO ENSURE PAYMENT OF PUZON’S OBLIGATION.
III
WHETHER X X X THE PRACTICE OF SMC IN RETURNING THE POSTDATED CHECKS
ISSUED IN PAYMENT OF BEER PRODUCTS PURCHASED ON CREDIT SHOULD THE
TRANSACTIONS COVERED BY THESE CHECKS [BE] SETTLED ON [THE] MATURITY
DATES THEREOF COULD BE LIKENED TO A CONTRACT OF PLEDGE.
IV
WHETHER X X X SMC HAD ESTABLISHED PROBABLE CAUSE TO JUSTIFY THE
INDICTMENT OF PUZON FOR THE CRIME OF THEFT PURSUANT TO ART. 308 OF THE
REVISED PENAL CODE.8
Petitioner's Arguments
SMC contends that Puzon was positively identified by its employees to have taken the subject
postdated checks. It also contends that ownership of the checks was transferred to it because
these were issued, not merely as security but were, in payment of Puzon’s purchases. SMC
points out that it has established more than sufficient probable cause to justify the indictment of
Puzon for the crime of Theft.
Respondent’s Arguments
On the other hand, Puzon contends that SMC raises questions of fact that are beyond the
province of an appeal on certiorari. He also insists that there is no probable cause to charge
him with theft because the subject checks were issued only as security and he therefore
retained ownership of the same.
Our Ruling
The petition has no merit.
Preliminary Matters
At the outset we find that as pointed out by Puzon, SMC raises questions of fact. The
resolution of the first issue raised by SMC of whether respondent stole the subject check,
which calls for the Court to determine whether respondent is guilty of a felony, first requires
that the facts be duly established in the proper forum and in accord with the proper procedure.
This issue cannot be resolved based on mere allegations of facts and affidavits. The same is
true with the second issue raised by petitioner, to wit: whether the checks issued by Puzon
were payments for his purchases or were intended merely as security to ensure payment.
These issues cannot be properly resolved in the present petition for review on certiorari which
is rooted merely on the resolution of the prosecutor finding no probable cause for the filing of
an information for theft.
The third issue raised by petitioner, on the other hand, would entail venturing into constitutional
matters for a complete resolution. This route is unnecessary in the present case considering
that the main matter for resolution here only concerns grave abuse of discretion and the
existence of probable cause for theft, which at this point is more properly resolved through
another more clear cut route.
Probable Cause for Theft
"Probable cause is defined as such facts and circumstances that will engender a well-founded
belief that a crime has been committed and that the respondent is probably guilty thereof and
should be held for trial."9 On the fine points of the determination of probable cause, Reyes v.
Pearlbank Securities, Inc.10 comprehensively elaborated that:
The determination of [the existence or absence of probable cause] lies within the discretion of
the prosecuting officers after conducting a preliminary investigation upon complaint of an
offended party. Thus, the decision whether to dismiss a complaint or not is dependent upon
the sound discretion of the prosecuting fiscal. He may dismiss the complaint forthwith, if he
finds the charge insufficient in form or substance or without any ground. Or he may proceed
with the investigation if the complaint in his view is sufficient and in proper form. To emphasize,
the determination of probable cause for the filing of information in court is an executive
function, one that properly pertains at the first instance to the public prosecutor and, ultimately,
to the Secretary of Justice, who may direct the filing of the corresponding information or move
for the dismissal of the case. Ultimately, whether or not a complaint will be dismissed is
dependent on the sound discretion of the Secretary of Justice. And unless made with grave
abuse of discretion, findings of the Secretary of Justice are not subject to review.
For this reason, the Court considers it sound judicial policy to refrain from interfering in the
conduct of preliminary investigations and to leave the Department of Justice ample latitude of
discretion in the determination of what constitutes sufficient evidence to establish probable
cause for the prosecution of supposed offenders. Consistent with this policy, courts do not
reverse the Secretary of Justice's findings and conclusions on the matter of probable cause
except in clear cases of grave abuse of discretion.
In the present case, we are also not sufficiently convinced to deviate from the general rule of
non-interference. Indeed the CA did not err in dismissing the petition for certiorari before it,
absent grave abuse of discretion on the part of the DOJ Secretary in not finding probable
cause against Puzon for theft.
The Revised Penal Code provides:
Art. 308. Who are liable for theft. - Theft is committed by any person who, with intent to gain
but without violence against, or intimidation of persons nor force upon things, shall take
personal property of another without the latter’s consent.
xxxx
"[T]he essential elements of the crime of theft are the following: (1) that there be a taking of
personal property; (2) that said property belongs to another; (3) that the taking be done with
intent to gain; (4) that the taking be done without the consent of the owner; and (5) that the
taking be accomplished without the use of violence or intimidation against persons or force
upon things."11
Considering that the second element is that the thing taken belongs to another, it is relevant to
determine whether ownership of the subject check was transferred to petitioner. On this point
the Negotiable Instruments Law provides:
Sec. 12. Antedated and postdated – The instrument is not invalid for the reason only that it is
antedated or postdated, provided this is not done for an illegal or fraudulent purpose. The
person to whom an instrument so dated is delivered acquires the title thereto as of the date of
delivery. (Underscoring supplied.)
Note however that delivery as the term is used in the aforementioned provision means that the
party delivering did so for the purpose of giving effect thereto. 12 Otherwise, it cannot be said
that there has been delivery of the negotiable instrument. Once there is delivery, the person to
whom the instrument is delivered gets the title to the instrument completely and irrevocably.
If the subject check was given by Puzon to SMC in payment of the obligation, the purpose of
giving effect to the instrument is evident thus title to or ownership of the check was transferred
upon delivery. However, if the check was not given as payment, there being no intent to give
effect to the instrument, then ownership of the check was not transferred to SMC.
The evidence of SMC failed to establish that the check was given in payment of the obligation
of Puzon. There was no provisional receipt or official receipt issued for the amount of the
check. What was issued was a receipt for the document, a "POSTDATED CHECK SLIP."13
Furthermore, the petitioner's demand letter sent to respondent states "As per company policies
on receivables, all issuances are to be covered by post-dated checks. However, you have
deviated from this policy by forcibly taking away the check you have issued to us to cover the
December issuance."14 Notably, the term "payment" was not used instead the terms "covered"
and "cover" were used.
Although the petitioner's witness, Gregorio L. Joven III, states in paragraph 6 of his affidavit
that the check was given in payment of the obligation of Puzon, the same is contradicted by his
statements in paragraph 4, where he states that "As a standard company operating procedure,
all beer purchases by dealers on credit shall be covered by postdated checks equivalent to the
value of the beer products purchased"; in paragraph 9 where he states that "the
transaction covered by the said check had not yet been paid for," and in paragraph 8 which
clearly shows that partial payment is expected to be made by the return of beer empties, and
not by the deposit or encashment of the check.1avvphi1 Clearly the term "cover" was not
meant to be used interchangeably with "payment."
When taken in conjunction with the counter-affidavit of Puzon – where he states that "As the
[liquid beer] contents are paid for, SMC return[s] to me the corresponding PDCs or request[s]
me to replace them with whatever was the unpaid balance." 15 – it becomes clear that both
parties did not intend for the check to pay for the beer products. The evidence proves that the
check was accepted, not as payment, but in accordance with the long-standing policy of SMC
to require its dealers to issue postdated checks to cover its receivables. The check was only
meant to cover the transaction and in the meantime Puzon was to pay for the transaction by
some other means other than the check. This being so, title to the check did not transfer to
SMC; it remained with Puzon. The second element of the felony of theft was therefore not
established. Petitioner was not able to show that Puzon took a check that belonged to another.
Hence, the prosecutor and the DOJ were correct in finding no probable cause for theft.
Consequently, the CA did not err in finding no grave abuse of discretion committed by the DOJ
in sustaining the dismissal of the case for theft for lack of probable cause.
WHEREFORE, the petition is DENIED. The December 21, 2004 Decision and March 28, 2005
Resolution of the Court of Appeals in CA-G.R. SP. No. 83905 are AFFIRMED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 85419 March 9, 1993
DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner,
vs.
SIMA WEI and/or LEE KIAN HUAT, MARY CHENG UY, SAMSON TUNG, ASIAN
INDUSTRIAL PLASTIC CORPORATION and PRODUCERS BANK OF THE
PHILIPPINES, defendants-respondents.
Yngson & Associates for petitioner.
Henry A. Reyes & Associates for Samso Tung & Asian Industrial Plastic Corporation.
Eduardo G. Castelo for Sima Wei.
Monsod, Tamargo & Associates for Producers Bank.
Rafael S. Santayana for Mary Cheng Uy.
CAMPOS, JR., J.:
On July 6, 1986, the Development Bank of Rizal (petitioner Bank for brevity) filed a complaint
for a sum of money against respondents Sima Wei and/or Lee Kian Huat, Mary Cheng Uy,
Samson Tung, Asian Industrial Plastic Corporation (Plastic Corporation for short) and the
Producers Bank of the Philippines, on two causes of action:
(1) To enforce payment of the balance of P1,032,450.02 on a promissory note executed by
respondent Sima Wei on June 9, 1983; and
(2) To enforce payment of two checks executed by Sima Wei, payable to petitioner, and drawn
against the China Banking Corporation, to pay the balance due on the promissory note.
Except for Lee Kian Huat, defendants filed their separate Motions to Dismiss alleging a
common ground that the complaint states no cause of action. The trial court granted the
defendants' Motions to Dismiss. The Court of Appeals affirmed this decision, * to which the
petitioner Bank, represented by its Legal Liquidator, filed this Petition for Review by Certiorari,
assigning the following as the alleged errors of the Court of Appeals: 1
(1) THE COURT OF APPEALS ERRED IN HOLDING THAT THE PLAINTIFF-PETITIONER
HAS NO CAUSE OF ACTION AGAINST DEFENDANTS-RESPONDENTS HEREIN.
(2) THE COURT OF APPEALS ERRED IN HOLDING THAT SECTION 13, RULE 3 OF THE
REVISED RULES OF COURT ON ALTERNATIVE DEFENDANTS IS NOT APPLICABLE TO
HEREIN DEFENDANTS-RESPONDENTS.
The antecedent facts of this case are as follows:
In consideration for a loan extended by petitioner Bank to respondent Sima Wei, the latter
executed and delivered to the former a promissory note, engaging to pay the petitioner Bank or
order the amount of P1,820,000.00 on or before June 24, 1983 with interest at 32% per
annum. Sima Wei made partial payments on the note, leaving a balance of P1,032,450.02. On
November 18, 1983, Sima Wei issued two crossed checks payable to petitioner Bank drawn
against China Banking Corporation, bearing respectively the serial numbers 384934, for the
amount of P550,000.00 and 384935, for the amount of P500,000.00. The said checks were
allegedly issued in full settlement of the drawer's account evidenced by the promissory note.
These two checks were not delivered to the petitioner-payee or to any of its authorized
representatives. For reasons not shown, these checks came into the possession of respondent
Lee Kian Huat, who deposited the checks without the petitioner-payee's indorsement (forged
or otherwise) to the account of respondent Plastic Corporation, at the Balintawak branch,
Caloocan City, of the Producers Bank. Cheng Uy, Branch Manager of the Balintawak branch of
Producers Bank, relying on the assurance of respondent Samson Tung, President of Plastic
Corporation, that the transaction was legal and regular, instructed the cashier of Producers
Bank to accept the checks for deposit and to credit them to the account of said Plastic
Corporation, inspite of the fact that the checks were crossed and payable to petitioner Bank
and bore no indorsement of the latter. Hence, petitioner filed the complaint as aforestated.
The main issue before Us is whether petitioner Bank has a cause of action against any or all of
the defendants, in the alternative or otherwise.
A cause of action is defined as an act or omission of one party in violation of the legal right or
rights of another. The essential elements are: (1) legal right of the plaintiff; (2) correlative
obligation of the defendant; and (3) an act or omission of the defendant in violation of said
legal right.2
The normal parties to a check are the drawer, the payee and the drawee bank. Courts have
long recognized the business custom of using printed checks where blanks are provided for
the date of issuance, the name of the payee, the amount payable and the drawer's signature.
All the drawer has to do when he wishes to issue a check is to properly fill up the blanks and
sign it. However, the mere fact that he has done these does not give rise to any liability on his
part, until and unless the check is delivered to the payee or his representative. A negotiable
instrument, of which a check is, is not only a written evidence of a contract right but is also a
species of property. Just as a deed to a piece of land must be delivered in order to convey title
to the grantee, so must a negotiable instrument be delivered to the payee in order to evidence
its existence as a binding contract. Section 16 of the Negotiable Instruments Law, which
governs checks, provides in part:
Every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument for the purpose of giving
effect thereto. . . .
Thus, the payee of a negotiable instrument acquires no interest with respect thereto until its
delivery to him.3 Delivery of an instrument means transfer of possession, actual or
constructive, from one person to another.4 Without the initial delivery of the instrument from the
drawer to the payee, there can be no liability on the instrument. Moreover, such delivery must
be intended to give effect to the instrument.
The allegations of the petitioner in the original complaint show that the two (2) China Bank
checks, numbered 384934 and 384935, were not delivered to the payee, the petitioner herein.
Without the delivery of said checks to petitioner-payee, the former did not acquire any right or
interest therein and cannot therefore assert any cause of action, founded on said checks,
whether against the drawer Sima Wei or against the Producers Bank or any of the other
respondents.
In the original complaint, petitioner Bank, as plaintiff, sued respondent Sima Wei on the
promissory note, and the alternative defendants, including Sima Wei, on the two checks. On
appeal from the orders of dismissal of the Regional Trial Court, petitioner Bank alleged that its
cause of action was not based on collecting the sum of money evidenced by the negotiable
instruments stated but on quasi-delict — a claim for damages on the ground of fraudulent acts
and evident bad faith of the alternative respondents. This was clearly an attempt by the
petitioner Bank to change not only the theory of its case but the basis of his cause of action. It
is well-settled that a party cannot change his theory on appeal, as this would in effect deprive
the other party of his day in court.5
Notwithstanding the above, it does not necessarily follow that the drawer Sima Wei is freed
from liability to petitioner Bank under the loan evidenced by the promissory note agreed to by
her. Her allegation that she has paid the balance of her loan with the two checks payable to
petitioner Bank has no merit for, as We have earlier explained, these checks were never
delivered to petitioner Bank. And even granting, without admitting, that there was delivery to
petitioner Bank, the delivery of checks in payment of an obligation does not constitute payment
unless they are cashed or their value is impaired through the fault of the creditor. 6 None of
these exceptions were alleged by respondent Sima Wei.
Therefore, unless respondent Sima Wei proves that she has been relieved from liability on the
promissory note by some other cause, petitioner Bank has a right of action against her for the
balance due thereon.
However, insofar as the other respondents are concerned, petitioner Bank has no privity with
them. Since petitioner Bank never received the checks on which it based its action against said
respondents, it never owned them (the checks) nor did it acquire any interest therein. Thus,
anything which the respondents may have done with respect to said checks could not have
prejudiced petitioner Bank. It had no right or interest in the checks which could have been
violated by said respondents. Petitioner Bank has therefore no cause of action against said
respondents, in the alternative or otherwise. If at all, it is Sima Wei, the drawer, who would
have a cause of action against her
co-respondents, if the allegations in the complaint are found to be true.
With respect to the second assignment of error raised by petitioner Bank regarding the
applicability of Section 13, Rule 3 of the Rules of Court, We find it unnecessary to discuss the
same in view of Our finding that the petitioner Bank did not acquire any right or interest in the
checks due to lack of delivery. It therefore has no cause of action against the respondents, in
the alternative or otherwise.
In the light of the foregoing, the judgment of the Court of Appeals dismissing the petitioner's
complaint is AFFIRMED insofar as the second cause of action is concerned. On the first cause
of action, the case is REMANDED to the trial court for a trial on the merits, consistent with this
decision, in order to determine whether respondent Sima Wei is liable to the Development
Bank of Rizal for any amount under the promissory note allegedly signed by her.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-53194 March 14, 1988
PHILIPPINE NATIONAL BANK petitioner,
vs.
HON. ROMULO S. QUIMPO, Presiding Judge, Court of First Instance of Rizal, Branch
XIV, and FRANCISCO S. GOZON II, respondents.
GANCAYCO, J.:
On July 3, 1973, Francisco S. Gozon II, who was a depositor of the Caloocan City Branch of
the Philippine National Bank, went to the bank in his car accompanied by his friend Ernesto
Santos whom he left in the car while he transacted business in the bank. When Santos saw
that Gozon left his check book he took a check therefrom, filled it up for the amount of
P5,000.00, forged the signature of Gozon, and thereafter he encashed the check in the bank
on the same day. The account of Gozon was debited the said amount. Upon receipt of the
statement of account from the bank, Gozon asked that the said amount of P5,000.00 should
be returned to his account as his signature on the check was forged but the bank refused.
Upon complaint of private respondent on February 1, 1974 Ernesto Santos was apprehended
by the police authorities and upon investigation he admitted that he stole the check of Gozon,
forged his signature and encashed the same with the Bank.
Hence Gozon filed the complaint for recovery of the amount of P5,000.00, plus interest,
damages, attorney's fees and costs against the bank in the Court of First Instance of Rizal.
After the issues were joined and the trial on the merits ensued, a decision was rendered on
February 4, 1980, the dispositive part of which reads as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff. The defendant is hereby
condemned to return to plaintiff the amount of P5,000.00 which it had unlawfully withheld from
the latter, with interest at the legal rate from September 22, 1972 until the amount is fully
delivered. The defendant is further condemned to pay plaintiff the sum of P2,000.00 as
attorney's fees and to pay the costs of this suit.
Not satisfied therewith, the bank now filed this petition for review on certiorari in this Court
raising the sole legal issue that —
THE ACT OF RESPONDENT FRANCISCO GOZON, II IN PUTTING HIS CHECK BOOK
CONTAINING THE CHECK IN QUESTION INTO THE HANDS OF ERNESTO SANTOS
WAS INDEED THE PROXIMATE CAUSE OF THE LOSS, THEREBY PRECLUDING HIM
FROM SETTING UP THE DEFENSE OF FORGERY OR WANT 0F AUTHORITY UNDER
SECTION 23 OF THE NEGOTIABLE INSTRUMENTS LAW, ACT NO. 3201
The petition is devoid of merit.
This Court reproduces with approval the disquisition of the court a quo as follows:
A bank is bound to know the signatures of its customers; and if it pays a forged check, it must
be considered as making the payment out of its own funds, and cannot ordinarily change the
amount so paid to the account of the depositor whose name was forged' (San Carlos Milling
Co. vs. Bank of the P.I., 59 Phil. 59).
This rule is absolutely necessary to the circulation of drafts and checks, and is based upon the
presumed negligence of the drawee in failing to meet its obligation to know the signature of its
correspondent. ... There is nothing inequitable in such a rule. If the paper comes to the drawee
in the regular course of business, and he, having the opportunity ascertaining its character,
pronounces it to be valid and pays it, it is not only a question of payment under mistake, but
payment in neglect of duty which the commercial law places upon him, and the result of his
negligence must rest upon him (12 ALR 1901, citing many cases found in I Agbayani, supra).
Defendant, however, interposed the defense that it exercised diligence in accordance with the
accepted norms of banking practice when it accepted and paid Exhibit "A". It presented
evidence that the check had to pass scrutiny by a signature verifier as well as an officer of the
bank.
A comparison of the signature (Exhibit "A-l") on the forged check (Exhibit "A") with plaintiffs
exemplar signatures (Exhibits "5-N" and "5-B") found in the PNB Form 35-A would immediately
show the negligence of the employees of the defendant bank. Even a not too careful
comparison would immediately arrest one's attention and direct it to the graceful lines of
plaintiffs exemplar signatures found in Exhibits "5-A" and "5-B". The formation of the first letter
"F" in the exemplars, which could be regarded as artistic, is completely different from the way
the same letter is formed in Exhibit "A-l". That alone should have alerted a more careful and
prudent signature verifier.
The prime duty of a bank is to ascertain the genuineness of the signature of the drawer or the
depositor on the check being encashed. 1 It is expected to use reasonable business prudence
in accepting and cashing a check presented to it.
In this case the findings of facts of the court a quo are conclusive. The trial court found that a
comparison of the signature on the forged check and the sample signatures of private
respondent show marked differences as the graceful lines in the sample signature which is
completely different from those of the signature on the forged check. Indeed the NBI
handwriting expert Estelita Santiago Agnes whom the trial court considered to be an "unbiased
scientific expert" indicated the marked differences between the signature of private respondent
on the sample signatures and the questioned signature. Notwithstanding the testimony of Col.
Fernandez, witness for petitioner, advancing the opinion that the questioned signature appears
to be genuine, the trial court by merely examining the pictorial report presented by said
witness, found a marked difference in the second "c" in Francisco as written on the questioned
signature as compared to the sample signatures, and the separation between the "s" and the
"c" in the questioned signature while they are connected in the sample signatures. 2
Obviously, petitioner was negligent in encashing said forged check without carefully examining
the signature which shows marked variation from the genuine signature of private respondent.
In reference to the allegation of the petitioner that it is the negligence of private respondent that
is the cause of the loss which he suffered, the trial court held:
The act of plaintiff in leaving his checkbook in the car while he went out for a short while can
not be considered negligence sufficient to excuse the defendant bank from its own negligence.
It should be home in mind that when defendant left his car, Ernesto Santos, a long time
classmate and friend remained in the same. Defendant could not have been expected to know
that the said Ernesto Santos would remove a check from his checkbook. Defendant had trust
in his classmate and friend. He had no reason to suspect that the latter would breach that trust
.
We agree.
Private respondent trustee Ernesto Santos as a classmate and a friend. He brought him along
in his car to the bank and he left his personal belongings in the car. Santos however removed
and stole a check from his cheek book without the knowledge and consent of private
respondent. No doubt private respondent cannot be considered negligent under the
circumstances of the case.
WHEREFORE, the petition is DISMISSED for lack of merit with costs against petitioner.
SO ORDERED.
G.R. No. 129015 August 13, 2004
SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC., petitioner,
vs.
FAR EAST BANK AND TRUST COMPANY AND COURT OF APPEALS, respondents.
DECISION
TINGA, J.:
Called to fore in the present petition is a classic textbook question – if a bank pays out on a
forged check, is it liable to reimburse the drawer from whose account the funds were paid out?
The Court of Appeals, in reversing a trial court decision adverse to the bank, invoked tenuous
reasoning to acquit the bank of liability. We reverse, applying time-honored principles of law.
The salient facts follow.
Plaintiff Samsung Construction Company Philippines, Inc. ("Samsung Construction"), while
based in Biñan, Laguna, maintained a current account with defendant Far East Bank and Trust
Company1 ("FEBTC") at the latter’s Bel-Air, Makati branch.2 The sole signatory to Samsung
Construction’s account was Jong Kyu Lee ("Jong"), its Project Manager, 3 while the checks
remained in the custody of the company’s accountant, Kyu Yong Lee ("Kyu").4
On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC Check No.
432100 to the bank’s branch in Bel-Air, Makati. The check, payable to cash and drawn against
Samsung Construction’s current account, was in the amount of Nine Hundred Ninety Nine
Thousand Five Hundred Pesos (P999,500.00). The bank teller, Cleofe Justiani, first checked
the balance of Samsung Construction’s account. After ascertaining there were enough funds to
cover the check,5 she compared the signature appearing on the check with the specimen
signature of Jong as contained in the specimen signature card with the bank. After comparing
the two signatures, Justiani was satisfied as to the authenticity of the signature appearing on
the check. She then asked Gonzaga to submit proof of his identity, and the latter presented
three (3) identification cards.6
At the same time, Justiani forwarded the check to the branch Senior Assistant Cashier Gemma
Velez, as it was bank policy that two bank branch officers approve checks exceeding One
Hundred Thousand Pesos, for payment or encashment. Velez likewise counterchecked the
signature on the check as against that on the signature card. He too concluded that the check
was indeed signed by Jong. Velez then forwarded the check and signature card to Shirley
Syfu, another bank officer, for approval. Syfu then noticed that Jose Sempio III ("Sempio"), the
assistant accountant of Samsung Construction, was also in the bank. Sempio was well-known
to Syfu and the other bank officers, he being the assistant accountant of Samsung
Construction. Syfu showed the check to Sempio, who vouched for the genuineness of Jong’s
signature. Confirming the identity of Gonzaga, Sempio said that the check was for the
purchase of equipment for Samsung Construction. Satisfied with the genuineness of the
signature of Jong, Syfu authorized the bank’s encashment of the check to Gonzaga.
The following day, the accountant of Samsung Construction, Kyu, examined the balance of the
bank account and discovered that a check in the amount of Nine Hundred Ninety Nine
Thousand Five Hundred Pesos (P999,500.00) had been encashed. Aware that he had not
prepared such a check for Jong’s signature, Kyu perused the checkbook and found that the
last blank check was missing.7 He reported the matter to Jong, who then proceeded to the
bank. Jong learned of the encashment of the check, and realized that his signature had been
forged. The Bank Manager reputedly told Jong that he would be reimbursed for the amount of
the check.8 Jong proceeded to the police station and consulted with his
lawyers.9 Subsequently, a criminal case for qualified theft was filed against Sempio before the
Laguna court.10
In a letter dated 6 May 1992, Samsung Construction, through counsel, demanded that FEBTC
credit to it the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos
(P999,500.00), with interest.11 In response, FEBTC said that it was still conducting an
investigation on the matter. Unsatisfied, Samsung Construction filed a Complaint on 10 June
1992 for violation of Section 23 of the Negotiable Instruments Law, and prayed for the payment
of the amount debited as a result of the questioned check plus interest, and attorney’s
fees.12 The case was docketed as Civil Case No. 92-61506 before the Regional Trial Court
("RTC") of Manila, Branch 9.13
During the trial, both sides presented their respective expert witnesses to testify on the claim
that Jong’s signature was forged. Samsung Corporation, which had referred the check for
investigation to the NBI, presented Senior NBI Document Examiner Roda B. Flores. She
testified that based on her examination, she concluded that Jong’s signature had been forged
on the check. On the other hand, FEBTC, which had sought the assistance of the Philippine
National Police (PNP),14 presented Rosario C. Perez, a document examiner from the PNP
Crime Laboratory. She testified that her findings showed that Jong’s signature on the check
was genuine.15
Confronted with conflicting expert testimony, the RTC chose to believe the findings of the NBI
expert. In a 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, can be traced to the neglect or fault of either, such loss would be borne by the
negligent party, even if innocent of intentional fraud. 20
Samsung Construction now argues that the Court of Appeals had seriously misapprehended
the facts when it overturned the RTC’s finding of forgery. It also contends that the appellate
court erred in finding that it had been negligent in safekeeping the check, and in applying the
equity principle enunciated in PNB v. National City Bank of New York.
Since the trial court and the Court of Appeals arrived at contrary findings on questions of fact,
the Court is obliged to examine the record to draw out the correct conclusions. Upon
examination of the record, and based on the applicable laws and jurisprudence, we reverse the
Court of Appeals.
Section 23 of the Negotiable Instruments Law states:
When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against
any party thereto, can be acquired through or under such signature, unless
the party against whom it is sought to enforce such right is precluded from setting
up the forgery or want of authority. (Emphasis supplied)
The general rule is to the effect that a forged signature is "wholly inoperative," and payment
made "through or under such signature" is ineffectual or does not discharge the instrument. 21 If
payment is made, the drawee cannot charge it to the drawer’s account. The traditional
justification for the result is that the drawee is in a superior position to detect a forgery because
he has the maker’s signature and is expected to know and compare it.22 The rule has a healthy
cautionary effect on banks by encouraging care in the comparison of the signatures against
those on the signature cards they have on file. Moreover, the very opportunity of the drawee to
insure and to distribute the cost among its customers who use checks makes the drawee an
ideal party to spread the risk to insurance.23
Brady, in his treatise The Law of Forged and Altered Checks, elucidates:
When a person deposits money in a general account in a bank, against which he has the
privilege of drawing checks in the ordinary course of business, the relationship between the
bank and the depositor is that of debtor and creditor. So far as the legal relationship between
the two is concerned, the situation is the same as though the bank had borrowed money from
the depositor, agreeing to repay it on demand, or had bought goods from the depositor,
agreeing to pay for them on demand. The bank owes the depositor money in the same sense
that any debtor owes money to his creditor. Added to this, in the case of bank and depositor,
there is, of course, the bank’s obligation to pay checks drawn by the depositor in proper form
and presented in due course. When the bank receives the deposit, it impliedly agrees to pay
only upon the depositor’s order. When the bank pays a check, on which the depositor’s
signature is a forgery, it has failed to comply with its contract in this respect. Therefore, the
bank is held liable.
The fact that the forgery is a clever one is immaterial. The forged signature may so closely
resemble the genuine as to defy detection by the depositor himself. And yet, if a bank pays the
check, it is paying out its own money and not the depositor’s.
The forgery may be committed by a trusted employee or confidential agent. The bank still must
bear the loss. Even in a case where the forged check was drawn by the depositor’s partner,
the loss was placed upon the bank. The case referred to is Robinson v. Security Bank, Ark.,
216 S. W. Rep. 717. In this case, the plaintiff brought suit against the defendant bank for
money which had been deposited to the plaintiff’s credit and which the bank had paid out on
checks bearing forgeries of the plaintiff’s signature.
xxx
It was held that the bank was liable. It was further held that the fact that the plaintiff waited
eight or nine months after discovering the forgery, before notifying the bank, did not, as a
matter of law, constitute a ratification of the payment, so as to preclude the plaintiff from
holding the bank liable. xxx
This rule of liability can be stated briefly in these words: "A bank is bound to know
its depositors’ signature." The rule is variously expressed in the many decisions
in which the question has been considered. But they all sum up to the proposition
that a bank must know the signatures of those whose general deposits it
carries.24
By no means is the principle rendered obsolete with the advent of modern commercial
transactions. Contemporary texts still affirm this well-entrenched standard. Nickles, in his
book Negotiable Instruments and Other Related Commercial Paper wrote, thus:
The deposit contract between a payor bank and its customer determines who
can draw against the customer’s account by specifying whose signature is
necessary on checks that are chargeable against the customer’s account.
Therefore, a check drawn against the account of an individual customer that is
signed by someone other than the customer, and without authority from her, is
not properly payable and is not chargeable to the customer’s account, inasmuch
as any "unauthorized signature on an instrument is ineffective" as the signature
of the person whose name is signed.25
Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute defense by
the party whose signature is forged.26 On the premise that Jong’s signature was indeed forged,
FEBTC is liable for the loss since it authorized the discharge of the forged check. Such liability
attaches even if the bank exerts due diligence and care in preventing such faulty discharge.
Forgeries often deceive the eye of the most cautious experts; and when a bank has been so
deceived, it is a harsh rule which compels it to suffer although no one has suffered by its being
deceived.27 The forgery may be so near like the genuine as to defy detection by the depositor
himself, and yet the bank is liable to the depositor if it pays the check.28
Thus, the first matter of inquiry is into whether the check was indeed forged. A document
formally presented is presumed to be genuine until it is proved to be fraudulent. In a forgery
trial, this presumption must be overcome but this can only be done by convincing testimony
and effective illustrations.29
In ruling that forgery was not duly proven, the Court of Appeals held:
[There] is ground to doubt the findings of the trial court sustaining the alleged
forgery in view of the conflicting conclusions made by handwriting experts from
the NBI and the PNP, both agencies of the government.
xxx
These contradictory findings create doubt on whether there was indeed a forgery.
In the case of Tenio-Obsequio v. Court of Appeals, 230 SCRA 550, the Supreme
Court held that forgery cannot be presumed; it must be proved by clear, positive
and convincing evidence.
This reasoning is pure sophistry. Any litigator worth his or her salt would never allow an
opponent’s expert witness to stand uncontradicted, thus the spectacle of competing expert
witnesses is not unusual. The trier of fact will have to decide which version to believe, and
explain why or why not such version is more credible than the other. Reliance therefore cannot
be placed merely on the fact that there are colliding opinions of two experts, both clothed with
the presumption of official duty, in order to draw a conclusion, especially one which is
extremely crucial. Doing so is tantamount to a jurisprudential cop-out.
Much is expected from the Court of Appeals as it occupies the penultimate tier in the judicial
hierarchy. This Court has long deferred to the appellate court as to its findings of fact in the
understanding that it has the appropriate skill and competence to plough through
the minutiae that scatters the factual field. In failing to thoroughly evaluate the evidence before
it, and relying instead on presumptions haphazardly drawn, the Court of Appeals was sadly
remiss. Of course, courts, like humans, are fallible, and not every error deserves a stern
rebuke. Yet, the appellate court’s error in this case warrants special attention, as it is absurd
and even dangerous as a precedent. If this rationale were adopted as a governing standard by
every court in the land, barely any actionable claim would prosper, defeated as it would be by
the mere invocation of the existence of a contrary "expert" opinion.
On the other hand, the RTC did adjudge the testimony of the NBI expert as more credible than
that of the PNP, and explained its reason behind the conclusion:
After subjecting the evidence of both parties to a crucible of analysis, the court
arrived at the conclusion that the testimony of the NBI document examiner is
more credible because the testimony of the PNP Crime Laboratory Services
document examiner reveals that there are a lot of differences in the questioned
signature as compared to the standard specimen signature. Furthermore, as
testified to by Ms. Rhoda Flores, NBI expert, the manner of execution of the
standard signatures used reveals that it is a free rapid continuous execution or
stroke as shown by the tampering terminal stroke of the signatures whereas the
questioned signature is a hesitating slow drawn execution stroke. Clearly, the
person who executed the questioned signature was hesitant when the signature
was made.30
During the testimony of PNP expert Rosario Perez, the RTC bluntly noted that "apparently,
there [are] differences on that questioned signature and the standard signatures."31 This Court,
in examining the signatures, makes a similar finding. The PNP expert excused the noted
"differences" by asserting that they were mere "variations," which are normal deviations found
in writing.32 Yet the RTC, which had the opportunity to examine the relevant documents and to
personally observe the expert witness, clearly disbelieved the PNP expert. The Court similarly
finds the testimony of the PNP expert as unconvincing. During the trial, she was confronted
several times with apparent differences between strokes in the questioned signature and the
genuine samples. Each time, she would just blandly assert that these differences were just
"variations,"33 as if the mere conjuration of the word would sufficiently disquiet whatever doubts
about the deviations. Such conclusion, standing alone, would be of little or no value unless
supported by sufficiently cogent reasons which might amount almost to a demonstration. 34
The most telling difference between the questioned and genuine signatures examined by the
PNP is in the final upward stroke in the signature, or "the point to the short stroke of the
terminal in the capital letter ‘L,’" as referred to by the PNP examiner who had marked it in her
comparison chart as "point no. 6." To the plain eye, such upward final stroke consists of a
vertical line which forms a ninety degree (90º) angle with the previous stroke. Of the twenty
one (21) other genuine samples examined by the PNP, at least nine (9) ended with an upward
stroke.35 However, unlike the questioned signature, the upward strokes of eight (8) of these
signatures are looped, while the upward stroke of the seventh 36 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 negligent, and invoked the doctrines that "where a
loss must be borne by one of two innocent person, can be traced to the neglect or fault of
either, it is reasonable that it would be borne by him, even if innocent of any intentional fraud,
through whose means it has succeeded49 or who put into the power of the third person to
perpetuate the wrong."50 Applying these rules, the Court of Appeals determined that it was the
negligence of Samsung Construction that allowed the encashment of the forged check.
In the case at bar, the forgery appears to have been made possible through the
acts of one Jose Sempio III, an assistant accountant employed by the plaintiff
Samsung [Construction] Co. Philippines, Inc. who supposedly stole the blank
check and who presumably is responsible for its encashment through a forged
signature of Jong Kyu Lee. Sempio was assistant to the Korean accountant who
was in possession of the blank checks and who through negligence, enabled
Sempio to have access to the same. Had the Korean accountant been more
careful and prudent in keeping the blank checks Sempio would not have had the
chance to steal a page thereof and to effect the forgery. Besides, Sempio was an
employee who appears to have had dealings with the defendant Bank in behalf
of the plaintiff corporation and on the date the check was encashed, he was there
to certify that it was a genuine check issued to purchase equipment for the
company.51
We recognize that Section 23 of the Negotiable Instruments Law bars a party from setting up
the defense of forgery if it is guilty of negligence.52 Yet, we are unable to conclude that
Samsung Construction was guilty of negligence in this case. The appellate court failed to
explain precisely how the Korean accountant was negligent or how more care and prudence
on his part would have prevented the forgery. We cannot sustain this "tar and feathering"
resorted to without any basis.
The bare fact that the forgery was committed by an employee of the party whose signature
was forged cannot necessarily imply that such party’s negligence was the cause for the
forgery. Employers do not possess the preternatural gift of cognition as to the evil that may lurk
within the hearts and minds of their employees. The Court’s pronouncement in PCI Bank v.
Court of Appeals53 applies in this case, to wit:
[T]he mere fact that the forgery was committed by a drawer-payor’s confidential
employee or agent, who by virtue of his position had unusual facilities for
perpetrating the fraud and imposing the forged paper upon the bank, does not
entitle the bank to shift the loss to the drawer-payor, in the absence of some
circumstance raising estoppel against the drawer. 54
Admittedly, the record does not clearly establish what measures Samsung Construction
employed to safeguard its blank checks. Jong did testify that his accountant, Kyu, kept the
checks inside a "safety box,"55 and no contrary version was presented by FEBTC. However,
such testimony cannot prove that the checks were indeed kept in a safety box, as Jong’s
testimony on that point is hearsay, since Kyu, and not Jong, would have the personal
knowledge as to how the checks were kept.
Still, in the absence of evidence to the contrary, we can conclude that there was no negligence
on Samsung Construction’s part. The presumption remains that every person takes ordinary
care of his concerns,56 and that the ordinary course of business has been
followed.57 Negligence is not presumed, but must be proven by him who alleges it. 58 While the
complaint was lodged at the instance of Samsung Construction, the matter it had to prove was
the claim it had alleged - whether the check was forged. It cannot be required as well to prove
that it was not negligent, because the legal presumption remains that ordinary care was
employed.
Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact that Samsung
Construction was negligent. While the payee, as in this case, may not have the personal
knowledge as to the standard procedures observed by the drawer, it well has the means of
disputing the presumption of regularity. Proving a negative fact may be "a difficult office," 59 but
necessarily so, as it seeks to overcome a presumption in law. FEBTC was unable to dispute
the presumption of ordinary care exercised by Samsung Construction, hence we cannot agree
with the Court of Appeals’ finding of negligence.
The assailed Decision replicated the extensive efforts which FEBTC devoted to establish that
there was no negligence on the part of the bank in its acceptance and payment of the forged
check. However, the degree of diligence exercised by the bank would be irrelevant if the
drawer is not precluded from setting up the defense of forgery under Section 23 by his own
negligence. The rule of equity enunciated in PNB v. National City Bank of New York, 60 as
relied upon by the Court of Appeals, deserves careful examination.
The point in issue has sometimes been said to be that of negligence. The
drawee who has paid upon the forged signature is held to bear the loss,
because he has been negligent in failing to recognize that the handwriting
is not that of his customer. But it follows obviously that if the payee, holder, or
presenter of the forged paper has himself been in default, if he has himself been
guilty of a negligence prior to that of the banker, or if by any act of his own he has
at all contributed to induce the banker's negligence, then he may lose his right to
cast the loss upon the banker.61 (Emphasis supplied)
Quite palpably, the general rule remains that the drawee who has paid upon the forged
signature bears the loss. The exception to this rule arises only when negligence can be traced
on the part of the drawer whose signature was forged, and the need arises to weigh the
comparative negligence between the drawer and the drawee to determine who should bear the
burden of loss. The Court finds no basis to conclude that Samsung Construction was negligent
in the safekeeping of its checks. For one, the settled rule is that the mere fact that the
depositor leaves his check book lying around does not constitute such negligence as will free
the bank from liability to him, where a clerk of the depositor or other persons, taking advantage
of the opportunity, abstract some of the check blanks, forges the depositor’s signature and
collect on the checks from the bank.62 And for another, in point of fact Samsung Construction
was not negligent at all since it reported the forgery almost immediately upon discovery.63
It is also worth noting that the forged signatures in PNB v. National City Bank of New
York were not of the drawer, but of indorsers. The same circumstance attends PNB v. Court of
Appeals,64 which was also cited by the Court of Appeals. It is accepted that a forged signature
of the drawer differs in treatment than a forged signature of the indorser.
The justification for the distinction between forgery of the signature of the drawer
and forgery of an indorsement is that the drawee is in a position to verify the
drawer’s signature by comparison with one in his hands, but has ordinarily no
opportunity to verify an indorsement.65
Thus, a drawee bank is generally liable to its depositor in paying a check which
bears either a forgery of the drawer’s signature or a forged indorsement. But the
bank may, as a general rule, recover back the money which it has paid on a
check bearing a forged indorsement, whereas it has not this right to the same
extent with reference to a check bearing a forgery of the drawer’s signature. 66
The general rule imputing liability on the drawee who paid out on the forgery holds in this case.
Since FEBTC puts into issue the degree of care it exercised before paying out on the forged
check, we might as well comment on the bank’s performance of its duty. It might be so that the
bank complied with its own internal rules prior to paying out on the questionable check. Yet,
there are several troubling circumstances that lead us to believe that the bank itself was remiss
in its duty.
The fact that the check was made out in the amount of nearly one million pesos is unusual
enough to require a higher degree of caution on the part of the bank. Indeed, FEBTC confirms
this through its own internal procedures. Checks below twenty-five thousand pesos require
only the approval of the teller; those between twenty-five thousand to one hundred thousand
pesos necessitate the approval of one bank officer; and should the amount exceed one
hundred thousand pesos, the concurrence of two bank officers is required. 67
In this case, not only did the amount in the check nearly total one million pesos, it was also
payable to cash. That latter circumstance should have aroused the suspicion of the bank, as it
is not ordinary business practice for a check for such large amount to be made payable to cash
or to bearer, instead of to the order of a specified person. 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.

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.