G.R. No.

93073 December 21, 1992

REPUBLIC PLANTERS BANK, petitioner,

vs.
COURT OF APPEALS and FERMIN CANLAS, respondents.

CAMPOS, JR., J.:

This is an appeal by way of a Petition for Review on Certiorari from the decision * of the Court of Appeals in
CA G.R. CV No. 07302, entitled "Republic Planters Bank.Plaintiff-Appellee vs. Pinch Manufacturing Corporation, et al., Defendants, and
Fermin Canlas, Defendant-Appellant", which affirmed the decision ** in Civil Case No. 82-5448 except that it completely absolved Fermin
Canlas from liability under the promissory notes and reduced the award for damages and attorney's fees. The RTC decision, rendered on
June 20, 1985, is quoted hereunder:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the

plaintiff Republic Planters Bank, ordering defendant Pinch Manufacturing Corporation
(formerly Worldwide Garment Manufacturing, Inc.) and defendants Shozo
Yamaguchi and Fermin Canlas to pay, jointly and severally, the plaintiff bank the
following sums with interest thereon at 16% per annum from the dates indicated, to
wit:

Under the promissory note (Exhibit "A"), the sum of P300,000.00 with interest from
January 29, 1981 until fully paid; under promissory note (Exhibit "B"), the sum of
P40,000.00 with interest from November 27, 1980; under the promissory note
(Exhibit "C"), the sum of P166,466.00 which interest from January 29, 1981; under
the promissory note (Exhibit "E"), the sum of P86,130.31 with interest from January
29, 1981; under the promissory note (Exhibit "G"), the sum of P12,703.70 with
interest from November 27, 1980; under the promissory note (Exhibit "H"), the sum of
P281,875.91 with interest from January 29, 1981; and under the promissory note
(Exhibit "I"), the sum of P200,000.00 with interest from January 29, 1981.

Under the promissory note (Exhibit "D") defendants Pinch Manufacturing Corporation
(formerly named Worldwide Garment Manufacturing, Inc.), and Shozo Yamaguchi
are ordered to pay jointly and severally, the plaintiff bank the sum of P367,000.00
with interest of 16% per annum from January 29, 1980 until fully paid

Under the promissory note (Exhibit "F") defendant corporation Pinch (formerly
Worldwide) is ordered to pay the plaintiff bank the sum of P140,000.00 with interest
at 16% per annum from November 27, 1980 until fully paid.

Defendant Pinch (formely Worldwide) is hereby ordered to pay the plaintiff the sum of
P231,120.81 with interest at 12% per annum from July 1, 1981, until fully paid and
the sum of P331,870.97 with interest from March 28, 1981, until fully paid.

All the defendants are also ordered to pay, jointly and severally, the plaintiff the sum
of P100,000.00 as and for reasonable attorney's fee and the further sum equivalent
to 3% per annum of the respective principal sums from the dates above stated as
penalty charge until fully paid, plus one percent (1%) of the principal sums as service
charge.
 With costs against the defendants.

SO ORDERED.  1

From the above decision only defendant Fermin Canlas appealed to the then Intermediate Court
(now the Court Appeals). His contention was that inasmuch as he signed the promissory notes in his
capacity as officer of the defunct Worldwide Garment Manufacturing, Inc, he should not be held
personally liable for such authorized corporate acts that he performed. It is now the contention of the
petitioner Republic Planters Bank that having unconditionally signed the nine (9) promissory notes
with Shozo Yamaguchi, jointly and severally, defendant Fermin Canlas is solidarity liable with Shozo
Yamaguchi on each of the nine notes.

We find merit in this appeal.

From the records, these facts are established: Defendant Shozo Yamaguchi and private respondent
Fermin Canlas were President/Chief Operating Officer and Treasurer respectively, of Worldwide
Garment Manufacturing, Inc.. By virtue of Board Resolution No.1 dated August 1, 1979, defendant
Shozo Yamaguchi and private respondent Fermin Canlas were authorized to apply for credit
facilities with the petitioner Republic Planters Bank in the forms of export advances and letters of
credit/trust receipts accommodations. Petitioner bank issued nine promissory notes, marked as
Exhibits A to I inclusive, each of which were uniformly worded in the following manner:

___________, after date, for value received, I/we, jointly and severaIly promise to
pay to the ORDER of the REPUBLIC PLANTERS BANK, at its office in Manila,
Philippines, the sum of ___________ PESOS(....) Philippine Currency...

On the right bottom margin of the promissory notes appeared the signatures of Shozo Yamaguchi
and Fermin Canlas above their printed names with the phrase "and (in) his personal capacity"
typewritten below. At the bottom of the promissory notes appeared: "Please credit proceeds of this
note to:

________ Savings Account ______XX Current Account

No. 1372-00257-6

of WORLDWIDE GARMENT MFG. CORP.

These entries were separated from the text of the notes with a bold line which ran horizontally
across the pages.

In the promissory notes marked as Exhibits C, D and F, the name Worldwide Garment
Manufacturing, Inc. was apparently rubber stamped above the signatures of defendant and private
respondent.

On December 20, 1982, Worldwide Garment Manufacturing, Inc. noted to change its corporate
name to Pinch Manufacturing Corporation.

On February 5, 1982, petitioner bank filed a complaint for the recovery of sums of money covered
among others, by the nine promissory notes with interest thereon, plus attorney's fees and penalty
charges. The complainant was originally brought against Worldwide Garment Manufacturing,
Inc. inter alia, but it was later amended to drop Worldwide Manufacturing, Inc. as defendant and
substitute Pinch Manufacturing Corporation it its place. Defendants Pinch Manufacturing Corporation
and Shozo Yamaguchi did not file an Amended Answer and failed to appear at the scheduled pre-
trial conference despite due notice. Only private respondent Fermin Canlas filed an Amended
Answer wherein he, denied having issued the promissory notes in question since according to him,
he was not an officer of Pinch Manufacturing Corporation, but instead of Worldwide Garment
Manufacturing, Inc., and that when he issued said promissory notes in behalf of Worldwide Garment
Manufacturing, Inc., the same were in blank, the typewritten entries not appearing therein prior to the
time he affixed his signature.

In the mind of this Court, the only issue material to the resolution of this appeal is whether private
respondent Fermin Canlas is solidarily liable with the other defendants, namely Pinch Manufacturing
Corporation and Shozo Yamaguchi, on the nine promissory notes.

We hold that private respondent Fermin Canlas is solidarily liable on each of the promissory notes
bearing his signature for the following reasons:

The promissory motes are negotiable instruments and must be governed by the Negotiable
Instruments Law.  2

Under the Negotiable lnstruments Law, persons who write their names on the face of promissory
notes are makers and are liable as such.  By signing the notes, the maker promises to pay to the
3

order of the payee or any holder   according to the tenor thereof.  Based on the above provisions of
4 5

law, there is no denying that private respondent Fermin Canlas is one of the co-makers of the
promissory notes. As such, he cannot escape liability arising therefrom.

Where an instrument containing the words "I promise to pay" is signed by two or more persons, they
are deemed to be jointly and severally liable thereon.  An instrument which begins" with "I" ,We" , or
6

"Either of us" promise to, pay, when signed by two or more persons, makes them solidarily
liable.   The fact that the singular pronoun is used indicates that the promise is individual as to each
7

other; meaning that each of the co-signers is deemed to have made an independent singular
promise to pay the notes in full.

In the case at bar, the solidary liability of private respondent Fermin Canlas is made clearer and
certain, without reason for ambiguity, by the presence of the phrase "joint and several" as describing
the unconditional promise to pay to the order of Republic Planters Bank. A joint and several note is
one in which the makers bind themselves both jointly and individually to the payee so that all may be
sued together for its enforcement, or the creditor may select one or more as the object of the suit. 8 A
joint and several obligation in common law corresponds to a civil law solidary obligation; that is, one of several debtors bound in such wise
that each is liable for the entire amount, and not merely for his proportionate share. 9 By making a joint and several promise to pay to the
order of Republic Planters Bank, private respondent Fermin Canlas assumed the solidary liability of a debtor and the payee may choose to
enforce the notes against him alone or jointly with Yamaguchi and Pinch Manufacturing Corporation as solidary debtors.

As to whether the interpolation of the phrase "and (in) his personal capacity" below the signatures of
the makers in the notes will affect the liability of the makers, We do not find it necessary to resolve
and decide, because it is immaterial and will not affect to the liability of private respondent Fermin
Canlas as a joint and several debtor of the notes. With or without the presence of said phrase,
private respondent Fermin Canlas is primarily liable as a co-maker of each of the notes and his
liability is that of a solidary debtor.

Finally, the respondent Court made a grave error in holding that an amendment in a corporation's
Articles of Incorporation effecting a change of corporate name, in this case from Worldwide Garment
manufacturing Inc to Pinch Manufacturing Corporation extinguished the personality of the original
corporation.
The corporation, upon such change in its name, is in no sense a new corporation, nor the successor
of the original corporation. It is the same corporation with a different name, and its character is in no
respect changed. 10

A change in the corporate name does not make a new corporation, and whether effected by special
act or under a general law, has no affect on the identity of the corporation, or on its property, rights,
or liabilities. 
11

The corporation continues, as before, responsible in its new name for all debts or other liabilities
which it had previously contracted or incurred. 12

As a general rule, officers or directors under the old corporate name bear no personal liability for
acts done or contracts entered into by officers of the corporation, if duly authorized. Inasmuch as
such officers acted in their capacity as agent of the old corporation and the change of name meant
only the continuation of the old juridical entity, the corporation bearing the same name is still bound
by the acts of its agents if authorized by the Board. Under the Negotiable Instruments Law, the
liability of a person signing as an agent is specifically provided for as follows:

Sec. 20. Liability of a person signing as agent and so forth. Where the instrument
contains or a person adds to his signature words indicating that he signs for or on
behalf of a principal , or in a representative capacity, he is not liable on the
instrument if he was duly authorized; but the mere addition of words describing him
as an agent, or as filling a representative character, without disclosing his principal,
does not exempt him from personal liability.

Where the agent signs his name but nowhere in the instrument has he disclosed the fact that he is
acting in a representative capacity or the name of the third party for whom he might have acted as
agent, the agent is personally liable to take holder of the instrument and cannot be permitted to
prove that he was merely acting as agent of another and parol or extrinsic evidence is not admissible
to avoid the agent's personal liability. 13

On the private respondent's contention that the promissory notes were delivered to him in blank for
his signature, we rule otherwise. A careful examination of the notes in question shows that they are
the stereotype printed form of promissory notes generally used by commercial banking institutions to
be signed by their clients in obtaining loans. Such printed notes are incomplete because there are
blank spaces to be filled up on material particulars such as payee's name, amount of the loan, rate
of interest, date of issue and the maturity date. The terms and conditions of the loan are printed on
the note for the borrower-debtor 's perusal. An incomplete instrument which has been delivered to
the borrower for his signature is governed by Section 14 of the Negotiable Instruments Law which
provides, in so far as relevant to this case, thus:

Sec. 14. Blanks: when may be filled. — Where the instrument is wanting in any
material particular, the person in possesion thereof has a prima facie authority to
complete it by filling up the blanks therein. ... 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...

Proof that the notes were signed in blank was only the self-serving testimony of private respondent
Fermin Canlas, as determined by the trial court, so that the trial court ''doubts the defendant (Canlas)
signed in blank the promissory notes". We chose to believe the bank's testimony that the notes were
filled up before they were given to private respondent Fermin Canlas and defendant Shozo
Yamaguchi for their signatures as joint and several promissors. For signing the notes above their
typewritten names, they bound themselves as unconditional makers. We take judicial notice of the
customary procedure of commercial banks of requiring their clientele to sign promissory notes
prepared by the banks in printed form with blank spaces already filled up as per agreed terms of the
loan, leaving the borrowers-debtors to do nothing but read the terms and conditions therein printed
and to sign as makers or co-makers. When the notes were given to private respondent Fermin
Canlas for his signature, the notes were complete in the sense that the spaces for the material
particular had been filled up by the bank as per agreement. The notes were not incomplete
instruments; neither were they given to private respondent Fermin Canlas in blank as he claims.
Thus, Section 14 of the NegotiabIe Instruments Law is not applicable.

The ruling in case of Reformina vs. Tomol relied upon by the appellate court in reducing the interest
rate on the promissory notes from 16% to 12% per annum does not squarely apply to the instant
petition. In the abovecited case, the rate of 12% was applied to forebearances of money, goods or
credit and court judgemets thereon, only in the absence of any stipulation between the parties.

In the case at bar however , it was found by the trial court that the rate of interest is 9% per annum,
which interest rate the plaintiff may at any time without notice, raise within the limits allowed law. And
so, as of February 16, 1984 , the plaintiff had fixed the interest at 16% per annum.

This Court has held that the rates under the Usury Law, as amended by Presidential Decree No.
116, are applicable only to interests by way of compensation for the use or forebearance of money.
Article 2209 of the Civil Code, on the other hand, governs interests by way of damages.  This fine
15

distinction was not taken into consideration by the appellate court, which instead made a general
statement that the interest rate be at 12% per annum.

Inasmuch as this Court had declared that increases in interest rates are not subject to any ceiling
prescribed by the Usury Law, the appellate court erred in limiting the interest rates at 12% per
annum. Central Bank Circular No. 905, Series of 1982 removed the Usury Law ceiling on interest
rates. 
16

In the 1ight of the foregoing analysis and under the plain language of the statute and jurisprudence
on the matter, the decision of the respondent: Court of Appeals absolving private respondent Fermin
Canlas is REVERSED and SET ASIDE. Judgement is hereby rendered declaring private respondent
Fermin Canlas jointly and severally liable on all the nine promissory notes with the following sums
and at 16% interest per annum from the dates indicated, to wit:

Under the promissory note marked as exhibit A, the sum of P300,000.00 with interest from January
29, 1981 until fully paid; under promissory note marked as Exhibit B, the sum of P40,000.00 with
interest from November 27, 1980: under the promissory note denominated as Exhibit C, the amount
of P166,466.00 with interest from January 29, 1981; under the promissory note denominated as
Exhibit D, the amount of P367,000.00 with interest from January 29, 1981 until fully paid; under the
promissory note marked as Exhibit E, the amount of P86,130.31 with interest from January 29, 1981;
under the promissory note marked as Exhibit F, the sum of P140,000.00 with interest from
November 27, 1980 until fully paid; under the promissory note marked as Exhibit G, the amount of
P12,703.70 with interest from November 27, 1980; the promissory note marked as Exhibit H, the
sum of P281,875.91 with interest from January 29, 1981; and the promissory note marked as Exhibit
I, the sum of P200,000.00 with interest on January 29, 1981.

The liabilities of defendants Pinch Manufacturing Corporation (formerly Worldwide Garment

Manufacturing, Inc.) and Shozo Yamaguchi, for not having appealed from the decision of the trial
court, shall be adjudged in accordance with the judgment rendered by the Court a quo.
With respect to attorney's fees, and penalty and service charges, the private respondent Fermin
Canlas is hereby held jointly and solidarity liable with defendants for the amounts found, by the
Court a quo. With costs against private respondent.
G.R. No. 105188 January 23, 1998

MYRON C. PAPA, Administrator of the Testate Estate of Angela M. Butte, petitioner,

vs.
A.U. VALENCIA and CO. INC., FELIX PEÑARROYO, SPS. ARSENIO B. REYES & AMANDA
SANTOS, and DELFIN JAO, respondents.

KAPUNAN, J.:

In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Myron C. Papa
seeks to reverse and set aside 1) the Decision dated 27 January 1992 of the Court of Appeals which
affirmed with modification the decision of the trial court; and 2) the Resolution dated 22 April 1992 of
the same court, which denied petitioner's motion for reconsideration of the above decision.

The antecedent facts of this case are as follows:

Sometime in June 1982, herein private respondents A.U. Valencia and Co., Inc. (hereinafter referred
to as respondent Valencia, for brevity) and Felix Peñarroyo (hereinafter called respondent
Peñarroyo), filed with the Regional Trial Court of Pasig, Branch 151, a complaint for specific
performance against herein petitioner Myron C. Papa, in his capacity as administrator of the Testate
Estate of one Angela M. Butte.

The complaint alleged that on 15 June 1973, petitioner Myron C. Papa, acting as attorney-in-fact of
Angela M. Butte, sold to respondent Peñarroyo, through respondent Valencia, a parcel of land,
consisting of 286.60 square meters, located at corner Retiro and Cadiz Streets, La Loma, Quezon
City, and covered by Transfer Certificate of Title No. 28993 of the Register of Deeds of Quezon City;
that prior to the alleged sale, the said property, together with several other parcels of land likewise
owned by Angela M. Butte, had been mortgaged by her to the Associated Banking Corporation (now
Associated Citizens Bank); that after the alleged sale, but before the title to the subject property had
been released, Angela M. Butte passed away; that despite representations made by herein
respondents to the bank to release the title to the property sold to respondent Peñarroyo, the bank
refused to release it unless and until all the mortgaged properties of the late Angela M. Butte were
also redeemed; that in order to protect his rights and interests over the property, respondent
Peñarroyo caused the annotation on the title of an adverse claim as evidenced by Entry No. P.E.-
6118/T-28993, inscribed on 18 January 1997.

The complaint further alleged that it was only upon the release of the title to the property, sometime
in April 1977, that respondents Valencia and Peñarroyo discovered that the mortgage rights of the
bank had been assigned to one Tomas L. Parpana (now deceased), as special administrator of the
Estate of Ramon Papa, Jr., on 12 April 1977; that since then, herein petitioner had been collecting
monthly rentals in the amount of P800.00 from the tenants of the property, knowing that said
property had already been sold to private respondents on 15 June 1973; that despite repeated
demands from said respondents, petitioner refused and failed to deliver the title to the property.
Thereupon, respondents Valencia and Peñarroyo filed a complaint for specific performance, praying
that petitioner be ordered to deliver to respondent Peñarroyo the title to the subject property (TCT
28993); to turn over to the latter the sum of P72,000.00 as accrued rentals as of April 1982, and the
monthly rental of P800.00 until the property is delivered to respondent Peñarroyo; to pay
respondents the sum of P20,000.00 as attorney's fees; and to pay the costs of the suit.
In his Answer, petitioner admitted that the lot had been mortgaged to the Associated Banking
Corporation (now Associated Citizens Bank). He contended, however, that the complaint did not
state a cause of action; that the real property in interest was the Testate Estate of Angela M. Butte,
which should have been joined as a party defendant; that the case amounted to a claim against the
Estate of Angela M. Butte and should have been filed in Special Proceedings No. A-17910 before
the Probate Court in Quezon City; and that, if as alleged in the complaint, the property had been
assigned to Tomas L. Parpana, as special administrator of the Estate of Ramon Papa, Jr., said
estate should be impleaded. Petitioner, likewise, claimed that he could not recall in detail the
transaction which allegedly occurred in 1973; that he did not have TCT No. 28993 in his possession;
that he could not be held personally liable as he signed the deed merely as attorney-in-fact of said
Angela M. Butte. Finally, petitioner asseverated that as a result of the filing of the case, he was
compelled to hire the services of counsel for a fee of P20,000.00 for which respondents should be
held liable.

Upon his motion, herein private respondent Delfin Jao was allowed to intervene in the case. Making
common cause with respondents Valencia and Peñarroyo, respondent Jao alleged that the subject
lot which had been sold to respondent Peñarroyo through respondent Valencia was in turn sold to
him on 20 August 1973 for the sum of P71,500.00, upon his paying earnest money in the amount of
P5,000.00. He, therefore, prayed that judgment be rendered in favor of respondents, the latter in turn
be ordered to execute in his favor the appropriate deed of conveyance covering the property in
question and to turn over to him the rentals which aforesaid respondents sought to collect from
petitioner Myron V. Papa.

Respondent Jao, likewise, averred that as a result of petitioner's refusal to deliver the title to the
property to respondents Valencia and Peñarroyo, who in turn failed to deliver the said title to him, he
suffered mental anguish and serious anxiety for which he sought payment of moral damages; and,
additionally, the payment of attorney's fees and costs.

For his part, petitioner, as administrator of the Testate Estate of Angela M. Butte, filed a third-party
complaint against herein private respondents, spouses Arsenio B. Reyes and Amanda Santos
(respondent Reyes spouses, for short). He averred, among other's that the late Angela M. Butte was
the owner of the subject property; that due to non-payment of real estate tax said property was sold
at public auction the City Treasurer of Quezon City to the respondent Reyes spouses on 21 January
1980 for the sum of P14,000.00; that the one-year period of redemption had expired; that
respondents Valencia and Peñarroyo had sued petitioner Papa as administrator of the estate of
Angela M. Butte, for the delivery of the title to the property; that the same aforenamed respondents
had acknowledged that the price paid by them was insufficient, and that they were willing to add a
reasonable amount or a minimum of P55,000.00 to the price upon delivery of the property,
considering that the same was estimated to be worth P143,000.00; that petitioner was willing to
reimburse respondents Reyes spouses whatever amount they might have paid for taxes and other
charges, since the subject property was still registered in the name of the late Angela M. Butte; that
it was inequitable to allow respondent Reyes spouses to acquire property estimated to be worth
P143,000.00, for a measly sum of P14,000.00. Petitioner prayed that judgment be rendered
canceling the tax sale to respondent Reyes spouses; restoring the subject property to him upon
payment by him to said respondent Reyes spouses of the amount of P14,000.00, plus legal interest;
and, ordering respondents Valencia and Peñarroyo to pay him at least P55,000.00 plus everything
they might have to pay the Reyes spouses in recovering the property.

Respondent Reyes spouses in their Answer raised the defense of prescription of petitioner's right to
redeem the property.
At the trial, only respondent Peñarroyo testified. All the other parties only submitted documentary
proof.

On 29 June 1987, the trial court rendered a decision, the dispositive portion of which reads:

WHEREUPON, judgment is hereby rendered as follows:

1) Allowing defendant to redeem from third-party defendants and ordering the latter
to allow the former to redeem the property in question, by paying the sum of
P14,000.00 plus legal interest of 12% thereon from January 21, 1980;

2) Ordering defendant to execute a Deed of Absolute Sale in favor of plaintiff Felix

Peñarroyo covering the property in question and to deliver peaceful possession and
enjoyment of the said property to the said plaintiff, free from any liens and
encumbrances;

Should this not be possible, for any reason not attributable to defendant, said
defendant is ordered to pay to plaintiff Felix Peñarroyo the sum of P45,000.00 plus
legal interest of 12% from June 15, 1973;

3) Ordering plaintiff Felix Peñarroyo to execute and deliver to intervenor a deed of

absolute sale over the same property, upon the latter's payment to the former of the
balance of the purchase price of P71,500.00;

Should this not be possible, plaintiff Felix Peñarroyo is ordered to pay intervenor the
sum of P5,000.00 plus legal interest of 12% from August 23, 1973; and

4) Ordering defendant to pay plaintiffs the amount of P5,000.00 for and as attorney's
fees and litigation expenses.

SO ORDERED. 1

Petitioner appealed the aforesaid decision of the trial court to the Court of Appeals, alleging among
others that the sale was never "consummated" as he did not encash the check (in the amount of
P40,000.00) given by respondents Valencia and Peñarroyo in payment of the full purchase price of
the subject lot. He maintained that what said respondent had actually paid was only the amount of
P5,000.00 (in cash) as earnest money.

Respondent Reyes spouses, likewise, appealed the above decision. However, their appeal was
dismissed because of failure to file their appellant's brief.

On 27 January 1992, the Court of Appeals rendered a decision, affirming with modification the trial
court's decision, thus:

WHEREFORE, the second paragraph of the dispositive portion of the appealed

decision is MODIFIED, by ordering the defendant-appellant to deliver to plaintiff-
appellees the owner's duplicate of TCT No. 28993 of Angela M. Butte and the
peaceful possession and enjoyment of the lot in question or, if the owner's duplicate
certificate cannot be produced, to authorize the Register of Deeds to cancel it and
issue a certificate of title in the name of Felix Peñarroyo. In all other respects, the
 decision appealed from is AFFIRMED. Costs against defendant-appellant Myron C.
Papa.

SO ORDERED. 2

In affirming the trial court's decision, respondent court held that contrary to petitioner's claim that he
did not encash the aforesaid check, and therefore, the sale was not consummated, there was no
evidence at all that petitioner did not, in fact, encash said check. On the other hand, respondent
Peñarroyo testified in court that petitioner Papa had received the amount of P45,000.00 and issued
receipts therefor. According to respondent court, the presumption is that the check was encashed,
especially since the payment by check was not denied by defendant-appellant (herein petitioner)
who, in his Answer, merely alleged that he "can no longer recall the transaction which is supposed to
have happened 10 years ago." 3

On petitioner's claim that he cannot be held personally liable as he had acted merely as attorney-in-
fact of the owner, Angela M. Butte, respondent court held that such contention is without merit. This
action was not brought against him in his personal capacity, but in his capacity as the administrator
of the Testate Estate of Angela M. Butte. 4

On petitioner's contention that the estate of Angela M. Butte should have been joined in the action as
the real party in interest, respondent court held that pursuant to Rule 3, Section 3 of the Rules of
Court, the estate of Angela M. Butte does not have to be joined in the action. Likewise, the estate of
Ramon Papa, Jr., is not an indispensable party under Rule 3, Section 7 of the same Rules. For the
fact is that Ramon Papa, Jr., or his estate, was not a party to the Deed of Absolute Sale, and it is
basic law that contracts bind only those who are parties thereto. 5

Respondent court observed that the conditions under which the mortgage rights of the bank were
assigned are not clear. In any case, any obligation which the estate of Angela M. Butte might have to
the estate of Ramon Papa, Jr. is strictly between them. Respondents Valencia and Peñarroyo are
not bound by any such obligation.

Petitioner filed a motion for reconsideration of the above decision, which motion was denied by
respondent Court of Appeals.

Hence, this petition wherein petitioner raises the following issues:

I. THE CONCLUSION OR FINDING OF THE COURT OF APPEALS THAT THE

SALE IN QUESTION WAS CONSUMMATED IS GROUNDED ON SPECULATION
OR CONJECTURE, AND IS CONTRARY TO THE APPLICABLE LEGAL
PRINCIPLE.

II. THE COURT OF APPEALS, IN MODIFYING THE DECISION OF THE TRIAL

COURT, ERRED BECAUSE IT, IN EFFECT, CANCELLED OR NULLIFIED AN
ASSIGNMENT OF THE SUBJECT PROPERTY IN FAVOR OF THE ESTATE OF
RAMON PAPA, JR. WHICH IS NOT A PARTY IN THIS CASE.

III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE ESTATE OF
ANGELA M. BUTTE AND THE ESTATE OF RAMON PAPA, JR. ARE
INDISPENSABLE PARTIES IN THIS
CASE. 6
Petitioner argues that respondent Court of Appeals erred in concluding that alleged sale of the
subject property had been consummated. He contends that such a conclusion is based on the
erroneous presumption that the check (in the amount of P40,000.00) had been cashed, citing Art.
1249 of the Civil Code, which provides, in part, that payment by checks shall produce the effect of
payment only when they have been cashed or when through the fault of the creditor they have been
impaired.  Petitioner insists that he never cashed said check; and, such being the case, its
7

delivery never produced the effect of payment. Petitioner, while admitting that he had issued
receipts for the payments, asserts that said receipts, particularly the receipt of PCIB Check
No. 761025 in the amount of P40,000.00, do not prove payment. He avers that there must be a
showing that said check had been encashed. If, according to petitioner, the check had been
encashed, respondent Peñarroyo should have presented PCIB Check No. 761025 duly
stamped received by the payee, or at least its microfilm copy.

Petitioner finally avers that, in fact, the consideration for the sale was still in the hands of
respondents Valencia and Peñarroyo, as evidenced by a letter addressed to him in which
said respondents wrote, in part:

. . . Please be informed that I had been authorized by Dr. Ramon Papa, Jr., heir
of Mrs. Angela M. Butte to pay you the aforementioned amount of P75,000.00
for the release and cancellation of subject property's mortgage. The money is
with me and if it is alright with you, I would like to tender the payment as soon
as possible. . . .
8

We find no merit in petitioner's arguments.

It is an undisputed fact that respondents Valencia and Peñarroyo had given petitioner Myron
C. Papa the amounts of Five Thousand Pesos (P5,000.00) in cash on 24 May 1973, and Forty
Thousand Pesos (P40,000.00) in check on 15 June 1973, in payment of the purchase price of
the subject lot. Petitioner himself admits having received said amounts,  and having issued
9

receipts therefor.  Petitioner's assertion that he never encashed the aforesaid check is not
10

substantiated and is at odds with his statement in his answer that "he can no longer recall
the transaction which is supposed to have happened 10 years ago." After more than ten (10)
years from the payment in party by cash and in part by check, the presumption is that the
check had been encashed. As already stated, he even waived the presentation of oral
evidence.

Granting that petitioner had never encashed the check, his failure to do so for more than ten
(10) years undoubtedly resulted in the impairment of the check through his unreasonable and
unexplained delay.

While it is true that the delivery of a check produces the effect of payment only when it is
cashed, pursuant to Art. 1249 of the Civil Code, the rule is otherwise if the debtor is
prejudiced by the creditor's unreasonable delay in presentment. The acceptance of a check
implies an undertaking of due diligence in presenting it for payment, and if he from whom it is
received sustains loss by want of such diligence, it will be held to operate as actual payment
of the debt or obligation for which it was given.  It has, likewise, been held that if no
11

presentment is made at all, the drawer cannot be held liable irrespective of loss or
injury  unless presentment is otherwise excused. This is in harmony with Article 1249 of the
12

Civil Code under which payment by way of check or other negotiable instrument is
conditioned on its being cashed, except when through the fault of the creditor, the
instrument is impaired. The payee of a check would be a creditor under this provision and if
its no-payment is caused by his negligence, payment will be deemed effected and the
obligation for which the check was given as conditional payment will be discharged. 13

Considering that respondents Valencia and Peñarroyo had fulfilled their part of the contract
of sale by delivering the payment of the purchase price, said respondents, therefore, had the
right to compel petitioner to deliver to them the owner's duplicate of TCT No. 28993 of Angela
M. Butte and the peaceful possession and enjoyment of the lot in question.

With regard to the alleged assignment of mortgage rights, respondent Court of Appeals has
found that the conditions under which said mortgage rights of the bank were assigned are
not clear. Indeed, a perusal of the original records of the case would show that there is
nothing there that could shed light on the transactions leading to the said assignment of
rights; nor is there any evidence on record of the conditions under which said mortgage
rights were assigned. What is certain is that despite the said assignment of mortgage rights,
the title to the subject property has remained in the name of the late Angela M. Butte.  This
14

much is admitted by petitioner himself in his answer to respondent's complaint as well as in

the third-party complaint that petitioner filed against respondent-spouses Arsenio B. Reyes
and Amanda Santos.  Assuming arquendo that the mortgage rights of the Associated
15

Citizens Bank had been assigned to the estate of Ramon Papa, Jr., and granting that the
assigned mortgage rights validly exists and constitute a lien on the property, the estate may
file the appropriate action to enforce such lien. The cause of action for specific performance
which respondents Valencia and Peñarroyo have against petitioner is different from the
cause of action which the estate of Ramon Papa, Jr. may have to enforce whatever rights or
liens it has on the property by reason of its being an alleged assignee of the bank's rights of
mortgage.

Finally, the estate of Angela M. Butte is not an indispensable party. Under Section 3 of Rule 3
of the Rules of Court, an executor or administrator may sue or be sued without joining the
party for whose benefit the action is presented or defended, thus:

Sec. 3. Representative parties. — A trustee of an express trust, a guardian,

executor or administrator, or a party authorized by statute, may sue or be sued
without joining the party for whose benefit the action is presented or defended;
but the court may, at any stage of the proceedings, order such beneficiary to
be made a party. An agent acting in his own name and for the benefit of an
undisclosed principal may sue or be sued without joining the principal except
when the contract involves things belonging to the principal. 16

Neither is the estate of Ramon Papa, Jr. an indispensable party without whom, no final
determination of the action can be had. Whatever prior and subsisting mortgage rights the
estate of Ramon Papa, Jr. has over the property may still be enforced regardless of the
change in ownership thereof.

WHEREFORE, the petition for review is hereby DENIED and the Decision of the Court of
Appeals, dated 27 January 1992 is AFFIRMED.
G.R. No. 167750               March 15, 2010

BANK OF THE PHILIPPINE ISLANDS, Petitioner,

vs.
REYNALD R. SUAREZ, Respondent.

DECISION

CARPIO, J.:

The Case

This petition for review1 assails the Decision dated 30 November 20042 and Resolution dated 11
April 2005 of the Court of Appeals in CA-G.R. CV No. 76988, affirming the trial court's decision of 18
October 2002 and denying reconsideration.

The Facts

Respondent Reynald R. Suarez (Suarez) is a lawyer who used to maintain both savings and current
accounts with petitioner Bank of the Philippine Islands’ (BPI) Ermita Branch from 1988 to 1997.

Sometime in 1997, Suarez had a client who planned to purchase several parcels of land in Tagaytay
City, but preferred not to deal directly with the land owners. In accordance with his client’s
instruction, Suarez transacted with the owners of the Tagaytay properties, making it appear that he
was the buyer of the lots. As regards the payment of the purchase money, Suarez and his client
made an arrangement such that Suarez’s client would deposit the money in Suarez’s BPI account
and then, Suarez would issue checks to the sellers. Hence, on 16 June 1997, Suarez’s client
deposited a Rizal Commercial Banking Corporation (RCBC) check with a face value of ₱19,129,100,
representing the total consideration of the sales, in BPI Pasong Tamo Branch to be credited to
Suarez’s current account in BPI Ermita Branch.

Aware of the banking system’s 3-day check clearing policy, 3 Suarez instructed his secretary,
Petronila Garaygay (Garaygay), to confirm from BPI whether the face value of the RCBC check was
already credited to his account that same day of 16 June 1997. According to Garaygay, BPI
allegedly confirmed the same-day crediting of the RCBC check. Relying on this confirmation, Suarez
issued on the same day five checks of different amounts totaling ₱19,129,100 for the purchase of
the Tagaytay properties.4

The next day, Suarez left for the United States (U.S.) for a vacation. While Suarez was in the U.S.,
Garaygay informed him that the five checks he issued were all dishonored by BPI due to
insufficiency of funds and that his current account had been debited a total of ₱57,200 as penalty for
the dishonor. Suarez’s secretary further told him that the checks were dishonored despite an
assurance from RCBC, the drawee bank for the sum of ₱19,129,100, that this amount had already
been debited from the account of the drawer on 16 June 1997 and the RCBC check was fully
funded.

On 19 June 1997, the payees of the five BPI checks that Suarez issued on 16 June 1997 presented
the checks again. Since the RCBC check (which Suarez’s client issued) had already been cleared
by that time, rendering Suarez’s available funds sufficient, the checks were honored by BPI.
Subsequently, Suarez sent a letter to BPI demanding an apology and the reversal of the charges
debited from his account. Suarez received a call from Fe Gregorius, then manager of the BPI Ermita
Branch, who requested a meeting with him to explain BPI’s side. However, the meeting did not
transpire.

Suarez sent another letter to BPI addressed to its president, Xavier Loinaz. Consequently, BPI
representatives asked another meeting with Suarez. During the meeting, the BPI officers handed
Suarez a letter, the relevant text of which reads:

Dear Atty. Suarez:

Your letter to our President, Xavier P. Loinaz dated 02 July 1997 was referred to us for investigation
and reply.

Our investigation discloses that when the checks you issued against your account were received for
clearing, the checks you deposited were not yet cleared. Hence, the dishonor of the your checks.

We do not see much in your allegation that you have suffered damages just because the reason for
the return was "DAIF" and not "DAUD". In both instances, there is a dishonor nonetheless. 5

Upon Suarez’s request, BPI delivered to him the five checks which he issued on 16 June 1997.
Suarez claimed that the checks were tampered with, specifically the reason for the dishonor,
prompting him to send another letter informing BPI of its act of falsification by making it appear that it
marked the checks with "drawn against uncollected deposit (DAUD) and not "drawn against
insufficient fund" (DAIF). In reply, BPI offered to reverse the penalty charges which were debited
from his account, but denied Suarez’s claim for damages. Suarez rejected BPI’s offer.

Claiming that BPI mishandled his account through negligence, Suarez filed with the Regional Trial
Court a complaint for damages, docketed as Civil Case No. 98-574.

The Regional Trial Court, Makati City, Branch 136 rendered judgment in favor of Suarez, thus:

WHEREFORE, judgment is hereby rendered ordering defendant bank to pay the following amounts:

1. The amount of ₱57,200.00, with interest from date of first demand until full payment as
actual damages;

2. The sum of ₱3,000,000.00 by way of moral damages;

3. The amount of ₱1,000,000.00 as and for exemplary damages;

4. The sum of ₱1.00 as attorney’s fees, and

The costs of litigation.

SO ORDERED.6

BPI appealed to the Court of Appeals, which affirmed the trial court’s decision. The dispositive
portion of the 30 November 2004 Decision of the Court of Appeals reads:
WHEREFORE, premises considered, the instant appeal is DISMISSED. The decision dated 18
October 2002 of the Regional Trial Court, Branch 136, of Makati is AFFIRMED in toto.

SO ORDERED.7

The Court of Appeals denied BPI’s motion for reconsideration in its 11 April 2005 Resolution.

Hence, this petition.

The Court of Appeals’ Ruling

In affirming the trial court’s decision, the Court of Appeals ruled as follows:

Contrary to its contention, plaintiff-appellee’s evidence convincingly established the latter’s

entitlement to damages, which was the direct result of defendant-appellant’s negligence in handling
his account. It was duly proven that after his client deposited a check in the amount of
₱19,129,100.00 on 16 June 1997, it was confirmed through plaintiff-appellee’s secretary by an
employee of defendant-appellant bank that the aforesaid amount was, on the same day, already
credited to his account. It was on the basis of this confirmation which made plaintiff-appellee issue
five (5) checks in the amount of ₱19,129,100.00 to different payees. And despite RCBC’s assurance
that the aforementioned amount had already been debited from the account of the drawer bank,
defendant-appellant bank still dishonored the five (5) checks for DAIF as reason when the various
payees presented them for payment on 17 June 1997.

It was also proven that defendant-appellant bank through its employee inadvertently marked the
dorsal sides of the checks as DAIF instead of DAUD. A closer look at the checks would indicate that
intercalations were made marking the acronym DAIF thereon to appear as DAUD. Although the
intercalation was obvious in the ₱12 million check, still the fact that there was intercalation made in
the said check cannot be denied. It bears to stress that there lies a big difference between a check
dishonored for reasons of DAUD and a check dishonored for DAIF. A check dishonored for reasons
of DAIF would unduly expose herein plaintiff-appellee to criminal prosecution for violation of B.P. 22
while a check dishonored for reasons of DAUD would not. Thus, it was erroneous on the part of
defendant-appellant bank to surmise that plaintiff-appellee would not suffer damages anyway for the
dishonored checks for reasons of DAUD or DAIF because there was dishonor nonetheless.

While plaintiff-appellee had been spared from any criminal prosecution, his reputation, however, was
sullied on account of the dishonored checks by reason of DAIF. His transaction with the would be
sellers of the property in Tagaytay was aborted because the latter doubted his capacity to fulfill his
obligation as buyer of their [properties.] As the agent of the true buyers, he had a lot of explaining to
do with his client. In short, he suffered humiliation.

Defendant-appellant bank also contends that plaintiff-appellee is liable to pay the charges mandated
by the Philippine Clearing House Rules and Regulations (PCHRR).

If truly these charges were mandated by the PCHRR, defendant-appellant bank should not have
attempted to renege on its act of debiting the charges to plaintiff-appellee’s account. In its letter
dated 28 July 1997 addressed to plaintiff-appellee, the former has offered to reverse these charges
in order to mitigate the effects of the returned checks on the latter. This, to the mind of the court, is
tantamount to an admission on their (defendant-appellant bank’s employees) part that they have
committed a blunder in handling plaintiff-appellee’s account. Perforce, defendant-appellant bank
should return the amount of the service charges debited to plaintiff-appellee. It is basic in the law
governing human relations that "no one shall be unjustly enriched at the expense of others." 8

The Issues

In its Memorandum, BPI raised the following issues:

A. WHETHER [BPI] WAS NEGLIGENT IN HANDLING THE ACCOUNT OF [SUAREZ];

B. WHETHER [SUAREZ] IS LIABLE TO PAY THE SERVICE CHARGES IMPOSED BY THE

PHILIPPINE CLEARING HOUSE CORPORATION; and

C. WHETHER [BPI] IS LIABLE TO PAY [SUAREZ] MORAL AND EXEMPLARY DAMAGES,

ATTORNEY’S FEES AND COSTS OF LITIGATION.9

The Court’s Ruling

The petition is partly meritorious.

As a rule, this Court is not a trier of facts. However, there are well- recognized exceptions to this
rule, one of which is when certain relevant facts were overlooked by the lower court, which facts, if
properly appreciated, would justify a different conclusion from the one reached in the assailed
decision.10 Reviewing the records, we find that the lower courts misappreciated the evidence in this
case.

Suarez insists that BPI was negligent in handling his account when BPI dishonored the checks he
issued to various payees on 16 June 1997, despite the RCBC check deposit made to his account on
the same day to cover the total amount of the BPI checks.

Negligence is defined as "the omission to do something which a reasonable man, guided upon those
considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of
something which a prudent man and reasonable man could not do." 11 The question concerning BPI's
negligence, however, depends on whether BPI indeed confirmed the same-day crediting of the
RCBC check’s face value to Suarez’s BPI account.

In essence, Suarez impresses upon this Court that BPI is estopped 12 from dishonoring his checks
since BPI confirmed the same-day crediting of the RCBC check deposit and assured the adequacy
of funds in his account. Suarez points out that he relied on this confirmation for the issuance of his
checks to the owners of the Tagaytay properties. In other words, Suarez claims that BPI made a
representation that he had sufficient available funds to cover the total value of his checks.

Suarez is mistaken.

Based on the records, there is no sufficient evidence to show that BPI conclusively confirmed the
same-day crediting of the RCBC check which Suarez’s client deposited late on 16 June
1997.13 Suarez’s secretary, Garaygay, testified that she was able to talk to a BPI male employee
about the same-day crediting of the RCBC check.14 However, Garaygay failed to (1) identify and
name the alleged BPI employee, and (2) establish that this particular male employee was authorized
by BPI either to disclose any information regarding a depositor’s bank account to a person other
than the depositor over the telephone, or to assure Garaygay that Suarez could issue checks
totaling the face value of the RCBC check. Moreover, a same-day clearing of a ₱19,129,100 check
requires approval of designated bank official or officials, and not any bank official can grant such
approval. Clearly, Suarez failed to prove that BPI confirmed the same-day crediting of the RCBC
check, or that BPI assured Suarez that he had sufficient available funds in his account. Accordingly,
BPI was not estopped from dishonoring the checks for inadequacy of available funds in Suarez’s
account since the RCBC check remained uncleared at that time.

While BPI had the discretion to undertake the same-day crediting of the RCBC check, 15 and
disregard the banking industry’s 3-day check clearing policy, Suarez failed to convincingly show his
entitlement to such privilege. As BPI pointed out, Suarez had no credit or bill purchase line with BPI
which would qualify him to the exceptions to the 3-day check clearing policy. 16 1awph!1

Considering that there was no binding representation on BPI’s part as regards the same-day
crediting of the RCBC check, no negligence can be ascribed to BPI’s dishonor of the checks
precisely because BPI was justified in dishonoring the checks for lack of available funds in Suarez’s
account.17

However, BPI mistakenly marked the dishonored checks with "drawn against insufficient funds
(DAIF), " instead of "drawn against uncollected deposit (DAUD)." DAUD means that the account has,
on its face, sufficient funds but not yet available to the drawer because the deposit, usually a check,
had not yet been cleared.18 DAIF, on the other hand, is a condition in which a depositor’s balance is
inadequate for the bank to pay a check.19 In other words, in the case of DAUD, the depositor has, on
its face, sufficient funds in his account, although it is not available yet at the time the check was
drawn, whereas in DAIF, the depositor lacks sufficient funds in his account to pay the check.
Moreover, DAUD does not expose the drawer to possible prosecution for estafa and violation of BP
22, while DAIF subjects the depositor to liability for such offenses. 20 It is clear therefore that, contrary
to BPI’s contention, DAIF differs from DAUD. Now, does the erroneous marking of DAIF, instead of
DAUD, give rise to BPI’s liability for damages?

The following are the conditions for the award of moral damages: (1) there is an injury — whether
physical, mental or psychological — clearly sustained by the claimant; (2) the culpable act or
omission is factually established; (3) the wrongful act or omission of the defendant is the proximate
cause of the injury sustained by the claimant; and (4) the award of damages is predicated on any of
the cases stated in Article 221921 of the Civil Code.22

In the present case, Suarez failed to establish that his claimed injury was proximately caused by the
erroneous marking of DAIF on the checks. Proximate cause has been defined as "any cause which,
in natural and continuous sequence, unbroken by any efficient intervening cause, produces the
result complained of and without which would not have occurred." 23 There is nothing in Suarez’s
testimony which convincingly shows that the erroneous marking of DAIF on the checks proximately
caused his alleged psychological or social injuries. Suarez merely testified that he suffered
humiliation and that the prospective consolidation of the titles to the Tagaytay properties did not
materialize due to the dishonor of his checks,24 not due to the erroneous marking of DAIF on his
checks. Hence, Suarez had only himself to blame for his hurt feelings and the unsuccessful
transaction with his client as these were directly caused by the justified dishonor of the checks. In
short, Suarez cannot recover compensatory damages for his own negligence. 25

While the erroneous marking of DAIF, which BPI belatedly rectified, was not the proximate cause of
Suarez’s claimed injury, the Court reminds BPI that its business is affected with public interest. It
must at all times maintain a high level of meticulousness and should guard against injury attributable
to negligence or bad faith on its part.26 Suarez had a right to expect such high level of care and
diligence from BPI. Since BPI failed to exercise such diligence, Suarez is entitled to nominal
damages27 to vindicate Suarez’s right to such high degree of care and diligence. Thus, we award
Suarez ₱75,000.00 nominal damages.

On the award of actual damages, we find the same without any basis. Considering that BPI legally
dishonored the checks for being drawn against uncollected deposit, BPI was justified in debiting the
penalty charges against Suarez’s account, pursuant to the Rules of the Philippine Clearing House
Corporation,28 to wit:

Sec. 27. PENALTY CHARGES ON RETURNED ITEMS

27.1 A service charge of ₱600.00 for each check shall be levied against the DRAWER of any check
or checks returned for any reason, except for the following:

a) Account Closed

b) No Account

c) Under Garnishment

d) Spurious Check

e) Documentary Stamps Missing (for foreign checks/drafts only)

f) Post-Dated/Stale-Dated

g) Validity Restricted

h) Miscleared Items

I) Deceased Depositor

j) Violation of Clearing Rules and/or Procedures

k) Lost by Presenting Bank while in transit to clearing

as well as other exceptions which may be defined/circulated by PCHC from time to time. 29

In view of the foregoing, the Court deems it unnecessary to resolve the other issues raised in this
case.

WHEREFORE, the Court GRANTS the petition in part. The Court SETS ASIDE the 30 November
2004 Decision and 11 April 2005 Resolution of the Court of Appeals in CA-G.R. CV No. 76988, and
deletes the award of all damages and fees. The Court awards to respondent Reynald R. Suarez
nominal damages in the sum of ₱75,000.00.

SO ORDERED.
G.R. No. 89802 May 7, 1992

ASSOCIATED BANK and CONRADO CRUZ, petitioners,

vs.
HON. COURT OF APPEALS, and MERLE V. REYES, doing business under the name and style
"Melissa's RTW," respondents.

Soluta, Leonidas, Marifosque, Javier, Liboon & aguila Law Offices for petitioners.

Roberto B. Lugue for private respondent.

CRUZ, J.:

The sole issue raised in this case is whether or not the private respondent has a cause of action
against the petitioners for their encashment and payment to another person of certain crossed
checks issued in her favor.

The private respondent is engaged in the business of ready-to-wear garments under the firm name
"Melissa's RTW." She deals with, among other customers, Robinson's Department Store, Payless
Department Store, Rempson Department Store, and the Corona Bazaar.

These companies issued in payment of their respective accounts crossed checks payable to
Melissa's RTW in the amounts and on the dates indicated below:

PAYOR BANK AMOUNT DATE

Payless Solid Bank P3,960.00 January 19, 1982

Robinson's FEBTC 4,140.00 December 18, 1981
Robinson's FEBTC 1,650.00 December 24, 1981
Robinson's FEBTC 1,980.00 January 12, 1982
Rempson TRB 1,575.00 January 9, 1982
Corona RCBC 2,500.00 December 22, 1981

When she went to these companies to collect on what she thought were still unpaid accounts, she
was informed of the issuance of the above-listed crossed checks. Further inquiry revealed that the
said checks had been deposited with the Associated Bank (hereinafter, "the Bank") and
subsequently paid by it to one Rafael Sayson, one of its "trusted depositors," in the words of its
branch manager and co-petitioner, Conrado Cruz, Sayson had not been authorized by the private
respondent to deposit and encash the said checks.

The private respondent sued the petitioners in the Regional Trial Court of Quezon City for recovery
of the total value of the checks plus damages. After trial, judgment was rendered requiring them to
pay the private respondent the total value of the subject checks in the amount of P15,805.00 plus
12% interest, P50,000.00 actual damages, P25,000.00 exemplary damages, P5,000.00 attorney's
fees, and the costs of the suit. 
1
The petitioners appealed to the respondent court, reiterating their argument that the private
respondent had no cause of action against them and should have proceeded instead against the
companies that issued the checks. In disposing of this contention, the Court of Appeals   said:
2

The cause of action of the appellee in the case at bar arose from the illegal,
anomalous and irregular acts of the appellants in violating common banking practices
to the damage and prejudice of the appellees, in allowing to be deposited and
encashed as well as paying to improper parties without the knowledge, consent,
authority or endorsement of the appellee which totalled P15,805.00, the six (6)
checks in dispute which were "crossed checks" or "for payee's account only," the
appellee being the payee.

The three (3) elements of a cause of action are present in the case at bar, namely:
(1) a right in favor of the plaintiff by whatever means and under whatever law it arises
or is created; (2) an obligation on the part of the named defendant to respect or not
to violate such right; and (3) an act or omission on the part of such defendant
violative of the right of the plaintiff or constituting a breach thereof. (Republic Planters
Bank vs. Intermediate Appellate Court, 131 SCRA 631).

And such cause of action has been proved by evidence of great weight. The contents
of the said checks issued by the customers of the appellee had not been questioned.
There is no dispute that the same are crossed checks or for payee's account only,
which is Melissa's RTW. The appellee had clearly shown that she had never
authorized anyone to deposit the said checks nor to encash the same; that the
appellants had allowed all said checks to be deposited, cleared and paid to one
Rafael Sayson in violation of the instructions in the said crossed checks that the
same were for payee's account only; and that the appellee maintained a savings
account with the Prudential Bank, Cubao Branch, Quezon City which never cleared
the said checks and the appellee had been damaged by such encashment of the
same.

We affirm.

Under accepted banking practice, crossing a check is done by writing two parallel lines diagonally on
the left top portion of the checks. The crossing is special where the name of a bank or a business
institution is written between the two parallel lines, which means that the drawee should pay only
with the intervention of that company.   The crossing is general where the words written between the
3

two parallel lines are "and Co." or "for payee's account only," as in the case at bar. This means that
the drawee bank should not encash the check but merely accept it for deposit.  4

In State Investment House vs. IAC,   this Court declared that "the effects of crossing a check are: (1)
5

that the check may not be encashed but only deposited in the bank; (2) that the check may be
negotiated only once –– to one who has an account with a bank; and (3) that the act of crossing the
check serves as a warning to the holder that the check has been issued for a definite purpose so
that he must inquire if he has received the check pursuant to that purpose."

The effects therefore of crossing a check relate to the mode of its presentment for payment. Under
Sec. 72 of the Negotiable Instruments Law, presentment for payment, to be sufficient, must be made
by the holder or by some person authorized to receive payment on his behalf. Who the holder or
authorized person is depends on the instruction stated on the face of the check.
The six checks in the case at bar had been crossed and issued "for payee's account only." This
could only signify that the drawers had intended the same for deposit only by the person indicated,
to wit, Melissa's RTW.

The petitioners argue that the cause of action for violation of the common instruction found on the
face of the checks exclusively belongs to the issuers thereof and not to the payee. Moreover, having
acted in good faith as they merely facilitated the encashment of the checks, they cannot be made
liable to the private respondent.

The subject checks were accepted for deposit by the Bank for the account of Rafael Sayson
although they were crossed checks and the payee was not Sayson but Melissa's RTW. The Bank
stamped thereon its guarantee that "all prior endorsements and/or lack of endorsements (were)
guaranteed." By such deliberate and positive act, the Bank had for all legal intents and purposes
treated the said checks as negotiable instruments and, accordingly, assumed the warranty of the
endorser.

The weight of authority is to the effect that "the possession of check on a forged or unauthorized
indorsement is wrongful, and when the money is collected on the check, the bank can be held 'for
moneys had and received."   The proceeds are held for the rightful owner of the payment and may
6

be recovered by him. The position of the bank taking the check on the forged or unauthorized
indorsement is the same as if it had taken the check and collected without indorsement at all. The
act of the bank amounts to conversion of the check.  7

It is not disputed that the proceeds of the subject checks belonged to the private respondent. As she
had not at any time authorized Rafael Sayson to endorse or encash them, there was conversion of
the funds by the Bank.

When the Bank paid the checks so endorsed notwithstanding that title had not passed to the
endorser, it did so at its peril and became liable to the payee for the value of the checks. This liability
attached whether or not the Bank was aware of the unauthorized endorsement. 8

The petitioners were negligent when they permitted the encashment of the checks by Sayson. The Bank should have first verified his right to
endorse the crossed checks, of which he was not the payee, and to deposit the proceeds of the checks to his own account. The Bank was by
reason of the nature of the checks put upon notice that they were issued for deposit only to the private respondent's account. Its failure to
inquire into Sayson's authority was a breach of a duty it owed to the private respondent.

As the Court stressed in Banco de Oro Savings and Mortgage Bank vs. Equitable Banking
Corp.,   "the law imposes a duty of diligence on the collecting bank to scrutinize checks deposited
9

with it, for the purpose of determining their genuineness and regularity. The collecting bank, being
primarily engaged in banking, holds itself out to the public as the expert on this field, and the law
thus holds it to a high standard of conduct."

The petitioners insist that the private respondent has no cause of action against them because they
have no privity of contract with her. They also argue that it was Eddie Reyes, the private
respondent's own husband, who endorsed the checks.

Assuming that Eddie Reyes did endorse the crossed checks, we hold that the Bank would still be
liable to the private respondent because he was not authorized to make the endorsements. And
even if the endorsements were forged, as alleged, the Bank would still be liable to the private
respondent for not verifying the endorser's authority. There is no substantial difference between an
actual forging of a name to a check as an endorsement by a person not authorized to make the
signature and the affixing of a name to a check as an endorsement by a person not authorized to
endorse it.  10
The Bank does not deny collecting the money on the endorsement. It was its responsibility to inquire
as to the authority of Rafael Sayson to deposit crossed checks payable to Melissa's RTW upon a
prior endorsement by Eddie Reyes. The failure of the Bank to make this inquiry was a breach of duty
that made it liable to the private respondent for the amount of the checks.

There being no evidence that the crossed checks were actually received by the private respondent,
she would have a right of action against the drawer companies, which in turn could go against their
respective drawee banks, which in turn could sue the herein petitioner as collecting bank. In a similar
situation, it was held that, to simplify proceedings, the payee of the illegally encashed checks should
be allowed to recover directly from the bank responsible for such encashment regardless of whether
or not the checks were actually delivered to the payee.   We approve such direct action in the case
11

at bar.

It is worth repeating that before presenting the checks for clearing and for payment, the Bank had
stamped on the back thereof the words: "All prior endorsements and/or lack of endorsements
guaranteed," and thus made the assurance that it had ascertained the genuineness of all prior
endorsements.

We find that the respondent court committed no reversible error in holding that the private
respondent had a valid cause of action against the petitioners and that the latter are indeed liable to
her for their unauthorized encashment of the subject checks. We also agree with the reduction of the
award of the exemplary damages for lack of sufficient evidence to support them.

WHEREFORE, the petition is DENIED, with costs against the petitioner. It is so ordered.
G.R. No. 176697               September 10, 2014

CESAR V. AREZA and LOLITA B. AREZA, Petitioners,

vs.
EXPRESS SAVINGS BANK, INC. and MICHAEL POTENCIANO, Respondnets.

DECISION

PEREZ, J.:

Before this Court is a Petition for Review on Certiorari under Ruic 45 of the Rules of Court, which
seeks to reverse the Decision1 and Resolution2 dated 29 June 2006 and 12 February 2007 of the
Court of Appeals in CAG.R. CV No. 83192. The Court of Appeals affirmed with modification the 22
April 2004 Resolution3 of the Regional Trial Court (RTC) of Calamba, Laguna, Branch 92, in Civil
Case No. B-5886.

The factual antecedents follow.

Petitioners Cesar V. Areza and LolitaB. Areza maintained two bank deposits with respondent
Express Savings Bank’s Biñan branch: 1) Savings Account No. 004-01-000185-5 and 2) Special
Savings Account No. 004-02-000092-3.

They were engaged in the business of "buy and sell" of brand new and second-hand motor vehicles.
On 2 May 2000, they received an order from a certain Gerry Mambuay (Mambuay) for the purchase
of a second-hand Mitsubishi Pajero and a brand-new Honda CRV.

The buyer, Mambuay, paid petitioners with nine (9) Philippine Veterans Affairs Office (PVAO) checks
payable to different payees and drawn against the Philippine Veterans Bank (drawee), each valued
at Two Hundred Thousand Pesos (₱200,000.00) for a total of One Million Eight Hundred Thousand
Pesos (₱1,800,000.00).

About this occasion, petitioners claimed that Michael Potenciano (Potenciano), the branch manager
of respondent Express Savings Bank (the Bank) was present during the transaction and immediately
offered the services of the Bank for the processing and eventual crediting of the said checks to
petitioners’ account.4 On the other hand,Potenciano countered that he was prevailed upon to accept
the checks by way of accommodation of petitioners who were valued clients of the Bank. 5

On 3 May 2000, petitioners deposited the said checks in their savings account with the Bank. The
Bank, inturn, deposited the checks with its depositary bank, Equitable-PCI Bank, in Biñan,Laguna.
Equitable-PCI Bank presented the checks to the drawee, the Philippine Veterans Bank, which
honored the checks.

On 6 May 2000, Potenciano informedpetitioners that the checks they deposited with the Bank
werehonored. He allegedly warned petitioners that the clearing of the checks pertained only to the
availability of funds and did not mean that the checks were not infirmed. 6 Thus, the entire amount of
₱1,800,000.00 was credited to petitioners’ savings account. Based on this information, petitioners
released the two cars to the buyer.
Sometime in July 2000, the subjectchecks were returned by PVAO to the drawee on the ground that
the amount on the face of the checks was altered from the original amount of ₱4,000.00 to
₱200,000.00. The drawee returned the checks to Equitable-PCI Bank by way of Special Clearing
Receipts. In August 2000, the Bank was informed by Equitable-PCI Bank that the drawee
dishonored the checks onthe ground of material alterations. Equitable-PCI Bank initially filed a
protest with the Philippine Clearing House. In February 2001, the latter ruled in favor of the drawee
Philippine Veterans Bank. Equitable-PCI Bank, debited the deposit account of the Bank in the
amount of ₱1,800,000.00.

The Bank insisted that they informed petitioners of said development in August 2000 by furnishing
them copies of the documents given by its depositary bank.  On the other hand, petitioners
7

maintained that the Bank never informed them of these developments.

On 9 March 2001, petitioners issued a check in the amount of ₱500,000.00. Said check was
dishonored by the Bank for the reason "Deposit Under Hold." According topetitioners, the Bank
unilaterally and unlawfully put their account with the Bank on hold. On 22 March 2001, petitioners’
counsel sent a demand letter asking the Bank to honor their check. The Bank refused to heed their
request and instead, closed the Special Savings Account of the petitioners with a balance of
₱1,179,659.69 and transferred said amount to their savings account. The Bank then withdrew the
amount of ₱1,800,000.00representing the returned checks from petitioners’ savings account.

Acting on the alleged arbitrary and groundless dishonoring of their checks and the unlawful and
unilateral withdrawal from their savings account, petitioners filed a Complaint for Sum of Money with
Damages against the Bank and Potenciano with the RTC of Calamba.

On 15 January 2004, the RTC, through Judge Antonio S. Pozas, ruled in favor of petitioners. The
dispositive portion of the Decision reads:

WHEREFORE, the foregoing considered, the Court orders that judgment be rendered in favor of
plaintiffs and against the defendants jointly and severally to pay plaintiffs as follows, to wit:

1. ₱1,800,000.00 representing the amount unlawfully withdrawn by the defendants from the
account of plaintiffs;

2. ₱500,000.00 as moral damages; and

3. ₱300,000.00 as attorney’s fees. 8

The trial court reduced the issue to whether or not the rights of petitioners were violated by
respondents when the deposits of the former were debited by respondents without any court order
and without their knowledge and consent. According to the trial court, it is the depositary bank which
should safeguard the right ofthe depositors over their money. Invoking Article 1977 of the Civil Code,
the trial court stated that the depositary cannot make use of the thing deposited without the express
permission of the depositor. The trial court also held that respondents should have observed the 24-
hour clearing house rule that checks should be returned within 24-hours after discovery of the
forgery but in no event beyond the period fixed by law for filing a legal action. In this case, petitioners
deposited the checks in May 2000, and respondents notified them of the problems on the check
three months later or in August 2000. In sum, the trial court characterized said acts of respondents
as attended with bad faith when they debited the amount of ₱1,800,000.00 from the account of
petitioners.
Respondents filed a motion for reconsideration while petitioners filed a motion for execution from the
Decision of the RTC on the ground that respondents’ motion for reconsideration did not conform with
Section 5, Rule 16 of the Rules of Court; hence, it was a mere scrap of paper that did not toll the
running of the period to appeal.

On 22 April 2004, the RTC, through Pairing Judge Romeo C. De Leon granted the motion for
reconsideration, set aside the Pozas Decision, and dismissed the complaint. The trial court awarded
respondents their counterclaim of moral and exemplary damages of ₱100,000.00 each. The trial
court first applied the principle of liberality when it disregarded the alleged absence of a notice of
hearing in respondents’ motion for reconsideration. On the merits, the trial court considered the
relationship of the Bank and petitioners with respect to their savings account deposits as a contract
of loan with the bank as the debtor and petitioners as creditors. As such, Article 1977 of the Civil
Code prohibiting the depository from making use of the thing deposited without the express
permission of the depositor is not applicable. Instead, the trial court applied Article 1980 which
provides that fixed, savings and current deposits ofmoney in banks and similar institutions shall be
governed by the provisions governing simple loan. The trial court then opined thatthe Bank had all
the right to set-off against petitioners’ savings deposits the value of their nine checks that were
returned.

On appeal, the Court of Appeals affirmed the ruling of the trial court but deleted the award of
damages. The appellate court made the following ratiocination:

Any argument as to the notice of hearing has been resolved when the pairing judge issued the order
on February 24, 2004 setting the hearing on March 26, 2004. A perusal of the notice of hearing
shows that request was addressed to the Clerk of Court and plaintiffs’ counsel for hearing to be set
on March 26, 2004.

The core issues in this case revolve on whether the appellee bank had the right to debit the amount
of ₱1,800,000.00 from the appellants’ accounts and whether the bank’s act of debiting was done
"without the plaintiffs’ knowledge."

We find that the elements of legal compensation are all present in the case at bar. Hence, applying
the case of the Bank of the Philippine Islands v. Court of Appeals, the obligors bound principally are
at the same time creditors of each other. Appellee bank stands as a debtor of appellant, a depositor.
At the same time, said bank is the creditor of the appellant with respect to the dishonored treasury
warrant checks which amount were already credited to the account of appellants. When the
appellants had withdrawn the amount of the checks they deposited and later on said checks were
returned, they became indebted to the appellee bank for the corresponding amount.

It should be noted that [G]erry Mambuay was the appellants’ walkin buyer. As sellers, appellants
oughtto have exercised due diligence in assessing his credit or personal background. The 24-hour
clearing house rule is not the one that governs in this case since the nine checks were discovered by
the drawee bank to contain material alterations.

Appellants merely allege that they were not informed of any development on the checks returned.
However, this Court believes that the bank and appellants had opportunities to communicate about
the checks considering that several transactions occurred from the time of alleged return of the
checks to the date of the debit.

However, this Court agrees withappellants that they should not pay moral and exemplary damages
to each of the appellees for lack of basis. The appellants were not shown to have acted in bad faith. 9
Petitioners filed the present petition for review on certiorariraising both procedural and substantive
issues, to wit:

1. Whether or not the Honorable Court of Appeals committed a reversible error of law and
grave abuse of discretion in upholding the legality and/or propriety of the Motion for
Reconsideration filed in violation of Section 5, Rule 15 ofthe Rules on Civil Procedure;

2. Whether or not the Honorable Court of Appeals committed a grave abuse of discretion in
declaring that the private respondents "had the right to debit the amount of ₱1,800,000.00
from the appellants’ accounts" and the bank’s act of debiting was done with the plaintiff’s
knowledge. 10

Before proceeding to the substantive issue, we first resolve the procedural issue raised by
petitioners.

Sections 5, Rule 15 of the Rules of Court states:

Section 5. Notice of hearing. – The notice of hearing shall be addressed to all parties concerned,
and shall specify the time and date of the hearing which must not be later than ten (10) days after
the filing of the motion.

Petitioners claim that the notice of hearing was addressed to the Clerk of Court and not to the
adverse party as the rules require. Petitioners add that the hearing on the motion for reconsideration
was scheduled beyond 10 days from the date of filing.

As held in Maturan v. Araula,  the rule requiring that the notice be addressed to the adverse party
11

has beensubstantially complied with when a copy of the motion for reconsideration was furnished to
the counsel of the adverse party, coupled with the fact that the trial court acted on said notice of
hearing and, as prayed for, issued an order  setting the hearing of the motion on 26 March 2004.
12

We would reiterate later that there is substantial compliance with the foregoing Rule if a copy of the
said motion for reconsideration was furnished to the counsel of the adverse party. 13

Now to the substantive issues to which procedural imperfection must, in this case, give way.

The central issue is whether the Bank had the right to debit ₱1,800,000.00 from petitioners’
accounts.

On 6 May 2000, the Bank informed petitioners that the subject checks had been honored. Thus, the
amountof ₱1,800,000.00 was accordingly credited to petitioners’ accounts, prompting them to
release the purchased cars to the buyer.

Unknown to petitioners, the Bank deposited the checks in its depositary bank, Equitable-PCI Bank.
Three months had passed when the Bank was informed by its depositary bank that the drawee had
dishonored the checks on the ground of material alterations.

The return of the checks created a chain of debiting of accounts, the last loss eventually falling upon
the savings account of petitioners with respondent bank. The trial court inits reconsidered decision
and the appellate court were one in declaring that petitioners should bear the loss.

We reverse.
The fact that material alteration caused the eventual dishonor of the checks issued by PVAO is
undisputed. In this case, before the alteration was discovered, the checks were already cleared by
the drawee bank, the Philippine Veterans Bank. Three months had lapsed before the drawee
dishonored the checks and returned them to Equitable-PCI Bank, the respondents’ depositary bank.
And itwas not until 10 months later when petitioners’ accounts were debited. A question thus arises:
What are the liabilities of the drawee, the intermediary banks, and the petitioners for the altered
checks?

LIABILITY OF THE DRAWEE

Section 63 of Act No. 2031 orthe Negotiable Instruments Law provides that the acceptor, by
accepting the instrument, engages that he will pay it according to the tenor of his acceptance. The
acceptor is a drawee who accepts the bill. In Philippine National Bank v. Court of Appeals,  the
14

payment of the amount of a check implies not only acceptance but also compliance with the
drawee’s obligation.

In case the negotiable instrument isaltered before acceptance, is the drawee liable for the original or
the altered tenor of acceptance? There are two divergent intepretations proffered by legal
analysts.  The first view is supported by the leading case of National City Bank ofChicago v. Bank of
15

the Republic.  In said case, a certain Andrew Manning stole a draft and substituted his name for that
16

of the original payee. He offered it as payment to a jeweler in exchange for certain jewelry. The
jeweler deposited the draft to the defendant bank which collectedthe equivalent amount from the
drawee. Upon learning of the alteration, the drawee sought to recover from the defendant bank the
amount of the draft, as money paid by mistake. The court denied recovery on the ground that the
drawee by accepting admitted the existence of the payee and his capacity to endorse.  Still, in Wells
17

Fargo Bank & Union Trust Co. v. Bank of Italy,  the court echoed the court’s interpretation in
18

National City Bank of Chicago, in this wise:

We think the construction placed upon the section by the Illinois court is correct and that it was not
the legislative intent that the obligation of the acceptor should be limited to the tenorof the instrument
as drawn by the maker, as was the rule at common law,but that it should be enforceable in favor of a
holder in due course against the acceptor according to its tenor at the time of its acceptance or
certification.

The foregoing opinion and the Illinois decision which it follows give effect to the literal words of the
Negotiable Instruments Law. As stated in the Illinois case: "The court must take the act as it is
written and should give to the words their natural and common meaning . . . ifthe language of the act
conflicts with statutes or decisions in force before its enactment the courts should not give the act a
strained construction in order to make it harmonize with earlier statutes or decisions." The wording of
the act suggests that a change in the common law was intended. A careful reading thereof,
independent of any common-law influence, requires that the words "according to the tenor of his
acceptance" be construed as referring to the instrument as it was at the time it came into the hands
of the acceptor for acceptance, for he accepts no other instrument than the one presented to him —
the altered form — and it alone he engages to pay. This conclusion is in harmony with the law of
England and the continental countries. It makes for the usefulness and currency of negotiable paper
without seriously endangering accepted banking practices, for banking institutions can readily
protect themselves against liability on altered instruments either by qualifying their acceptance or
certification or by relying on forgery insurance and specialpaper which will make alterations obvious.
All of the arguments advanced against the conclusion herein announced seem highly technical in the
face of the practical facts that the drawee bank has authenticated an instrument in a certain form,
and that commercial policy favors the protection of anyone who, in due course, changes his position
on the faith of that authentication.
19
The second view is that the acceptor/drawee despite the tenor of his acceptance is liable only to the
extent of the bill prior to alteration.  This view appears to be in consonance with Section 124 of the
20

Negotiable Instruments Law which statesthat a material alteration avoids an instrument except as
against an assenting party and subsequent indorsers, but a holder in due course may enforce
payment according to its original tenor. Thus, when the drawee bank pays a materially altered
check, it violates the terms of the check, as well as its duty tocharge its client’s account only for bona
fide disbursements he had made. If the drawee did not pay according to the original tenor of the
instrument, as directed by the drawer, then it has no right to claim reimbursement from the drawer,
much less, the right to deduct the erroneous payment it made from the drawer’s account which it
was expected to treat with utmost fidelity.  The drawee, however, still has recourse to recover its
21

loss. It may pass the liability back to the collecting bank which is what the drawee bank exactly did in
this case. It debited the account of Equitable-PCI Bank for the altered amount of the checks.

LIABILITY OF DEPOSITARY BANK AND COLLECTING BANK

A depositary bank is the first bank to take an item even though it is also the payor bank, unless the
item is presented for immediate payment over the counter.  It is also the bank to which a check is
22

transferred for deposit in an account at such bank, evenif the check is physically received and
indorsed first by another bank.  A collecting bank is defined as any bank handling an item for
23

collection except the bank on which the check is drawn. 24

When petitioners deposited the check with the Bank, they were designating the latter as the
collecting bank. This is in consonance with the rule that a negotiable instrument, such as a check,
whether a manager's check or ordinary check, is not legal tender. As such, after receiving the
deposit, under its own rules, the Bank shall credit the amount in petitioners’ account or infuse value
thereon only after the drawee bank shall have paid the amount of the check or the check has been
cleared for deposit.25

The Bank and Equitable-PCI Bank are both depositary and collecting banks.

A depositary/collecting bank where a check is deposited, and which endorses the check upon
presentment with the drawee bank, is an endorser. Under Section 66 of the Negotiable Instruments
Law, an endorser warrants "that the instrument is genuine and in all respects what it purports to be;
that he has good title to it; that all prior parties had capacity to contract; and that the instrument is at
the time of his endorsement valid and subsisting." It has been repeatedly held that in check
transactions, the depositary/collecting bank or last endorser generally suffers the loss because it has
the duty to ascertain the genuineness of all prior endorsements considering that the act of
presenting the check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the endorsements.  If any of the
26

warranties made by the depositary/collecting bank turns out to be false, then the drawee bank may
recover from it up to the amount of the check. 27

The law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it for
the purpose of determining their genuineness and regularity. The collecting bank being primarily
engaged in banking holds itself out to the public as the expert and the law holds it to a high standard
of conduct.28

As collecting banks, the Bank and Equitable-PCI Bank are both liable for the amount of the
materially altered checks. Since Equitable-PCI Bank is not a party to this case and the Bank allowed
its account with EquitablePCI Bank to be debited, it has the option toseek recourse against the latter
in another forum.
 24-HOUR CLEARING RULE

Petitioners faulted the drawee bank for not following the 24-hour clearing period because it was only
in August 2000 that the drawee bank notified Equitable-PCI that there were material alterations in
the checks.

We do not subscribe to the position taken by petitioners that the drawee bank was at fault because it
did not follow the 24-hour clearing period which provides that when a drawee bank fails to return a
forged or altered check to the collecting bank within the 24-hour clearing period, the collecting bank
is absolved from liability.

Section 21 of the Philippine Clearing House Rules and Regulations provides: Sec. 21. Special
Return Items Beyond The Reglementary Clearing Period.- Items which have been the subject of
material alteration or items bearing forged endorsement when such endorsement is necessary for
negotiation shall be returned by direct presentation or demand to the Presenting Bank and not
through the regular clearing house facilities within the period prescribed by law for the filing of a legal
action by the returning bank/branch, institution or entity sending the same.

Antonio Viray, in his book Handbook on Bank Deposits, elucidated:

It is clear that the so-called "24-hour" rule has been modified. In the case of Hongkong & Shanghai
vs. People’s Bank reiterated in Metropolitan Bank and Trust Co. vs. FNCB, the Supreme Court
strictly enforced the 24-hour rule under which the drawee bank forever loses the right to claim
against presenting/collecting bank if the check is not returned at the next clearing day orwithin 24
hours. Apparently, the commercial banks felt strict enforcement of the 24-hour rule is too harsh and
therefore made representations and obtained modification of the rule, which modification is now
incorporated in the Manual of Regulations. Since the same commercial banks controlled the
Philippine Clearing House Corporation, incorporating the amended rule in the PCHC Rules naturally
followed.

As the rule now stands, the 24-hour rule is still in force, that is, any check which should be refused
by the drawee bank in accordance with long standing and accepted banking practices shall be
returned through the PCHC/local clearing office, as the case may be, not later than the next regular
clearing (24-hour). The modification, however, is that items which have been the subject of material
alteration or bearing forged endorsement may be returned even beyond 24 hours so long that the
same is returned within the prescriptive period fixed by law. The consensus among lawyers is that
the prescriptiveperiod is ten (10)years because a check or the endorsement thereon is a written
contract. Moreover, the item need not be returned through the clearing house but by direct
presentation to the presenting bank. 29

In short, the 24-hour clearing ruledoes not apply to altered checks.

LIABILITY OF PETITIONERS

The 2008 case of Far East Bank & Trust Company v. Gold Palace Jewellery Co.  is in point. A
30

foreigner purchased several pieces of jewelry from Gold Palace Jewellery using a United Overseas
Bank (Malaysia) issued draft addressed to the Land Bank of the Philippines (LBP). Gold Palace
Jewellery deposited the draft in the company’s account with Far East Bank. Far East Bank
presented the draft for clearing to LBP. The latter cleared the same and Gold Palace Jewellery’s
account was credited with the amount stated in the draft. Consequently, Gold Palace Jewellery
released the pieces of jewelries to the foreigner. Three weeks later, LBP informed Far East Bank
that the amount in the foreign draft had been materially altered from ₱300,000.00 to ₱380,000.00.
LBP returnedthe check to Far East Bank. Far East Bank refunded LBP the ₱380,000.00 paid by
LBP. Far East Bank initially debited ₱168,053.36 from Gold Palace Jewellery’s account and
demanded the payment of the difference between the amount in the altered draft and the amount
debited from Gold Palace Jewellery.

However, for the reasons already discussed above, our pronouncement in the Far East Bank and
Trust Companycase that "the drawee is liable on its payment of the check according to the tenor of
the check at the time of payment, which was the raised amount"  is inapplicable to the factual milieu
31

obtaining herein.

We only adopt said decision in so far as it adjudged liability on the part of the collecting bank, thus:

Thus, considering that, in this case, Gold Palace is protected by Section 62 of the NIL, its collecting
agent, Far East, should not have debited the money paid by the drawee bank from respondent
company's account. When Gold Palace deposited the check with Far East, the latter, under the
terms of the deposit and the provisions of the NIL, became an agent of the former for the collection
of the amount in the draft. The subsequent payment by the drawee bank and the collection of the
amount by the collecting bank closed the transaction insofar as the drawee and the holder of the
check or his agent are concerned, converted the check into a mere voucher, and, as already
discussed, foreclosed the recovery by the drawee of the amount paid. This closure of the transaction
is a matter of course; otherwise, uncertainty in commercial transactions, delay and annoyance will
arise if a bank at some future time will call on the payee for the return of the money paid to him on
the check.

As the transaction in this case had been closed and the principalagent relationship between the
payee and the collecting bank had already ceased, the latter in returning the amount to the drawee
bank was already acting on its own and should now be responsible for its own actions. x x x
Likewise, Far East cannot invoke the warranty of the payee/depositor who indorsed the instrument
for collection to shift the burden it brought upon itself. This is precisely because the said indorsement
is only for purposes of collection which, under Section 36 of the NIL, is a restrictive indorsement. It
did not in any way transfer the title of the instrument to the collecting bank. Far East did not own the
draft, it merely presented it for payment. Considering that the warranties of a general indorser as
provided in Section 66 of the NIL are based upon a transfer of title and are available only to holders
in due course, these warranties did not attach to the indorsement for deposit and collection made by
Gold Palace to Far East. Without any legal right to do so, the collecting bank, therefore, could not
debit respondent's account for the amount it refunded to the drawee bank.

The foregoing considered, we affirm the ruling of the appellate court to the extent that Far East could
not debit the account of Gold Palace, and for doing so, it must return what it had erroneously taken. 32

Applying the foregoing ratiocination, the Bank cannot debit the savings account of petitioners. A
depositary/collecting bank may resist or defend against a claim for breach of warranty if the drawer,
the payee, or either the drawee bank or depositary bank was negligent and such negligence
substantially contributed tothe loss from alteration. In the instant case, no negligence can be
attributed to petitioners. We lend credence to their claim that at the time of the sales transaction, the
Bank’s branch manager was present and even offered the Bank’s services for the processing and
eventual crediting of the checks. True to the branch manager’s words, the checks were cleared three
days later when deposited by petitioners and the entire amount ofthe checks was credited to their
savings account.

ON LEGAL COMPENSATION
Petitioners insist that the Bank cannotbe considered a creditor of the petitioners because it should
have made a claim of the amount of ₱1,800,000.00 from Equitable-PCI Bank, its own depositary
bank and the collecting bank in this case and not from them.

The Bank cannot set-off the amount it paid to Equitable-PCI Bank with petitioners’ savings account.
Under Art. 1278 of the New Civil Code, compensation shall take place when two persons, in their
own right, are creditors and debtors of each other. And the requisites for legal compensation are:

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

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

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

(3) That the two debts be due;

(4) That they be liquidated and demandable;

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

It is well-settled that the relationship of the depositors and the Bank or similar institution is that of
creditor-debtor. Article 1980 of the New Civil Code provides that fixed, savings and current deposits
of money in banks and similar institutions shall be governed by the provisions concerning simple
loans. The bank is the debtorand the depositor is the creditor. The depositor lends the bank money
and the bank agrees to pay the depositor on demand. The savings deposit agreement between the
bank and the depositor is the contract that determines the rights and obligations of the parties. 33

But as previously discussed, petitioners are not liable for the deposit of the altered checks. The
Bank, asthe depositary and collecting bank ultimately bears the loss. Thus, there being no
indebtedness to the Bank on the part of petitioners, legal compensation cannot take place.
DAMAGES

The Bank incurred a delay in informing petitioners of the checks’ dishonor. The Bank was informed
of the dishonor by Equitable-PCI Bank as early as August 2000 but it was only on 7 March 2001
when the Bank informed petitioners that it will debit from their account the altered amount. This delay
is tantamount to negligence on the part of the collecting bank which would entitle petitioners to an
award for damages under Article 1170 of the New Civil Code which reads:

Art. 1170. 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.

The damages in the form of actual or compensatory damages represent the amount debited by the
Bank from petitioners’ account.

We delete the award of moral damages. Contrary to the lower court’s finding, there was no showing
that the Bank acted fraudulently or in bad faith. It may have been remiss in its duty to diligently
protect the account of its depositors but its honest but mistaken belief that petitioners’ account
should be debited is not tantamount to bad faith. We also delete the award of attorney’s fees for it is
not a sound public policy to place a premium on the right to litigate. No damages can becharged to
those who exercise such precious right in good faith, even if done erroneously. 34

To recap, the drawee bank, Philippine Veterans Bank in this case, is only liable to the extent of the
check prior to alteration.  Since Philippine Veterans Bank paid the altered amount of the check, it
1âwphi1

may pass the liability back as it did, to Equitable-PCI Bank,the collecting bank. The collecting banks,
Equitable-PCI Bank and the Bank, are ultimately liable for the amount of the materially altered
check. It cannot further pass the liability back to the petitioners absent any showing in the negligence
on the part of the petitioners which substantially contributed to the loss from alteration.

Based on the foregoing, we affirm the Pozasdecision only insofar as it ordered respondents to jointly
and severally pay petitioners ₱1,800,000.00, representing the amount withdrawn from the latter’s
account. We do not conform with said ruling regarding the finding of bad faith on the part of
respondents, as well as its failure toobserve the 24-hour clearing rule.

WHEREFORE, the petition is GRANTED. The Decision and Resolution dated 29 June 2006 and 12
February 2007 respectively of the Court of Appeals in CA-G.R. CV No. 83192 are REVERSED and
SET ASIDE. The 15 January 2004 Decision of the Regional Trial Court of Calamba City, Branch 92
in Civil Case No. B-5886 rendered by Judge Antonio S. Pozas is REINSTATEDonly insofar as it
ordered respondents to jointly and severally pay petitioners ₱1,800,000.00 representing the amount
withdrawn from the latter’s account. The award of moral damages and attorney’s fees are
DELETED.
G.R. No. 205839

LAND BANK OF THE PHILIPPINES, Petitioner

vs.
NARCISO L. KHO, Respondent

x-----------------------x

G.R. No. 205840

MA.LORENA FLORES and ALEXANDER CRUZ, Petitioners,

vs.
NARCISO L. KHO, Respondent.

DECISION

BRION, J.:

These are consolidated petitions for review on certiorari assailing the Court of Appeals' (CA) August
30, 2012 decision and February 14, 2013 Resolution in CA-G.R. CV No. 93881. The CA set aside
1

the Regional Trial Court’s (RTC) dismissal of Civil Case No. Q-06-57154 and remanded the case
2

for further proceedings.

Antecedents

The respondent Narciso Kho is the sole proprietor of United Oil Petroleum, a business engaged in
trading diesel fuel. Sometime in December 2006, he entered into a verbal agreement to purchase
lubricants from Red Orange International Trading (Red Orange), represented by one Rudy Medel.
Red Orange insisted that it would only accept a Land Bank manager’s check as payment.

On December 28, 2005, Kho, accompanied by Rudy Medel, opened Savings Account No. 0681-
0681-80 at the Araneta Branch of petitioner Land Bank of the Philippines (Land Bank). His
3

initial ₱25,993,537.37 deposit  consisted of the following manager’s checks:

4

1 UCPB Del Monte Branch PHP 15,000,000

Check No. 19107

2 E-PCI Banawe Branch PHP 2,900,000

Check No. 26200720

3 I.E. Bank Retiro Branch PHP 8,093,537.37

Check No. 1466

These checks were scheduled for clearance on January 2, 2006.

Kho also purchased Land Bank Manager’s Check No. 07410 leveraged by his newly opened
savings account. Recem Macarandan, the Acting Operations Supervisor of the Araneta branch, and
Leida Benitez, the Document Examiner, prepared and signed the check. 5

The check was postdated to January 2, 2006, and scheduled for actual delivery on the same date
after the three checks were expected to have been cleared. It was valued at ₱25,000,000.00 and
made payable to Red Orange. 6

Kho requested a photocopy of the manager’s check to provide Red Orange with proof that he had
available funds for the transaction.  The branch manager, petitioner Ma. Lorena Flores,
1âwphi1

accommodated his request. Kho gave the photocopy of the check to Rudy Medel. 7

On January 2, 2006, Kho returned to the bank and picked up check No. 07410. Accordingly,
₱25,000,000.00 was debited from his savings account.

Unfortunately, his deal with Red Orange did not push through.

On January 3, 2006, an employee of the Bank of the Philippine Islands (BPI) called Land Bank,
Araneta Branch, to inform them that Red Orange had deposited check No. 07410 for payment.
Flores confirmed with BPI that Land Bank had issued the check to Kho. 8

On January 4, 2006, the Central Clearing Department (CCD) of the Land Bank Head Office faxed a
copy of the deposited check to the Araneta branch for payment. The officers of the Araneta
branch examined the fax copy and thought that the details matched the check purchased by Kho.
Thus, Land Bank confirmed the deposited check. 9

On January 5, 2006, Flores informed Kho by phone that Check No. 07410 was cleared and paid by
the BPI, Kamuning branch. 10

Shocked, Kho informed Flores that he never negotiated the check because the deal did not
materialize. More importantly, the actual check was still in his possession. 11

Kho immediately went to Land Bank with the check No. 07410. They discovered that what was
deposited and encashed with BPI was a spurious manager’s check.  Kho demanded the
12

cancellation of his manager’s check and the release of the remaining money in his account (then
₱995,207.27).  However, Flores refused his request because she had no authority to do so at the
13

time.

Kho returned to the Land Bank, Araneta branch on January 12, 2006, with the same demands. He
was received by petitioner Alexander Cruz who was on his second day as the Officer in
Charge (OIC) of the Araneta branch.  Cruz informed him that there was a standing freeze order on
14

his account because of the (then) ongoing investigation on the fraudulent withdrawal of the
manager’s check. 15

On January 16, 2006, Kho sent Land Bank a final demand letter for the return of his ₱25,000,000.00
and the release of the ₱995,207.27 from his account but the bank did not comply.

Hence, on January 23, 2006, Kho filed a Complaint for Specific Performance and Damages against
Land Bank, represented by its Araneta Avenue Branch Manager Flores and its OIC Cruz. He also
impleaded Flores and Cruz in their personal capacities. The complaint was docketed as Civil Case
No. Q-06-57154.
Kho asserted that the manager’s check No. 07410 was still in his possession and that he had no
obligation to inform Land Bank whether or not he had already negotiated the check. 16

On the other hand, Land Bank argued that Kho was negligent because he handed Medel a
photocopy of the manager’s check and that this was the proximate cause of his loss. 17

On April 30, 2009, the RTC dismissed the complaint. 18

Citing Associated Bank v. Court of Appeals, the RTC reasoned that the failure of the
purchaser/drawer to exercise ordinary care that substantially contributed to the making of the forged
check precludes him from asserting the forgery.  It held that (1) Kho’s act of giving Medel a
19

photocopy of the check and (2) his failure to inform the bank that the transaction with Red Orange
did not push through were the proximate causes of his loss. 20

The RTC also found that Flores and Cruz acted in good faith in performing their duties as officers of
Land Bank when they refused to cancel the manager’s check and disallowed Kho from withdrawing
from his account. 21

Kho appealed to the CA where the case was docketed as CA-G.R. CV No. 93881.

On August 30, 2012, the CA set aside the RTC’s decision and remanded the case for further
proceedings.

The CA pointed out that Land Bank was conducting an investigation to determine whether there was
a fraudulent negotiation of the manager’s check No. 07410. It held that the outcome of the
investigation – which was not yet available during the trial – is crucial to the resolution of the case. It
noted that the RTC’s ruling on Kho’s negligence in dealing with Medel preempted the outcome of
Land Bank’s investigation.  Thus, it remanded the case to the RTC with the directive to consider the
22

outcome of the investigation.

Dissatisfied, Land Bank, Flores, and Cruz, filed separately petitions for review on certiorari before
this Court.

The Arguments

Land Bank asserts that neither party denied the spurious nature of the manager’s check that was
deposited with BPI. Therefore, the conclusion of its investigation as to the fraudulent negotiation
of check No. 07410 is immaterial to the resolution of the case. 23

Land Bank adopts the RTC’s conclusion that Kho is precluded from asserting the forgery of check
No. 07410 because his negligence substantially contributed to his loss. 24

The bank highlights the following instances of Kho’s negligence:

(1) Kho transacted with Rudy Medel, a person he barely knew, without verifying Medel’s actual
relationship with Red Orange. In fact, Kho even mistook him as "Rudy Rodel" in his complaint;

(2) Kho accorded Medel an unusual degree of trust. He brought Medel with him to the bank and
carelessly gave the latter a photocopy of the manager’s check; and
(3) When he picked up check No. 07410 on January 2, 2006, Kho did not even bother to inform
Land Bank that his transaction with Red Orange did not push through. He could have prevented or
detected the duplication of the check if he had simply notified the bank.25

Flores and Cruz maintain that they did not incur any personal liability to Kho because they were only
performing their official duties in good faith. They insist that their alleged wrongdoing, if there was
any, were corporate acts performed within the scope of their official authority; therefore, only Land
Bank should be made liable for the consequences. 26

For his part, Kho adopts the CA’s arguments and reasoning in CA-G. R. CV No. 93881. 27

Our Ruling

At the outset, we agree with Land Bank’s contention that the result of its investigation is not
indispensable to resolving this case. After all, it was not conducted by an independent party but by a
party-litigant. We cannot expect the report to yield a completely impartial result. At best, the
investigation report will be of doubtful probative value.

More importantly, all the facts necessary to decide the case are already available. Although they
have reached different legal conclusions, both the RTC and the CA agree that:

 On December 28, 2005, Kho opened an account with Land Bank in order to leverage a business
deal with Red Orange;

 He purchased Land Bank Manager’s check No. 07410 worth ₱25,000,000.00 payable to Red
Orange and dated January 2, 2006;

 He also gave Rudy Medel a photocopy of the check that the bank had given him;

 After his visit to the Bank, the deal with Medel and Red Orange did not push through;

 He picked up check No. 07410 from the bank on January 2, 2006, without informing the bank that
the deal did not materialize;

 Afterwards, Red Orange presented a spurious copy of check No. 07410 to BPI, Kamuning for
payment;

 Land Bank cleared the check;

 However, Kho never negotiated the actual check. It was in his possession the whole time.

This case can already be resolved based on these undisputed facts. Therefore, the CA erred when it
remanded the case for further proceedings.

That said, we cannot agree that the proximate causes of the loss were Kho’s act of giving Medel a
photocopy of check No. 07410 and his failure to inform Land Bank that his deal with Red Orange did
not push through.

Proximate cause – which is determined by a mixed consideration of logic, common sense, policy,
and precedent – is "that cause which, in natural and continuous sequence, unbroken by any efficient
intervening cause, produces the injury, and without which the result would not have occurred." 28
We cannot understand how both the RTC and the CA overlooked the fact that Land Bank’s officers
cleared the counterfeit check. We stress that the signatories of the genuine check No. 07410 were
Land Bank’s officers themselves.

The business of banking is imbued with public interest; it is an industry where the general public’s
trust and confidence in the system is of paramount importance.  Consequently, banks are expected
29

to exert the highest degree of, if not the utmost, diligence. They are obligated to treat their
depositors’ accounts with meticulous care, always keeping in mind the fiduciary nature of their
relationship. 30

Banks hold themselves out to the public as experts in determining the genuineness of checks and
corresponding signatures thereon.  Stemming from their primordial duty of diligence, one of a bank’s
31

prime duties is to ascertain the genuineness of the drawer’s signature on check being
encashed.  This holds especially true for manager’s checks.
32

A manager’s check is a bill of exchange drawn by a bank upon itself, and is accepted by its
issuance. It is an order of the bank to pay, drawn upon itself, committing in effect its total resources,
integrity, and honor behind its issuance. The check is signed by the manager (or some other
authorized officer) for the bank. In this case, the signatories were Macarandan and Benitez.

The genuine check No. 07410 remained in Kho’s possession the entire time and Land Bank admits
that the check it cleared was a fake. When Land Bank’s CCD forwarded the deposited check to its
Araneta branch for inspection, its officers had every opportunity to recognize the forgery of their
signatures or the falsity of the check. Whether by error or neglect, the bank failed to do so, which led
to the withdrawal and eventual loss of the ₱25,000,000.00.

This is the proximate cause of the loss. Land Bank breached its duty of diligence and assumed the
risk of incurring a loss on account of a forged or counterfeit check. Hence, it should suffer the
resulting damage.

We cannot agree with the Land Bank and the RTC’s positions that Kho is precluded from invoking
the forgery. A drawer or a depositor of the bank is precluded from asserting the forgery if the drawee
bank can prove his failure to exercise ordinary care and if this negligence substantially contributed to
the forgery or the perpetration of the fraud.

In Gempesaw v. Court of Appeals,  Natividad Gempesaw, a businesswoman, completely placed her

33

trust in her bookkeeper. Gempesaw allowed her bookkeeper to prepare the checks payable to her
suppliers. She signed the checks without verifying their amounts and their corresponding invoices.
Despite receiving her banks statements, Gempesaw never verified the correctness of the returned
checks nor confirmed if the payees actually received payment. This went on for over two years,
allowing her bookkeeper to forge the indorsements of over 82 checks.

Gempesaw failed to examine her records with reasonable diligence before signing the checks and
after receiving her bank statements. Her gross negligence allowed her bookkeeper to benefit from
the subsequent forgeries for over two years.

Gempesaw’s negligence precluded her from asserting the forgery. Nevertheless, we adjudged the
drawee Bank liable to share evenly in her loss for its failure to exercise utmost diligence, which
amounted to a breach of its contractual obligations to the depositor. 34
In Associated Bank v. Court of Appeals,  the province of Tarlac (the depositor) released 30 checks
35

payable to the order of a government hospital to a retired administrative officer/cashier of the

hospital. The retired officer forged the hospital’s indorsement and deposited the checks into his
personal account. This took place for over three years resulting in the accumulated loss of
₱203,300.00. We found the province of Tarlac grossly negligent, to the point of substantially
contributing to its loss.
36

Nevertheless, we apportioned the loss evenly between the province of Tarlac and the drawee bank
because of the bank’s failure to pay according to the terms of the check. It violated its duty to charge
the customer’s account only for properly payable items. 37

Kho’s negligence does not even come close to approximating those of Gempesaw or of the province
of Tarlac. While his act of giving Medel a photocopy of the check may have allowed the latter to
create a duplicate, this cannot possibly excuse Land Bank’s failure to recognize that the check itself
–not just the signatures – is a fake instrument. More importantly, Land Bank itself furnished Kho the
photocopy without objecting to the latter’s intention of giving it to Medel.

Kho' s failure to inform Land Bank that the deal did not push through as of January 2, 2006, does not
justify Land Bank's confirmation and clearing of a fake check bearing the forged signatures of its
own officers. Whether or not the deal pushed through, the check remained in Kho's possession. He
was entitled to a reasonable expectation that the bank would not release any funds corresponding to
the check.

Lastly, we agree with the RTC's finding that neither Flores nor Cruz is liable to Kho in their private
capacities. Their refusal to honor Kho' s demands was made in good faith pursuant to the directives
of the Land Bank's management.

As a pillar of economic development, the banking industry is impressed with public interest. The
general public relies on banks' sworn duty to serve with utmost diligence. Public trust and confidence
in banks is critical to a healthy, stable, and well-functioning economy. Let this serve as a reminder
for banks to always act with the highest degree of diligence and the most meticulous attention to
detail.

WHEREFORE, we PARTLY GRANT the petitions. The Court of Appeals' August 30, 2012 decision
and February 14, 2013 resolution in CA-G.R. CV No. 93881 are SET ASIDE. The Regional Trial
Court's April 30, 2009 decision in Civil Case No. Q-06-57154 is REVERSED.

Petitioner Land Bank of the Philippines is ORDERED:

(1) to PAY Narciso Kho the sum of TWENTY FIVE MILLION PESOS (₱25,000,000.00), plus interest
at the legal rate reckoned from the filing of the complaint; and

(2) to ALLOW Narciso Kho to withdraw his remaining funds from Savings Account No. 0681-0681-
80.
G.R. No. 133179               March 27, 2008

ALLIED BANKING CORPORATION, Petitioner,

vs.
LIM SIO WAN, METROPOLITAN BANK AND TRUST CO., and PRODUCERS
BANK, Respondents.

DECISION

VELASCO, JR., J.:

To ingratiate themselves to their valued depositors, some banks at times bend over backwards that
they unwittingly expose themselves to great risks.

The Case

This Petition for Review on Certiorari under Rule 45 seeks to reverse the Court of Appeals’ (CA’s)
Decision promulgated on March 18, 19981 in CA-G.R. CV No. 46290 entitled Lim Sio Wan v. Allied
Banking Corporation, et al. The CA Decision modified the Decision dated November 15, 1993 2 of the
Regional Trial Court (RTC), Branch 63 in Makati City rendered in Civil Case No. 6757.

The Facts

The facts as found by the RTC and affirmed by the CA are as follows:

On November 14, 1983, respondent Lim Sio Wan deposited with petitioner Allied Banking
Corporation (Allied) at its Quintin Paredes Branch in Manila a money market placement of PhP
1,152,597.35 for a term of 31 days to mature on December 15, 1983, 3 as evidenced by Provisional
Receipt No. 1356 dated November 14, 1983. 4

On December 5, 1983, a person claiming to be Lim Sio Wan called up Cristina So, an officer of
Allied, and instructed the latter to pre-terminate Lim Sio Wan’s money market placement, to issue a
manager’s check representing the proceeds of the placement, and to give the check to one Deborah
Dee Santos who would pick up the check.5 Lim Sio Wan described the appearance of Santos so that
So could easily identify her.6

Later, Santos arrived at the bank and signed the application form for a manager’s check to be
issued.7 The bank issued Manager’s Check No. 035669 for PhP 1,158,648.49, representing the
proceeds of Lim Sio Wan’s money market placement in the name of Lim Sio Wan, as payee. 8 The
check was cross-checked "For Payee’s Account Only" and given to Santos. 9

Thereafter, the manager’s check was deposited in the account of Filipinas Cement Corporation
(FCC) at respondent Metropolitan Bank and Trust Co. (Metrobank), 10 with the forged signature of Lim
Sio Wan as indorser.11

Earlier, on September 21, 1983, FCC had deposited a money market placement for PhP 2 million
with respondent Producers Bank. Santos was the money market trader assigned to handle FCC’s
account.12 Such deposit is evidenced by Official Receipt No. 317568 13 and a Letter dated September
21, 1983 of Santos addressed to Angie Lazo of FCC, acknowledging receipt of the placement. 14 The
placement matured on October 25, 1983 and was rolled-over until December 5, 1983 as evidenced
by a Letter dated October 25, 1983.15 When the placement matured, FCC demanded the payment of
the proceeds of the placement.16 On December 5, 1983, the same date that So received the phone
call instructing her to pre-terminate Lim Sio Wan’s placement, the manager’s check in the name of
Lim Sio Wan was deposited in the account of FCC, purportedly representing the proceeds of FCC’s
money market placement with Producers Bank.17 In other words, the Allied check was deposited with
Metrobank in the account of FCC as Producers Bank’s payment of its obligation to FCC.

To clear the check and in compliance with the requirements of the Philippine Clearing House
Corporation (PCHC) Rules and Regulations, Metrobank stamped a guaranty on the check, which
reads: "All prior endorsements and/or lack of endorsement guaranteed." 18

The check was sent to Allied through the PCHC. Upon the presentment of the check, Allied funded
the check even without checking the authenticity of Lim Sio Wan’s purported indorsement. Thus, the
amount on the face of the check was credited to the account of FCC.19

On December 9, 1983, Lim Sio Wan deposited with Allied a second money market placement to
mature on January 9, 1984.20

On December 14, 1983, upon the maturity date of the first money market placement, Lim Sio Wan
went to Allied to withdraw it.21 She was then informed that the placement had been pre-terminated
upon her instructions. She denied giving any instructions and receiving the proceeds thereof. She
desisted from further complaints when she was assured by the bank’s manager that her money
would be recovered.22

When Lim Sio Wan’s second placement matured on January 9, 1984, So called Lim Sio Wan to ask
for the latter’s instructions on the second placement. Lim Sio Wan instructed So to roll-over the
placement for another 30 days.23 On January 24, 1984, Lim Sio Wan, realizing that the promise that
her money would be recovered would not materialize, sent a demand letter to Allied asking for the
payment of the first placement.24 Allied refused to pay Lim Sio Wan, claiming that the latter had
authorized the pre-termination of the placement and its subsequent release to Santos. 25

Consequently, Lim Sio Wan filed with the RTC a Complaint dated February 13, 1984 26 docketed as
Civil Case No. 6757 against Allied to recover the proceeds of her first money market placement.
Sometime in February 1984, she withdrew her second placement from Allied.

Allied filed a third party complaint27 against Metrobank and Santos. In turn, Metrobank filed a fourth
party complaint28 against FCC. FCC for its part filed a fifth party complaint 29 against Producers Bank.
Summonses were duly served upon all the parties except for Santos, who was no longer connected
with Producers Bank.30

On May 15, 1984, or more than six (6) months after funding the check, Allied informed Metrobank
that the signature on the check was forged. 31 Thus, Metrobank withheld the amount represented by
the check from FCC. Later on, Metrobank agreed to release the amount to FCC after the latter
executed an Undertaking, promising to indemnify Metrobank in case it was made to reimburse the
amount.32

Lim Sio Wan thereafter filed an amended complaint to include Metrobank as a party-defendant,
along with Allied.33 The RTC admitted the amended complaint despite the opposition of
Metrobank.34 Consequently, Allied’s third party complaint against Metrobank was converted into a
cross-claim and the latter’s fourth party complaint against FCC was converted into a third party
complaint.35
After trial, the RTC issued its Decision, holding as follows:

WHEREFORE, judgment is hereby rendered as follows:

1. Ordering defendant Allied Banking Corporation to pay plaintiff the amount of

P1,158,648.49 plus 12% interest per annum from March 16, 1984 until fully paid;

2. Ordering defendant Allied Bank to pay plaintiff the amount of P100,000.00 by way of moral
damages;

3. Ordering defendant Allied Bank to pay plaintiff the amount of P173,792.20 by way of
attorney’s fees; and,

4. Ordering defendant Allied Bank to pay the costs of suit.

Defendant Allied Bank’s cross-claim against defendant Metrobank is DISMISSED.

Likewise defendant Metrobank’s third-party complaint as against Filipinas Cement Corporation is

DISMISSED.

Filipinas Cement Corporation’s fourth-party complaint against Producer’s Bank is also DISMISSED.

SO ORDERED.36

The Decision of the Court of Appeals

Allied appealed to the CA, which in turn issued the assailed Decision on March 18, 1998, modifying
the RTC Decision, as follows:

WHEREFORE, premises considered, the decision appealed from is MODIFIED. Judgment is

rendered ordering and sentencing defendant-appellant Allied Banking Corporation to pay sixty (60%)
percent and defendant-appellee Metropolitan Bank and Trust Company forty (40%) of the amount of
P1,158,648.49 plus 12% interest per annum from March 16, 1984 until fully paid. The moral
damages, attorney’s fees and costs of suit adjudged shall likewise be paid by defendant-appellant
Allied Banking Corporation and defendant-appellee Metropolitan Bank and Trust Company in the
same proportion of 60-40. Except as thus modified, the decision appealed from is AFFIRMED.

SO ORDERED.37

Hence, Allied filed the instant petition.

The Issues

Allied raises the following issues for our consideration:

The Honorable Court of Appeals erred in holding that Lim Sio Wan did not authorize [Allied] to pre-
terminate the initial placement and to deliver the check to Deborah Santos.

The Honorable Court of Appeals erred in absolving Producers Bank of any liability for the
reimbursement of amount adjudged demandable.
The Honorable Court of Appeals erred in holding [Allied] liable to the extent of 60% of amount
adjudged demandable in clear disregard to the ultimate liability of Metrobank as guarantor of all
endorsement on the check, it being the collecting bank. 38

The petition is partly meritorious.

A Question of Fact

Allied questions the finding of both the trial and appellate courts that Allied was not authorized to
release the proceeds of Lim Sio Wan’s money market placement to Santos. Allied clearly raises a
question of fact. When the CA affirms the findings of fact of the RTC, the factual findings of both
courts are binding on this Court.39

We also agree with the CA when it said that it could not disturb the trial court’s findings on the
credibility of witness So inasmuch as it was the trial court that heard the witness and had the
opportunity to observe closely her deportment and manner of testifying. Unless the trial court had
plainly overlooked facts of substance or value, which, if considered, might affect the result of the
case,40 we find it best to defer to the trial court on matters pertaining to credibility of witnesses.

Additionally, this Court has held that the matter of negligence is also a factual question. 41 Thus, the
finding of the RTC, affirmed by the CA, that the respective parties were negligent in the exercise of
their obligations is also conclusive upon this Court.

The Liability of the Parties

As to the liability of the parties, we find that Allied is liable to Lim Sio Wan. Fundamental and familiar
is the doctrine that the relationship between a bank and a client is one of debtor-creditor.

Articles 1953 and 1980 of the Civil Code provide:

Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership
thereof, and is bound to pay to the creditor an equal amount of the same kind and quality.

Art. 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning simple loan.

Thus, we have ruled in a line of cases that a bank deposit is in the nature of a simple loan or
mutuum.42 More succinctly, in Citibank, N.A. (Formerly First National City Bank) v. Sabeniano, this
Court ruled that a money market placement is a simple loan or mutuum. 43 Further, we defined a
money market in Cebu International Finance Corporation v. Court of Appeals, as follows:

[A] money market is a market dealing in standardized short-term credit instruments (involving large

amounts) where lenders and borrowers do not deal directly with each other but through a middle
man or dealer in open market. In a money market transaction, the investor is a lender who loans his
money to a borrower through a middleman or dealer.

In the case at bar, the money market transaction between the petitioner and the private respondent
is in the nature of a loan.44
Lim Sio Wan, as creditor of the bank for her money market placement, is entitled to payment upon
her request, or upon maturity of the placement, or until the bank is released from its obligation as
debtor. Until any such event, the obligation of Allied to Lim Sio Wan remains unextinguished.

Art. 1231 of the Civil Code enumerates the instances when obligations are considered extinguished,
thus:

Art. 1231. Obligations are extinguished:

(1) By payment or performance;

(2) By the loss of the thing due;

(3) By the condonation or remission of the debt;

(4) By the confusion or merger of the rights of creditor and debtor;

(5) By compensation;

(6) By novation.

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a

resolutory condition, and prescription, are governed elsewhere in this Code. (Emphasis supplied.)

From the factual findings of the trial and appellate courts that Lim Sio Wan did not authorize the
release of her money market placement to Santos and the bank had been negligent in so doing,
there is no question that the obligation of Allied to pay Lim Sio Wan had not been extinguished. Art.
1240 of the Code states that "payment shall be made to the person in whose favor the obligation has
been constituted, or his successor in interest, or any person authorized to receive it." As commented
by Arturo Tolentino:

Payment made by the debtor to a wrong party does not extinguish the obligation as to the creditor, if
there is no fault or negligence which can be imputed to the latter. Even when the debtor acted in
utmost good faith and by mistake as to the person of his creditor, or through error induced by the
fraud of a third person, the payment to one who is not in fact his creditor, or authorized to receive
such payment, is void, except as provided in Article 1241. Such payment does not prejudice the
creditor, and accrual of interest is not suspended by it.45 (Emphasis supplied.)

Since there was no effective payment of Lim Sio Wan’s money market placement, the bank still has
an obligation to pay her at six percent (6%) interest from March 16, 1984 until the payment thereof.

We cannot, however, say outright that Allied is solely liable to Lim Sio Wan.

Allied claims that Metrobank is the proximate cause of the loss of Lim Sio Wan’s money. It points out
that Metrobank guaranteed all prior indorsements inscribed on the manager’s check, and without
Metrobank’s guarantee, the present controversy would never have occurred. According to Allied:

Failure on the part of the collecting bank to ensure that the proceeds of the check is paid to the
proper party is, aside from being an efficient intervening cause, also the last negligent act, x x x
contributory to the injury caused in the present case, which thereby leads to the conclusion that it is
the collecting bank, Metrobank that is the proximate cause of the alleged loss of the plaintiff in the
instant case.46

We are not persuaded.

Proximate cause is "that cause, which, in natural and continuous sequence, unbroken by any
efficient intervening cause, produces the injury and without which the result would not have
occurred."47 Thus, there is an efficient supervening event if the event breaks the sequence leading
from the cause to the ultimate result. To determine the proximate cause of a controversy, the
question that needs to be asked is: If the event did not happen, would the injury have resulted? If the
answer is NO, then the event is the proximate cause.

In the instant case, Allied avers that even if it had not issued the check payment, the money
represented by the check would still be lost because of Metrobank’s negligence in indorsing the
check without verifying the genuineness of the indorsement thereon.

Section 66 in relation to Sec. 65 of the Negotiable Instruments Law provides:

Section 66. Liability of general indorser.—Every indorser who indorses without qualification, warrants
to all subsequent holders in due course;

a) The matters and things mentioned in subdivisions (a), (b) and (c) of the next preceding
section; and

b) That the instrument is at the time of his indorsement valid and subsisting;

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

Section 65. Warranty where negotiation by delivery, so forth.—Every person negotiating an

instrument by delivery or by a qualified indorsement, warrants:

a) That the instrument is genuine and in all respects what it purports to be;

b) That he has a good title of 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.

But when the negotiation is by delivery only, the warranty extends in favor of no holder other than
the immediate transferee.

The provisions of subdivision (c) of this section do not apply to persons negotiating public or
corporation securities, other than bills and notes. (Emphasis supplied.)

The warranty "that the instrument is genuine and in all respects what it purports to be" covers all the
defects in the instrument affecting the validity thereof, including a forged indorsement. Thus, the last
indorser will be liable for the amount indicated in the negotiable instrument even if a previous
indorsement was forged. We held in a line of cases that "a collecting bank which indorses a check
bearing a forged indorsement and presents it to the drawee bank guarantees all prior indorsements,
including the forged indorsement itself, and ultimately should be held liable therefor." 48

However, this general rule is subject to exceptions. One such exception is when the issuance of the
check itself was attended with negligence. Thus, in the cases cited above where the collecting bank
is generally held liable, in two of the cases where the checks were negligently issued, this Court held
the institution issuing the check just as liable as or more liable than the collecting bank.

In isolated cases where the checks were deposited in an account other than that of the payees on
the strength of forged indorsements, we held the collecting bank solely liable for the whole amount of
the checks involved for having indorsed the same. In Republic Bank v. Ebrada, 49 the check was
properly issued by the Bureau of Treasury. While in Banco de Oro Savings and Mortgage Bank
(Banco de Oro) v. Equitable Banking Corporation, 50 Banco de Oro admittedly issued the checks in
the name of the correct payees. And in Traders Royal Bank v. Radio Philippines Network, Inc., 51 the
checks were issued at the request of Radio Philippines Network, Inc. from Traders Royal Bank. 1avvphi1

However, in Bank of the Philippine Islands v. Court of Appeals, we said that the drawee bank is
liable for 60% of the amount on the face of the negotiable instrument and the collecting bank is liable
for 40%. We also noted the relative negligence exhibited by two banks, to wit:

Both banks were negligent in the selection and supervision of their employees resulting in the
encashment of the forged checks by an impostor. Both banks were not able to overcome the
presumption of negligence in the selection and supervision of their employees. It was the gross
negligence of the employees of both banks which resulted in the fraud and the subsequent loss.
While it is true that petitioner BPI’s negligence may have been the proximate cause of the loss,
respondent CBC’s negligence contributed equally to the success of the impostor in encashing the
proceeds of the forged checks. Under these circumstances, we apply Article 2179 of the Civil Code
to the effect that while respondent CBC may recover its losses, such losses are subject to mitigation
by the courts. (See Phoenix Construction Inc. v. Intermediate Appellate Courts, 148 SCRA 353
[1987]).

Considering the comparative negligence of the two (2) banks, we rule that the demands of
substantial justice are satisfied by allocating the loss of P2,413,215.16 and the costs of the
arbitration proceeding in the amount of P7,250.00 and the cost of litigation on a 60-40 ratio. 52

Similarly, we ruled in Associated Bank v. Court of Appeals that the issuing institution and the
collecting bank should equally share the liability for the loss of amount represented by the checks
concerned due to the negligence of both parties:

The Court finds as reasonable, the proportionate sharing of fifty percent-fifty percent (50%-50%).
Due to the negligence of the Province of Tarlac in releasing the checks to an unauthorized person
(Fausto Pangilinan), in allowing the retired hospital cashier to receive the checks for the payee
hospital for a period close to three years and in not properly ascertaining why the retired hospital
cashier was collecting checks for the payee hospital in addition to the hospital’s real cashier,
respondent Province contributed to the loss amounting to P203,300.00 and shall be liable to the
PNB for fifty (50%) percent thereof. In effect, the Province of Tarlac can only recover fifty percent
(50%) of P203,300.00 from PNB.

The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00.
It is liable on its warranties as indorser of the checks which were deposited by Fausto Pangilinan,
having guaranteed the genuineness of all prior indorsements, including that of the chief of the payee
hospital, Dr. Adena Canlas. Associated Bank was also remiss in its duty to ascertain the
genuineness of the payee’s indorsement.53

A reading of the facts of the two immediately preceding cases would reveal that the reason why the
bank or institution which issued the check was held partially liable for the amount of the check was
because of the negligence of these parties which resulted in the issuance of the checks.

In the instant case, the trial court correctly found Allied negligent in issuing the manager’s check and
in transmitting it to Santos without even a written authorization. 54 In fact, Allied did not even ask for
the certificate evidencing the money market placement or call up Lim Sio Wan at her residence or
office to confirm her instructions. Both actions could have prevented the whole fraudulent transaction
from unfolding. Allied’s negligence must be considered as the proximate cause of the resulting loss.

To reiterate, had Allied exercised the diligence due from a financial institution, the check would not
have been issued and no loss of funds would have resulted. In fact, there would have been no
issuance of indorsement had there been no check in the first place.

The liability of Allied, however, is concurrent with that of Metrobank as the last indorser of the check.
When Metrobank indorsed the check in compliance with the PCHC Rules and Regulations 55 without
verifying the authenticity of Lim Sio Wan’s indorsement and when it accepted the check despite the
fact that it was cross-checked payable to payee’s account only, 56 its negligent and cavalier
indorsement contributed to the easier release of Lim Sio Wan’s money and perpetuation of the fraud.
Given the relative participation of Allied and Metrobank to the instant case, both banks cannot be
adjudged as equally liable. Hence, the 60:40 ratio of the liabilities of Allied and Metrobank, as ruled
by the CA, must be upheld.

FCC, having no participation in the negotiation of the check and in the forgery of Lim Sio Wan’s
indorsement, can raise the real defense of forgery as against both banks. 57

As to Producers Bank, Allied Bank’s argument that Producers Bank must be held liable as employer
of Santos under Art. 2180 of the Civil Code is erroneous. Art. 2180 pertains to the vicarious liability
of an employer for quasi-delicts that an employee has committed. Such provision of law does not
apply to civil liability arising from delict.

One also cannot apply the principle of subsidiary liability in Art. 103 of the Revised Penal Code in the
instant case. Such liability on the part of the employer for the civil aspect of the criminal act of the
employee is based on the conviction of the employee for a crime. Here, there has been no
conviction for any crime.

As to the claim that there was unjust enrichment on the part of Producers Bank, the same is correct.
Allied correctly claims in its petition that Producers Bank should reimburse Allied for whatever
judgment that may be rendered against it pursuant to Art. 22 of the Civil Code, which provides:
"Every person who through an act of performance by another, or any other means, acquires or
comes into possession of something at the expense of the latter without just cause or legal ground,
shall return the same to him."1avvphi1

The above provision of law was clarified in Reyes v. Lim, where we ruled that "[t]here is unjust
enrichment when a person unjustly retains a benefit to the loss of another, or when a person retains
money or property of another against the fundamental principles of justice, equity and good
conscience."58
In Tamio v. Ticson, we further clarified the principle of unjust enrichment, thus: "Under Article 22 of
the Civil Code, there is unjust enrichment when (1) a person is unjustly benefited, and (2) such
benefit is derived at the expense of or with damages to another." 59

In the instant case, Lim Sio Wan’s money market placement in Allied Bank was pre-terminated and
withdrawn without her consent. Moreover, the proceeds of the placement were deposited in
Producers Bank’s account in Metrobank without any justification. In other words, there is no reason
that the proceeds of Lim Sio Wans’ placement should be deposited in FCC’s account purportedly as
payment for FCC’s money market placement and interest in Producers Bank.  With such payment,
lavvphil

Producers Bank’s indebtedness to FCC was extinguished, thereby benefitting the former. Clearly,
Producers Bank was unjustly enriched at the expense of Lim Sio Wan. Based on the facts and
circumstances of the case, Producers Bank should reimburse Allied and Metrobank for the amounts
the two latter banks are ordered to pay Lim Sio Wan.

It cannot be validly claimed that FCC, and not Producers Bank, should be considered as having
been unjustly enriched. It must be remembered that FCC’s money market placement with Producers
Bank was already due and demandable; thus, Producers Bank’s payment thereof was justified. FCC
was entitled to such payment. As earlier stated, the fact that the indorsement on the check was
forged cannot be raised against FCC which was not a part in any stage of the negotiation of the
check. FCC was not unjustly enriched.

From the facts of the instant case, we see that Santos could be the architect of the entire
controversy. Unfortunately, since summons had not been served on Santos, the courts have not
acquired jurisdiction over her.60 We, therefore, cannot ascribe to her liability in the instant case.

Clearly, Producers Bank must be held liable to Allied and Metrobank for the amount of the check
plus 12% interest per annum, moral damages, attorney’s fees, and costs of suit which Allied and
Metrobank are adjudged to pay Lim Sio Wan based on a proportion of 60:40.

WHEREFORE, the petition is PARTLY GRANTED. The March 18, 1998 CA Decision in CA-G.R. CV
No. 46290 and the November 15, 1993 RTC Decision in Civil Case No. 6757 are AFFIRMED with
MODIFICATION.

Thus, the CA Decision is AFFIRMED, the fallo of which is reproduced, as follows:

WHEREFORE, premises considered, the decision appealed from is MODIFIED. Judgment is

rendered ordering and sentencing defendant-appellant Allied Banking Corporation to pay sixty (60%)
percent and defendant-appellee Metropolitan Bank and Trust Company forty (40%) of the amount of
P1,158,648.49 plus 12% interest per annum from March 16, 1984 until fully paid. The moral
damages, attorney’s fees and costs of suit adjudged shall likewise be paid by defendant-appellant
Allied Banking Corporation and defendant-appellee Metropolitan Bank and Trust Company in the
same proportion of 60-40. Except as thus modified, the decision appealed from is AFFIRMED.

SO ORDERED.

Additionally and by way of MODIFICATION, Producers Bank is hereby ordered to pay Allied and
Metrobank the aforementioned amounts. The liabilities of the parties are concurrent and
independent of each other.
 [G.R. No. 138569. September 11, 2003.]

THE CONSOLIDATED BANK and TRUST CORPORATION, Petitioner, v. COURT OF

APPEALS and L.C. DIAZ and COMPANY, CPA’s, Respondents.

DECISION

CARPIO, J.:

The Case

Before us is a petition for review of the Decision 1 of the Court of Appeals dated 27
October 1998 and its Resolution dated 11 May 1999. The assailed decision reversed the
Decision 2 of the Regional Trial Court of Manila, Branch 8, absolving petitioner
Consolidated. Bank and Trust Corporation, now known as Solidbank Corporation
("Solidbank"), of any liability. The questioned resolution of the appellate court denied
the motion for reconsideration of Solidbank but modified the decision by deleting the
award of exemplary damages, attorney’s fees, expenses of litigation and cost of suit. chanrob1es virtua1 1aw 1ibrary

The Facts

Solidbank is a domestic banking corporation organized and existing under Philippine

laws. Private respondent L.C. Diaz and Company, CPA’s ("L.C. Diaz"), is a professional
partnership engaged in the practice of accounting.

Sometime in March 1976, L.C. Diaz opened a savings account with Solidbank,
designated as Savings Account No. S/A 200-16872-6.

On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya ("Macaraya"),
filled up a savings (cash) deposit slip for P990 and a savings (checks) deposit slip for
P50. Macaraya instructed the messenger of L.C. Diaz, Ismael Calapre ("Calapre"), to
deposit the money with Solidbank. Macaraya also gave Calapre the Solidbank passbook.

Calapre went to Solidbank and presented to Teller No. 6 the two deposit slips and the
passbook. The teller acknowledged receipt of the deposit by returning to Calapre the
duplicate copies of the two deposit slips. Teller No. 6 stamped the deposit slips with the
words "DUPLICATE" and "SAVING TELLER 6 SOLIDBANK HEAD OFFICE." Since the
transaction took time and Calapre had to make another deposit for L.C. Diaz with Allied
Bank, he left the passbook with Solidbank. Calapre then went to Allied Bank. When
Calapre returned to Solidbank to retrieve the passbook, Teller No. 6 informed him that
"somebody got the passbook. 3 Calapre went back to L.C. Diaz and reported the
incident to Macaraya.

Macaraya immediately prepared a deposit slip in duplicate copies with a check of

P200,000. Macaraya, together with Calapre, went to Solidbank and presented to Teller
No. 6 the deposit slip and check. The teller stamped the words "DUPLICATE" and
"SAVING TELLER 6 SOLIDBANK HEAD OFFICE" on the duplicate copy of the deposit slip.
When Macaraya asked for the passbook, Teller No. 6 told Macaraya that someone got
the passbook but she could not remember to whom she gave the passbook. When
Macaraya asked Teller No. 6 if Calapre got the passbook, Teller No. 6 answered that
someone shorter than Calapre got the passbook. Calapre was then standing beside
Macaraya.

Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for the deposit of
a check for P90,000 drawn on Philippine Banking Corporation ("PBC"). This PBC check
of L.C. Diaz was a check that it had "long closed." 4 PBC subsequently dishonored the
check because of insufficient funds and because the signature in the check differed from
PBC’s specimen signature. Failing to get back the passbook, Macaraya went back to her
office and reported the matter to the Personnel Manager of L.C. Diaz, Emmanuel
Alvarez.

The following day, 15 August 1991, L.C. Diaz through its Chief Executive Officer, Luis C.
Diaz ("Diaz"), called up Solidbank to stop any transaction using the same passbook
until L.C. Diaz could open a new account. 5 On the same day, Diaz formally wrote
Solidbank to make the same request. It was also on the same day that L.C. Diaz
learned of the unauthorized withdrawal the day before, 14 August 1991, of P300,000
from its savings account. The withdrawal slip for the P300,000 bore the signatures of
the authorized signatories of L.C. Diaz, namely Diaz and Rustico L. Murillo. The
signatories, however, denied signing the withdrawal slip. A certain Noel Tamayo
received the P300,000. cralaw : red

In an Information 6 dated 5 September 1991, L.C. Diaz charged its messenger,

Emerano Ilagan ("Ilagan") and one Roscon Verdazola with Estafa through Falsification
of Commercial Document. The Regional Trial Court of Manila dismissed the criminal
case after the City Prosecutor filed a Motion to Dismiss on 4 August 1992.

On 24 August 1992, L.C. Diaz through its counsel demanded from Solidbank the return
of its money. Solidbank refused.

On 25 August 1992, L.C. Diaz filed a Complaint 7 for Recovery of a Sum of Money
against Solidbank with the Regional Trial Court of Manila, Branch 8. After trial, the trial
court rendered on 28 December 1994 a decision absolving Solidbank and dismissing the
complaint.

L.C. Diaz then appealed 8 to the Court of Appeals. On 27 October 1998, the Court of
Appeals issued its Decision reversing the decision of the trial court.

On 11 May 1999, the Court of Appeals issued its Resolution denying the motion for
reconsideration of Solidbank. The appellate court, however, modified its decision by
deleting the award of exemplary damages and attorney’s fees.

The Ruling of the Trial Court

In absolving Solidbank, the trial court applied the rules on savings account written on
the passbook. The rules state that "possession of this book shall raise the presumption
of ownership and any payment or payments made by the bank upon the production of
the said book and entry therein of the withdrawal shall have the same effect as if made
to the depositor personally." 9

At the time of the withdrawal, a certain Noel Tamayo was not only in possession of the
passbook, he also presented a withdrawal slip with the signatures of the authorized
signatories of L.C. Diaz. The specimen signatures of these persons were in the
signature cards. The teller stamped the withdrawal slip with the words "Saving Teller
No. 5." The teller then passed on the withdrawal slip to Genere Manuel ("Manuel") for
authentication. Manuel verified the signatures on the withdrawal slip. The withdrawal
slip was then given to another officer who compared the signatures on the withdrawal
slip with the specimen on the signature cards. The trial court concluded that Solidbank
acted with care and observed the rules on savings account when it allowed the
withdrawal of P300,000 from the savings account of L.C. Diaz.

The trial court pointed out that the burden of proof now shifted to L.C. Diaz to prove
that the signatures on the withdrawal slip were forged. The trial court admonished L.C.
Diaz for not offering in evidence the National Bureau of Investigation ("NBI") report on
the authenticity of the signatures on the withdrawal slip for P300,000. The trial court
believed that L.C. Diaz did not offer this evidence because it is derogatory to its action.

Another provision of the rules on savings account states that the depositor must keep
the passbook "under lock and key." 10 When another person presents the passbook for
withdrawal prior to Solidbank’s receipt of the notice of loss of the passbook, that person
is considered as the owner of the passbook. The trial court ruled that the passbook
presented during the questioned transaction was "now out of the lock and key and
presumptively ready for a business transaction." 11

Solidbank did not have any participation in the custody and care of the passbook. The
trial court believed that Solidbank’s act of allowing the withdrawal of P300,000 was not
the direct and proximate cause of the loss. The trial court held that L.C. Diaz’s
negligence caused the unauthorized withdrawal. Three facts establish L.C. Diaz’s
negligence: (1) the possession of the passbook by a person other than the depositor
L.C. Diaz; (2) the presentation of a signed withdrawal receipt by an unauthorized
person; and (3) the possession by an unauthorized person of a PBC check "long closed"
by L.C. Diaz, which check was deposited on the day of the fraudulent withdrawal.

The trial court debunked L.C. Diaz’s contention that Solidbank did not follow the
precautionary procedures observed by the two parties whenever L.C. Diaz withdrew
significant amounts from its account. L.C. Diaz claimed that a letter must accompany
withdrawals of more than P20,000. The letter must request Solidbank to allow the
withdrawal and convert the amount to a manager’s check. The bearer must also have a
letter authorizing him to withdraw the same amount. Another person driving a car must
accompany the bearer so that he would not walk from Solidbank to the office in making
the withdrawal. The trial court pointed out that L.C. Diaz disregarded these precautions
in its past withdrawal. On 16 July 1991, L.C. Diaz withdrew P82,554 without any
separate letter of authorization or any communication with Solidbank that the money
be converted into a manager’s check.

The trial court further justified the dismissal of the complaint by holding that the case
was a last ditch effort of L.C. Diaz to recover P300,000 after the dismissal of the
criminal case against Ilagan.

The dispositive portion of the decision of the trial court reads: chanrob1es virtual 1aw library

IN VIEW OF THE FOREGOING, judgment is hereby rendered DISMISSING the

complaint.

The Court further renders judgment in favor of defendant bank pursuant to its
counterclaim the amount of Thirty Thousand Pesos (P30,000.00) as attorney’s fees.

With costs against plaintiff.

SO ORDERED. 12

The Ruling of the Court of Appeals

The Court of Appeals ruled that Solidbank’s negligence was the proximate cause of the
unauthorized withdrawal of P300,000 from the savings account of L.C. Diaz. The
appellate court reached this conclusion after applying the provision of the Civil Code on
quasi-delict, to wit:
chanrob1es virtual 1aw library

Article 2176. Whoever by act or omission causes damage to another, there being fault
or negligence, is obliged to pay for the damage done. Such fault or negligence, if there
is no pre-existing contractual relation between the parties, is called a quasi-delict and is
governed by the provisions of this chapter.

The appellate court held that the three elements of a quasi-delict are present in this
case, namely: (a) damages suffered by the plaintiff; (b) fault or negligence of the
defendant, or some other person for whose acts he must respond; and (c) the
connection of cause and effect between the fault or negligence of the defendant and the
damage incurred by the plaintiff.

The Court of Appeals pointed out that the teller of Solidbank who received the
withdrawal slip for P300,000 allowed the withdrawal without making the necessary
inquiry. The appellate court stated that the teller, who was not presented by Solidbank
during trial, should have called up the depositor because the money to be withdrawn
was a significant amount. Had the teller called up L.C. Diaz, Solidbank would have
known that the withdrawal was unauthorized. The teller did not even verify the identity
of the impostor who made the withdrawal. Thus, the appellate court found Solidbank
liable for its negligence in the selection and supervision of its employees.

The appellate court ruled that while L.C. Diaz was also negligent in entrusting its
deposits to its messenger and its messenger in leaving the passbook with the teller,
Solidbank could not escape liability because of the doctrine of "last clear chance."
Solidbank could have averted the injury suffered by L.C. Diaz had it called up L.C. Diaz
to verify the withdrawal.

The appellate court ruled that the degree of diligence required from Solidbank is more
than that of a good father of a family. The business and functions of banks are affected
with public interest. Banks are obligated to treat the accounts of their depositors with
meticulous care, always having in mind the fiduciary nature of their relationship with
their clients. The Court of Appeals found Solidbank remiss in its duty, violating its
fiduciary relationship with L.C. Diaz.

The dispositive portion of the decision of the Court of Appeals reads: chanrob1es virtual 1aw library

WHEREFORE, premises considered, the decision appealed from is hereby REVERSED

and a new one entered.

1. Ordering defendant-appellee Consolidated Bank and Trust Corporation. to pay

plaintiff-appellant the sum of Three Hundred Thousand Pesos (P300,000.00), with
interest thereon at the rate of 12% per annum from the date of filing of the complaint
until paid, the sum of P20,000.00 as exemplary damages, and P20,000.00 as attorney’s
fees and expenses of litigation as well as the cost of suit; and

2. Ordering the dismissal of defendant-appellee’s counterclaim in the amount of

P30,000.00 as attorney’s fees.

SO ORDERED. 13

Acting on the motion for reconsideration of Solidbank, the appellate court affirmed its
decision but modified the award of damages. The appellate court deleted the award of
exemplary damages and attorney’s fees. Invoking Article 2231 14 of the Civil Code, the
appellate court ruled that exemplary damages could be granted if the defendant acted
with gross negligence. Since Solidbank was guilty of simple negligence only, the award
of exemplary damages was not justified. Consequently, the award of attorney’s fees
was also disallowed pursuant to Article 2208 of the Civil Code. The expenses of
litigation and cost of suit were also not imposed on Solidbank.

The dispositive portion of the Resolution reads as follows: chanrob1es virtual 1aw library

WHEREFORE, foregoing considered, our decision dated October 27, 1998 is affirmed
with modification by deleting the award of exemplary damages and attorney’s fees,
expenses of litigation and cost of suit. chanrob1es virtua1 1aw 1ibrary

SO ORDERED. 15

Hence, this petition.

The Issues

Solidbank seeks the review of the decision and resolution of the Court of Appeals on
these grounds: chanrob1es virtual 1aw library

I. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER BANK SHOULD

SUFFER THE LOSS BECAUSE ITS TELLER SHOULD HAVE FIRST CALLED PRIVATE
RESPONDENT BY TELEPHONE BEFORE IT ALLOWED THE WITHDRAWAL OF P300,000.00
TO RESPONDENT’S MESSENGER EMERANO ILAGAN, SINCE THERE IS NO AGREEMENT
BETWEEN THE PARTIES IN THE OPERATION OF THE SAVINGS ACCOUNT, NOR IS
THERE ANY BANKING LAW, WHICH MANDATES THAT A BANK TELLER SHOULD FIRST
CALL UP THE DEPOSITOR BEFORE ALLOWING A WITHDRAWAL OF A BIG AMOUNT IN A
SAVINGS ACCOUNT.

II. THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF LAST CLEAR
CHANCE AND IN HOLDING THAT PETITIONER BANK’S TELLER HAD THE LAST
OPPORTUNITY TO WITHHOLD THE WITHDRAWAL WHEN IT IS UNDISPUTED THAT THE
TWO SIGNATURES OF RESPONDENT ON THE WITHDRAWAL SLIP ARE GENUINE AND
PRIVATE RESPONDENT’S PASSBOOK WAS DULY PRESENTED, AND CONTRARIWISE
RESPONDENT WAS NEGLIGENT IN THE SELECTION AND SUPERVISION OF ITS
MESSENGER EMERANO ILAGAN, AND IN THE SAFEKEEPING OF ITS CHECKS AND
OTHER FINANCIAL DOCUMENTS.

III. THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE INSTANT CASE IS A
LAST DITCH EFFORT OF PRIVATE RESPONDENT TO RECOVER ITS P300,000.00 AFTER
FAILING IN ITS EFFORTS TO RECOVER THE SAME FROM ITS EMPLOYEE EMERANO
ILAGAN.

IV. THE COURT OF APPEALS ERRED IN NOT MITIGATING THE DAMAGES AWARDED
AGAINST PETITIONER UNDER ARTICLE 2197 OF THE CIVIL CODE, NOTWITHSTANDING
ITS FINDING THAT PETITIONER BANK’S NEGLIGENCE WAS ONLY CONTRIBUTORY. 16

The Ruling of the Court

The petition is partly meritorious.

Solidbank’s Fiduciary Duty under the Law

The rulings of the trial court and the Court of Appeals conflict on the application of the
law. The trial court pinned the liability on L.C. Diaz based on the provisions of the rules
on savings account, a recognition of the contractual relationship between Solidbank and
L.C. Diaz, the latter being a depositor of the former. On the other hand, the Court of
Appeals applied the law on quasi-delict to determine who between the two parties was
ultimately negligent. The law on quasi-delict or culpa aquiliana is generally applicable
when there is no pre-existing contractual relationship between the parties.

We hold that Solidbank is liable for breach of contract due to negligence, or culpa
contractual.

The contract between the bank and its depositor is governed by the provisions of the
Civil Code on simple loan. 17 Article 1980 of the Civil Code expressly provides that." . .
savings . . . deposits of money in banks and similar institutions shall be governed by
the provisions concerning simple loan." There is a debtor-creditor relationship between
the bank and its depositor. The bank is the debtor and the depositor is the creditor. The
depositor lends the bank money and the bank agrees to pay the depositor on demand.
The savings deposit agreement between the bank and the depositor is the contract that
determines the rights and obligations of the parties.

The law imposes on banks high standards in view of the fiduciary nature of banking.
Section 2 of Republic Act No. 8791 ("RA 8791"), 18 which took effect on 13 June 2000,
declares that the State recognizes the "fiduciary nature of banking that requires high
standards of integrity and performance." 19 This new provision in the general banking
law, introduced in 2000, is a statutory affirmation of Supreme Court decisions, starting
with the 1990 case of Simex International v. Court of Appeals, 20 holding that "the
bank is under obligation to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their relationship. 21

This fiduciary relationship means that the bank’s obligation to observe "high standards
of integrity and performance" is deemed written into every deposit agreement between
a bank and its depositor. The fiduciary nature of banking requires banks to assume a
degree of diligence higher than that of a good father of a family. Article 1172 of the
Civil Code states that the degree of diligence required of an obligor is that prescribed by
law or contract, and absent such stipulation then the diligence of a good father of a
family. 22 Section 2 of RA 8791 prescribes the statutory diligence required from banks
— that banks must observe "high standards of integrity and performance" in servicing
their depositors. Although RA 8791 took effect almost nine years after the unauthorized
withdrawal of the P300,000 from L.C. Diaz’s savings account, jurisprudence 23 at the
time of the withdrawal already imposed on banks the same high standard of diligence
required under RA No. 8791.

However, the fiduciary nature of a bank-depositor relationship does not convert the
contract between the bank and its depositors from a simple loan to a trust agreement,
whether express or implied. Failure by the bank to pay the depositor is failure to pay a
simple loan, and not a breach of trust. 24 The law simply imposes on the bank a higher
standard of integrity and performance in complying with its obligations under the
contract of simple loan, beyond those required of non-bank debtors under a similar
contract of simple loan.

The fiduciary nature of banking does not convert a simple loan into a trust agreement
because banks do not accept deposits to enrich depositors but to earn money for
themselves. The law allows banks to offer the lowest possible interest rate to depositors
while charging the highest possible interest rate on their own borrowers. The interest
spread or differential belongs to the bank and not to the depositors who are not cestui
que trust of banks. If depositors are cestui que trust of banks, then the interest spread
or income belongs to the depositors, a situation that Congress certainly did not intend
in enacting Section 2 of RA 8791.

Solidbank’s Breach of its Contractual Obligation

Article 1172 of the Civil Code provides that "responsibility arising from negligence in the
performance of every kind of obligation is demandable." For breach of the savings
deposit agreement due to negligence, or culpa contractual, the bank is liable to its
depositor.

Calapre left the passbook with Solidbank because the "transaction took time" and he
had to go to Allied Bank for another transaction. The passbook was still in the hands of
the employees of Solidbank for the processing of the deposit when Calapre left
Solidbank. Solidbank’s rules on savings account require that the "deposit book should
be carefully guarded by the depositor and kept under lock and key, if possible." When
the passbook is in the possession of Solidbank’s tellers during withdrawals, the law
imposes on Solidbank and its tellers an even higher degree of diligence in safeguarding
the passbook.

Likewise, Solidbank’s tellers must exercise a high degree of diligence in insuring that
they return the passbook only to the depositor or his authorized representative. The
tellers know, or should know, that the rules on savings account provide that any person
in possession of the passbook is presumptively its owner. If the tellers give the
passbook to the wrong person, they would be clothing that person presumptive
ownership of the passbook, facilitating unauthorized withdrawals by that person. For
failing to return the passbook to Calapre, the authorized representative of L.C. Diaz,
Solidbank and Teller No. 6 presumptively failed to observe such high degree of
diligence in safeguarding the passbook, and in insuring its return to the party
authorized to receive the same.

In culpa contractual, once the plaintiff proves a breach of contract, there is a

presumption that the defendant was at fault or negligent. The burden is on the
defendant to prove that he was not at fault or negligent. In contrast, in culpa aquiliana
the plaintiff has the burden of proving that the defendant was negligent. In the present
case, L.C. Diaz has established that Solidbank breached its contractual obligation to
return the passbook only to the authorized representative of L.C. Diaz. There is thus a
presumption that Solidbank was at fault and its teller was negligent in not returning the
passbook to Calapre. The burden was on Solidbank to prove that there was no
negligence on its part or its employees.

Solidbank failed to discharge its burden. Solidbank did not present to the trial court
Teller No. 6, the teller with whom Calapre left the passbook and who was supposed to
return the passbook to him. The record does not indicate that Teller No. 6 verified the
identity of the person who retrieved the passbook. Solidbank also failed to adduce in
evidence its standard procedure in verifying the identity of the person retrieving the
passbook, if there is such a procedure, and that Teller No. 6 implemented this
procedure in the present case.

Solidbank is bound by the negligence of its employees under the principle of respondeat
superior or command responsibility. The defense of exercising the required diligence in
the selection and supervision of employees is not a complete defense in culpa
contractual, unlike in culpa aquiliana.25 cralaw:red

The bank must not only exercise "high standards of integrity and performance," it must
also insure that its employees do likewise because this is the only way to insure that
the bank will comply with its fiduciary duty. Solidbank failed to present the teller who
had the duty to return to Calapre the passbook, and thus failed to prove that this teller
exercised the "high standards of integrity and performance" required of Solidbank’s
employees. chanrob1es virtua1 1aw 1ibrary

Proximate Cause of the Unauthorized Withdrawal

Another point of disagreement between the trial and appellate courts is the proximate
cause of the unauthorized withdrawal. The trial court believed that L.C. Diaz’s
negligence in not securing its passbook under lock and key was the proximate cause
that allowed the impostor to withdraw the P300,000. For the appellate court, the
proximate cause was the teller’s negligence in processing the withdrawal without first
verifying with L.C. Diaz. We do not agree with either court.

Proximate cause is that cause which, in natural and continuous sequence, unbroken by
any efficient intervening cause, produces the injury and without which the result would
not have occurred. 26 Proximate cause is determined by the facts of each case upon
mixed considerations of logic, common sense, policy and precedent. 27

L.C. Diaz was not at fault that the passbook landed in the hands of the impostor.
Solidbank was in possession of the passbook while it was processing the deposit. After
completion of the transaction, Solidbank had the contractual obligation to return the
passbook only to Calapre, the authorized representative of L.C. Diaz. Solidbank failed to
fulfill its contractual obligation because it gave the passbook to another person.

Solidbank’s failure to return the passbook to Calapre made possible the withdrawal of
the P300,000 by the impostor who took possession of the passbook. Under Solidbank’s
rules on savings account, mere possession of the passbook raises the presumption of
ownership. It was the negligent act of Solidbank’s Teller No. 6 that gave the impostor
presumptive ownership of the passbook. Had the passbook not fallen into the hands of
the impostor, the loss of P300,000 would not have happened. Thus, the proximate
cause of the unauthorized withdrawal was Solidbank’s negligence in not returning the
passbook to Calapre.

We do not subscribe to the appellate court’s theory that the proximate cause of the
unauthorized withdrawal was the teller’s failure to call up L.C. Diaz to verify the
withdrawal. Solidbank did not have the duty to call up L.C. Diaz to confirm the
withdrawal. There is no arrangement between Solidbank and L.C. Diaz to this effect.
Even the agreement between Solidbank and L.C. Diaz pertaining to measures that the
parties must observe whenever withdrawals of large amounts are made does not direct
Solidbank to call up L.C. Diaz.

There is no law mandating banks to call up their clients whenever their representatives
withdraw significant amounts from their accounts. L.C. Diaz therefore had the burden to
prove that it is the usual practice of Solidbank to call up its clients to verify a
withdrawal of a large amount of money. L.C. Diaz failed to do so.

Teller No. 5 who processed the withdrawal could not have been put on guard to verify
the withdrawal. Prior to the withdrawal of P300,000, the impostor deposited with Teller
No. 6 the P90,000 PBC check, which later bounced. The impostor apparently deposited
a large amount of money to deflect suspicion from the withdrawal of a much bigger
amount of money. The appellate court thus erred when it imposed on Solidbank the
duty to call up L.C. Diaz to confirm the withdrawal when no law requires this from
banks and when the teller had no reason to be suspicious of the transaction.

Solidbank continues to foist the defense that Ilagan made the withdrawal. Solidbank
claims that since Ilagan was also a messenger of L.C. Diaz, he was familiar with its
teller so that there was no more need for the teller to verify the withdrawal. Solidbank
relies on the following statements in the Booking and Information Sheet of Emerano
Ilagan:chanrob1es virtual 1aw library
. . . Ilagan also had with him (before the withdrawal) a forged check of PBC and
indicated the amount of P90,000 which he deposited in favor of L.C. Diaz and Company.
After successfully withdrawing this large sum of money, Accused Ilagan gave alias Rey
(Noel Tamayo) his share of the loot. Ilagan then hired a taxicab in the amount of
P1,000 to transport him (Ilagan) to his home province at Bauan, Batangas. Ilagan
extravagantly and lavishly spent his money but a big part of his loot was wasted in
cockfight and horse racing. Ilagan was apprehended and meekly admitted his guilt. 28
(Emphasis supplied.)

L.C. Diaz refutes Solidbank’s contention by pointing out that the person who withdrew
the P300,000 was a certain Noel Tamayo. Both the trial and appellate courts stated that
this Noel Tamayo presented the passbook with the withdrawal slip.

We uphold the finding of the trial and appellate courts that a certain Noel Tamayo
withdrew the P300,000. The Court is not a trier of facts. We find no justifiable reason to
reverse the factual finding of the trial court and the Court of Appeals. The tellers who
processed the deposit of the P90,000 check and the withdrawal of the P300,000 were
not presented during trial to substantiate Solidbank’s claim that Ilagan deposited the
check and made the questioned withdrawal. Moreover, the entry quoted by Solidbank
does not categorically state that Ilagan presented the withdrawal slip and the passbook.

Doctrine of Last Clear Chance

The doctrine of last clear chance states that where both parties are negligent but the
negligent act of one is appreciably later than that of the other, or where it is impossible
to determine whose fault or negligence caused the loss, the one who had the last clear
opportunity to avoid the loss but failed to do so, is chargeable with the loss. 29 Stated
differently, the antecedent negligence of the plaintiff does not preclude him from
recovering damages caused by the supervening negligence of the defendant, who had
the last fair chance to prevent the impending harm by the exercise of due diligence. 30

We do not apply the doctrine of last clear chance to the present case. Solidbank is liable
for breach of contract due to negligence in the performance of its contractual obligation
to L.C. Diaz. This is a case of culpa contractual, where neither the contributory
negligence of the plaintiff nor his last clear chance to avoid the loss, would exonerate
the defendant from liability. 31 Such contributory negligence or last clear chance by the
plaintiff merely serves to reduce the recovery of damages by the plaintiff but does not
exculpate the defendant from his breach of contract. 32

Mitigated Damages

Under Article 1172, "liability (for culpa contractual) may be regulated by the courts,
according to the circumstances." This means that if the defendant exercised the proper
diligence in the selection and supervision of its employee, or if the plaintiff was guilty of
contributory negligence, then the courts may reduce the award of damages. In this
case, L.C. Diaz was guilty of contributory negligence in allowing a withdrawal slip signed
by its authorized signatories to fall into the hands of an impostor. Thus, the liability of
Solidbank should be reduced.

In Philippine Bank of Commerce v. Court of Appeals, 33 where the Court held the
depositor guilty of contributory negligence, we allocated the damages between the
depositor and the bank on a 40-60 ratio. Applying the same ruling to this case, we hold
that L.C. Diaz must shoulder 40% of the actual damages awarded by the appellate
court. Solidbank must pay he other 60% of the actual damages.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED with MODIFICATION.

Petitioner Solidbank Corporation shall pay private respondent L.C. Diaz and Company,
CPA’s only 60% of the actual damages awarded by the Court of Appeals. The remaining
40% of the actual damages shall be borne by private respondent L.C. Diaz and
Company, CPA’s. Proportionate costs.
G.R. No. 97626 March 14, 1997

PHILIPPINE BANK OF COMMERCE, now absorbed by PHILIPPINE COMMERCIAL

INTERNATIONAL BANK, ROGELIO LACSON, DIGNA DE LEON, MARIA ANGELITA PASCUAL,
et al., petitioners,
vs.
THE COURT OF APPEALS, ROMMEL'S MARKETING CORP., represented by ROMEO LIPANA,
its President & General Manager, respondents.

HERMOSISIMA, JR., J.:

Challenged in this petition for review is the Decision dated February 28, 1991  rendered by public
1

respondent Court of Appeals which affirmed the Decision dated November 15, 1985 of the Regional
Trial Court, National Capital Judicial Region, Branch CLX (160), Pasig City, in Civil Case No. 27288
entitled "Rommel's Marketing Corporation, etc. v. Philippine Bank of Commerce, now absorbed by
Philippine Commercial and Industrial Bank."

The case stemmed from a complaint filed by the private respondent Rommel's Marketing
Corporation (RMC for brevity), represented by its President and General Manager Romeo Lipana, to
recover from the former Philippine Bank of Commerce (PBC for brevity), now absorbed by the
Philippine Commercial International Bank, the sum of P304,979.74 representing various deposits it
had made in its current account with said bank but which were not credited to its account, and were
instead deposited to the account of one Bienvenido Cotas, allegedly due to the gross and
inexcusable negligence of the petitioner bank.

RMC maintained two (2) separate current accounts, Current Account Nos. 53-01980-3 and 53-
01748-7, with the Pasig Branch of PBC in connection with its business of selling appliances.

In the ordinary and usual course of banking operations, current account deposits are accepted by
the bank on the basis of deposit slips prepared and signed by the depositor, or the latter's agent or
representative, who indicates therein the current account number to which the deposit is to be
credited, the name of the depositor or current account holder, the date of the deposit, and the
amount of the deposit either in cash or checks. The deposit slip has an upper portion or stub, which
is detached and given to the depositor or his agent; the lower portion is retained by the bank. In
some instances, however, the deposit slips are prepared in duplicate by the depositor. The original
of the deposit slip is retained by the bank, while the duplicate copy is returned or given to the
depositor.

From May 5, 1975 to July 16, 1976, petitioner Romeo Lipana claims to have entrusted RMC funds in
the form of cash totalling P304,979.74 to his secretary, Irene Yabut, for the purpose of depositing
said funds in the current accounts of RMC with PBC. It turned out, however, that these deposits, on
all occasions, were not credited to RMC's account but were instead deposited to Account No. 53-
01734-7 of Yabut's husband, Bienvenido Cotas who likewise maintains an account with the same
bank. During this period, petitioner bank had, however, been regularly furnishing private respondent
with monthly statements showing its current accounts balances. Unfortunately, it had never been the
practice of Romeo Lipana to check these monthly statements of account reposing complete trust
and confidence on petitioner bank.

Irene Yabut's modus operandi is far from complicated. She would accomplish two (2) copies of the
deposit slip, an original and a duplicate. The original showed the name of her husband as depositor
and his current account number. On the duplicate copy was written the account number of her
husband but the name of the account holder was left blank. PBC's teller, Azucena Mabayad, would,
however, validate and stamp both the original and the duplicate of these deposit slips retaining only
the original copy despite the lack of information on the duplicate slip. The second copy was kept by
Irene Yabut allegedly for record purposes. After validation, Yabut would then fill up the name of RMC
in the space left blank in the duplicate copy and change the account number written thereon, which
is that of her husband's, and make it appear to be RMC's account number, i.e., C.A. No. 53-01980-3.
With the daily remittance records also prepared by Ms. Yabut and submitted to private respondent
RMC together with the validated duplicate slips with the latter's name and account number, she
made her company believe that all the while the amounts she deposited were being credited to its
account when, in truth and in fact, they were being deposited by her and credited by the petitioner
bank in the account of Cotas. This went on in a span of more than one (1) year without private
respondent's knowledge.

Upon discovery of the loss of its funds, RMC demanded from petitioner bank the return of its money,
but as its demand went unheeded, it filed a collection suit before the Regional Trial Court of Pasig,
Branch 160. The trial court found petitioner bank negligent and ruled as follows:

WHEREFORE, judgment is hereby rendered sentencing defendant Philippine Bank

of Commerce, now absorbed by defendant Philippine Commercial & Industrial Bank,
and defendant Azucena Mabayad to pay the plaintiff, jointly and severally, and
without prejudice to any criminal action which may be instituted if found warranted:

1. The sum of P304,979.72, representing plaintiffs lost deposit, plus interest thereon
at the legal rate from the filing of the complaint;

2. A sum equivalent to 14% thereof, as exemplary damages;

3. A sum equivalent to 25% of the total amount due, as and for attorney's fees; and

4. Costs.

Defendants' counterclaim is hereby dismissed for lack of merit. 2

On appeal, the appellate court affirmed the foregoing decision with modifications, viz:

WHEREFORE, the decision appealed from herein is MODIFIED in the sense that the
awards of exemplary damages and attorney's fees specified therein are eliminated
and instead, appellants are ordered to pay plaintiff, in addition to the principal sum of
P304,979.74 representing plaintiff's lost deposit plus legal interest thereon from the
filing of the complaint, P25,000.00 attorney's fees and costs in the lower court as well
as in this Court.
3

Hence, this petition anchored on the following grounds:

1) The proximate cause of the loss is the negligence of respondent Rommel

Marketing Corporation and Romeo Lipana in entrusting cash to a dishonest
employee.

2) The failure of respondent Rommel Marketing Corporation to cross-check the

bank's statements of account with its own records during the entire period of more
 than one (1) year is the proximate cause of the commission of subsequent frauds
and misappropriation committed by Ms. Irene Yabut.

3) The duplicate copies of the deposit slips presented by respondent Rommel

Marketing Corporation are falsified and are not proof that the amounts appearing
thereon were deposited to respondent Rommel Marketing Corporation's account with
the bank,

4) The duplicate copies of the deposit slips were used by Ms. Irene Yabut to cover up
her fraudulent acts against respondent Rommel Marketing Corporation, and not as
records of deposits she made with the bank. 4

The petition has no merit.

Simply put, the main issue posited before us is: What is the proximate cause of the loss, to the tune
of P304,979.74, suffered by the private respondent RMC — petitioner bank's negligence or that of
private respondent's?

Petitioners submit that the proximate cause of the loss is the negligence of respondent RMC and
Romeo Lipana in entrusting cash to a dishonest employee in the person of Ms. Irene
Yabut.  According to them, it was impossible for the bank to know that the money deposited by Ms.
5

Irene Yabut belong to RMC; neither was the bank forewarned by RMC that Yabut will be depositing
cash to its account. Thus, it was impossible for the bank to know the fraudulent design of Yabut
considering that her husband, Bienvenido Cotas, also maintained an account with the bank. For the
bank to inquire into the ownership of the cash deposited by Ms. Irene Yabut would be irregular.
Otherwise stated, it was RMC's negligence in entrusting cash to a dishonest employee which
provided Ms. Irene Yabut the opportunity to defraud RMC. 6

Private respondent, on the other hand, maintains that the proximate cause of the loss was the
negligent act of the bank, thru its teller Ms. Azucena Mabayad, in validating the deposit slips, both
original and duplicate, presented by Ms. Yabut to Ms. Mabayad, notwithstanding the fact that one of
the deposit slips was not completely accomplished.

We sustain the private respondent.

Our law on quasi-delicts states:

Art. 2176. Whoever by act or omission causes damage to another, there being fault
or negligence, is obliged to pay for the damage done. Such fault or negligence, if
there is no pre-existing contractual relation between the parties, is called a quasi-
delict and is governed by the provisions of this Chapter.

There are three elements of a quasi-delict: (a) damages suffered by the plaintiff; (b) fault or
negligence of the defendant, or some other person for whose acts he must respond; and (c) the
connection of cause and effect between the fault or negligence of the defendant and the damages
incurred by the plaintiff.
7

In the case at bench, there is no dispute as to the damage suffered by the private respondent
(plaintiff in the trial court) RMC in the amount of P304,979.74. It is in ascribing fault or negligence
which caused the damage where the parties point to each other as the culprit.
Negligence is the omission to do something which a reasonable man, guided by those
considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of
something which a prudent and reasonable man would do. The seventy-eight (78)-year-old, yet still
relevant, case of Picart v. Smith,  provides the test by which to determine the existence of negligence
8

in a particular case which may be stated as follows: Did the defendant in doing the alleged negligent
act use that reasonable care and caution which an ordinarily prudent person would have used in the
same situation? If not, then he is guilty of negligence. The law here in effect adopts the standard
supposed to be supplied by the imaginary conduct of the discreet paterfamilias of the Roman law.
The existence of negligence in a given case is not determined by reference to the personal judgment
of the actor in the situation before him. The law considers what would be reckless, blameworthy, or
negligent in the man of ordinary intelligence and prudence and determines liability by that.

Applying the above test, it appears that the bank's teller, Ms. Azucena Mabayad, was negligent in
validating, officially stamping and signing all the deposit slips prepared and presented by Ms. Yabut,
despite the glaring fact that the duplicate copy was not completely accomplished contrary to the self-
imposed procedure of the bank with respect to the proper validation of deposit slips, original or
duplicate, as testified to by Ms. Mabayad herself, thus:

Q: Now, as teller of PCIB, Pasig Branch, will you please tell us Mrs.
Mabayad your important duties and functions?

A: I accept current and savings deposits from depositors and

encashments.

Q: Now in the handling of current account deposits of bank clients,

could you tell us the procedure you follow?

A: The client or depositor or the authorized representative prepares a

deposit slip by filling up the deposit slip with the name, the account
number, the date, the cash breakdown, if it is deposited for cash, and
the check number, the amount and then he signs the deposit slip.

Q: Now, how many deposit slips do you normally require in

accomplishing current account deposit, Mrs. Mabayad?

A: The bank requires only one copy of the deposit although some of
our clients prepare the deposit slip in duplicate.

Q: Now in accomplishing current account deposits from your clients,

what do you issue to the depositor to evidence the deposit made?

A: We issue or we give to the clients the depositor's stub as a receipt

of the deposit.

Q: And who prepares the deposit slip?

A: The depositor or the authorized representative sir?

Q: Where does the depositor's stub comes (sic) from Mrs. Mabayad,
is it with the deposit slip?
 A: The depositor's stub is connected with the deposit slip or the
bank's copy. In a deposit slip, the upper portion is the depositor's stub
and the lower portion is the bank's copy, and you can detach the
bank's copy from the depositor's stub by tearing it sir.

Q: Now what do you do upon presentment of the deposit slip by the

depositor or the depositor's authorized representative?

A: We see to it that the deposit slip  is properly accomplished and
9

then we count the money and then we tally it with the deposit slip sir.

Q: Now is the depositor's stub which you issued to your clients

validated?

A: Yes, sir.   [Emphasis ours]

10

Clearly, Ms. Mabayad failed to observe this very important procedure. The fact that the
duplicate slip was not compulsorily required by the bank in accepting deposits should not
relieve the petitioner bank of responsibility. The odd circumstance alone that such duplicate
copy lacked one vital information — that of the name of the account holder — should have
already put Ms. Mabayad on guard. Rather than readily validating the incomplete duplicate
copy, she should have proceeded more cautiously by being more probing as to the true
reason why the name of the account holder in the duplicate slip was left blank while that in
the original was filled up. She should not have been so naive in accepting hook, line and
sinker the too shallow excuse of Ms. Irene Yabut to the effect that since the duplicate copy
was only for her personal record, she would simply fill up the blank space later on.   A
11

"reasonable man of ordinary prudence"   would not have given credence to such explanation
12

and would have insisted that the space left blank be filled up as a condition for validation.
Unfortunately, this was not how bank teller Mabayad proceeded thus resulting in huge losses
to the private respondent.

Negligence here lies not only on the part of Ms. Mabayad but also on the part of the bank itself in its
lackadaisical selection and supervision of Ms. Mabayad. This was exemplified in the testimony of Mr.
Romeo Bonifacio, then Manager of the Pasig Branch of the petitioner bank and now its Vice-
President, to the effect that, while he ordered the investigation of the incident, he never came to
know that blank deposit slips were validated in total disregard of the bank's validation
procedures, viz:

Q: Did he ever tell you that one of your cashiers affixed the stamp
mark of the bank on the deposit slips and they validated the same
with the machine, the fact that those deposit slips were unfilled up, is
there any report similar to that?

A: No, it was not the cashier but the teller.

Q: The teller validated the blank deposit slip?

A: No it was not reported.

Q: You did not know that any one in the bank tellers or cashiers
validated the blank deposit slip?
 A: I am not aware of that.

Q: It is only now that you are aware of that?

A: Yes, sir.  13

Prescinding from the above, public respondent Court of Appeals aptly observed:

xxx xxx xxx

It was in fact only when he testified in this case in February, 1983, or after the lapse
of more than seven (7) years counted from the period when the funds in question
were deposited in plaintiff's accounts (May, 1975 to July, 1976) that bank manager
Bonifacio admittedly became aware of the practice of his teller Mabayad of validating
blank deposit slips. Undoubtedly, this is gross, wanton, and inexcusable negligence
in the appellant bank's supervision of its employees.  14

It was this negligence of Ms. Azucena Mabayad, coupled by the negligence of the petitioner bank in
the selection and supervision of its bank teller, which was the proximate cause of the loss suffered
by the private respondent, and not the latter's act of entrusting cash to a dishonest employee, as
insisted by the petitioners.

Proximate cause is determined on the facts of each case upon mixed considerations of logic,
common sense, policy and precedent.   Vda. de Bataclan v. Medina,   reiterated in the case of Bank
15 16

of the Phil. Islands v. Court of Appeals,   defines proximate cause as "that cause, which, in natural
17

and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and
without which the result would not have occurred. . . ." In this case, absent the act of Ms. Mabayad in
negligently validating the incomplete duplicate copy of the deposit slip, Ms. Irene Yabut would not
have the facility with which to perpetrate her fraudulent scheme with impunity. Apropos, once again,
is the pronouncement made by the respondent appellate court, to wit:

. . . . Even if Yabut had the fraudulent intention to misappropriate the funds entrusted
to her by plaintiff, she would not have been able to deposit those funds in her
husband's current account, and then make plaintiff believe that it was in the latter's
accounts wherein she had deposited them, had it not been for bank teller Mabayad's
aforesaid gross and reckless negligence. The latter's negligence was thus the
proximate, immediate and efficient cause that brought about the loss claimed by
plaintiff in this case, and the failure of plaintiff to discover the same soon enough by
failing to scrutinize the monthly statements of account being sent to it by appellant
bank could not have prevented the fraud and misappropriation which Irene Yabut
had already completed when she deposited plaintiff's money to the account of her
husband instead of to the latter's accounts. 18

Furthermore, under the doctrine of "last clear chance" (also referred to, at times as "supervening
negligence" or as "discovered peril"), petitioner bank was indeed the culpable party. This doctrine, in
essence, states that where both parties are negligent, but the negligent act of one is appreciably
later in time than that of the other, or when it is impossible to determine whose fault or negligence
should be attributed to the incident, the one who had the last clear opportunity to avoid the
impending harm and failed to do so is chargeable with the consequences thereof.   Stated
19

differently, the rule would also mean that an antecedent negligence of a person does not preclude
the recovery of damages for the supervening negligence of, or bar a defense against liability sought
by another, if the latter, who had the last fair chance, could have avoided the impending harm by the
exercise of due diligence.   Here, assuming that private respondent RMC was negligent in entrusting
20

cash to a dishonest employee, thus providing the latter with the opportunity to defraud the company,
as advanced by the petitioner, yet it cannot be denied that the petitioner bank, thru its teller, had the
last clear opportunity to avert the injury incurred by its client, simply by faithfully observing their self-
imposed validation procedure.

At this juncture, it is worth to discuss the degree of diligence ought to be exercised by banks in
dealing with their clients.

The New Civil Code provides:

Art. 1173. The fault or negligence of the obligor consists in the omission of that
diligence which is required by the nature of the obligation and corresponds with the
circumstances of the persons, of the time and of the place. When negligence shows
bad faith, the provisions of articles 1171 and 2201, paragraph 2, shall apply.

If the law or contract does not state the diligence which is to be observed in the
performance, that which is expected of a good father of a family shall be required.
(1104a)

In the case of banks, however, the degree of diligence required is more than that of a good father of
a family. Considering the fiduciary nature of their relationship with their depositors, banks are duty
bound to treat the accounts of their clients with the highest degree of care.  21

As elucidated in Simex International (Manila), Inc. v. Court of Appeals,   in every case, the depositor
22

expects the bank to treat his account with the utmost fidelity, whether such account consists only of
a few hundred pesos or of millions. The bank must record every single transaction accurately, down
to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at
any given time the amount of money the depositor can dispose as he sees fit, confident that the
bank will deliver it as and to whomever he directs. A blunder on the part of the bank, such as the
failure to duly credit him his deposits as soon as they are made, can cause the depositor not a little
embarrassment if not financial loss and perhaps even civil and criminal litigation.

The point is that as a business affected with public interest and because of the nature of its
functions, the bank is under obligation to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their relationship. In the case before us, it is apparent
that the petitioner bank was remiss in that duty and violated that relationship.

Petitioners nevertheless aver that the failure of respondent RMC to cross-check the bank's
statements of account with its own records during the entire period of more than one (1) year is the
proximate cause of the commission of subsequent frauds and misappropriation committed by Ms.
Irene Yabut.

We do not agree.

While it is true that had private respondent checked the monthly statements of account sent by the
petitioner bank to RMC, the latter would have discovered the loss early on, such cannot be used by
the petitioners to escape liability. This omission on the part of the private respondent does not
change the fact that were it not for the wanton and reckless negligence of the petitioners' employee
in validating the incomplete duplicate deposit slips presented by Ms. Irene Yabut, the loss would not
have occurred. Considering, however, that the fraud was committed in a span of more than one (1)
year covering various deposits, common human experience dictates that the same would not have
been possible without any form of collusion between Ms. Yabut and bank teller Mabayad. Ms.
Mabayad was negligent in the performance of her duties as bank teller nonetheless. Thus, the
petitioners are entitled to claim reimbursement from her for whatever they shall be ordered to pay in
this case.

The foregoing notwithstanding, it cannot be denied that, indeed, private respondent was likewise
negligent in not checking its monthly statements of account. Had it done so, the company would
have been alerted to the series of frauds being committed against RMC by its secretary. The
damage would definitely not have ballooned to such an amount if only RMC, particularly Romeo
Lipana, had exercised even a little vigilance in their financial affairs. This omission by RMC amounts
to contributory negligence which shall mitigate the damages that may be awarded to the private
respondent   under Article 2179 of the New Civil Code, to wit:
23

. . . 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.

In view of this, we believe that the demands of substantial justice are satisfied by allocating
the damage on a 60-40 ratio. Thus, 40% of the damage awarded by the respondent
appellate court, except the award of P25,000.00 attorney's fees, shall be borne by private
respondent RMC; only the balance of 60% needs to be paid by the petitioners. The award of
attorney's fees shall be borne exclusively by the petitioners.

WHEREFORE, the decision of the respondent Court of Appeals is modified by reducing the amount
of actual damages private respondent is entitled to by 40%. Petitioners may recover from Ms.
Azucena Mabayad the amount they would pay the private respondent. Private respondent shall have
recourse against Ms. Irene Yabut. In all other respects, the appellate court's decision is AFFIRMED.

Proportionate costs.

SO ORDERED.

Bellosillo, Vitug and Kapunan, JJ., concur.

Separate Opinions

PADILLA, J., dissenting:

I regret that I cannot join the majority in ruling that the proximate cause of the damage suffered by
Rommel's Marketing Corporation (RMC) is mainly "the wanton and reckless negligence of the
petitioner's employee in validating the incomplete duplicate deposit slips presented by Ms. Irene
Yabut" (Decision, p. 15). Moreover, I find it difficult to agree with the ruling that "petitioners are
entitled to claim reimbursement from her (the bank teller) for whatever they shall be ordered to pay
in this case."

It seems that an innocent bank teller is being unduly burdened with what should fall on Ms. Irene
Yabut, RMC's own employee, who should have been charged with estafa or estafa through
falsification of private document. Interestingly, the records are silent on whether RMC had ever filed
any criminal case against Ms. Irene Yabut, aside from the fact that she does not appear to have
been impleaded even as a party defendant in any civil case for damages. Why is RMC insulating
Ms. Irene Yabut from liability when in fact she orchestrated the entire fraud on RMC, her employer?

To set the record straight, it is not completely accurate to state that from 5 May 1975 to 16 July
1976, Miss Irene Yabut had transacted with PCIB (then PBC) through only one teller in the person of
Azucena Mabayad. In fact, when RMC filed a complaint for estafa before the Office of the Provincial
Fiscal of Rizal, it indicted all the tellers of PCIB in the branch who were accused of conspiracy to
defraud RMC of its current account deposits. (See Annex B, Rollo p. 22 and 47).

Even private respondent RMC, in its Comment, maintains that "when the petitioner's tellers" allowed
Irene Yabut to carry out her modus operandi undetected over a period of one year, "their negligence
cannot but be gross." (Rollo, p. 55; see also Rollo pp. 58 to 59). This rules out the possibility that
there may have been some form of collusion between Yabut and bank teller Mabayad. Mabayad
was just unfortunate that private respondent's documentary evidence showed that she was the
attending teller in the bulk of Yabut's transactions with the bank.

Going back to Yabut's modus operandi, it is not disputed that each time Yabut would transact
business with PBC's tellers, she would accomplish two (2) copies of the current account deposit slip.
PBC's deposit slip, as issued in 1975, had two parts. The upper part was called the depositor's stub
and the lower part was called the bank copy. Both parts were detachable from each other. The
deposit slip was prepared and signed by the depositor or his representative, who indicated therein
the current account number to which the deposit was to be credited, the name of the depositor or
current account holder, the date of the deposit, and the amount of the deposit either in cash or in
checks. (Rollo, p. 137)

Since Yabut deposited money in cash, the usual bank procedure then was for the teller to count
whether the cash deposit tallied with the amount written down by the depositor in the deposit slip. If it
did, then the teller proceeded to verify whether the current account number matched with the current
account name as written in the deposit slip.

In the earlier days before the age of full computerization, a bank normally maintained a ledger which
served as a repository of accounts to which debits and credits resulting from transactions with the
bank were posted from books of original entry. Thus, it was only after the transaction was posted in
the ledger that the teller proceeded to machine validate the deposit slip and then affix his signature
or initial to serve as proof of the completed transaction.

It should be noted that the teller validated the depositor's stub in the upper portion and the bank copy
on the lower portion on both the original and duplicate copies of the deposit slips presented by
Yabut. The teller, however, detached the validated depositor's stub on the original deposit slip and
allowed Yabut to retain the whole validated duplicate deposit slip that bore the same account
number as the original deposit slip, but with the account name purposely left blank by Yabut, on the
assumption that it would serve no other purpose but for a personal record to complement the original
validated depositor's stub.
Thus, when Yabut wrote the name of RMC on the blank account name on the validated duplicate
copy of the deposit slip, tampered with its account number, and superimposed RMC's account
number, said act only served to cover-up the loss already caused by her to RMC, or after the deposit
slip was validated by the teller in favor of Yabut's husband. Stated otherwise, when there is a clear
evidence of tampering with any of the material entries in a deposit slip, the genuineness and due
execution of the document become an issue in resolving whether or not the transaction had been fair
and regular and whether the ordinary course of business had been followed by the bank.

It is logical, therefore, to conclude that the legal or proximate cause of RMC's loss was when Yabut,
its employee, deposited the money of RMC in her husband's name and account number instead of
that of RMC, the rightful owner of such deposited funds. Precisely, it was the criminal act of Yabut
that directly caused damage to RMC, her employer, not the validation of the deposit slip by the teller
as the deposit slip was made out by Yabut in her husband's name and to his account.

Even if the bank teller had required Yabut to completely fill up the duplicate deposit slip, the original
deposit slip would nonetheless still be validated under the account of Yabut's husband. In fine, the
damage had already been done to RMC when Yabut deposited its funds in the name and account
number of her husband with petitioner bank. It is then entirely left to speculation what Yabut would
have done afterwards — like tampering both the account number and the account name on the stub
of the original deposit slip and on the duplicate copy — in order to cover up her crime.

Under the circumstances in this case, there was no way for PBC's bank tellers to reasonably foresee
that Yabut might or would use the duplicate deposit slip to cover up her crime. In the first place, the
bank tellers were absolutely unaware that a crime had already been consummated by Yabut when
her transaction by her sole doing was posted in the ledger and validated by the teller in favor of her
husband's account even if the funds deposited belonged to RMC.

The teller(s) in this case were not in any way proven to be parties to the crime either as accessories
or accomplices. Nor could it be said that the act of posting and validation was in itself a negligent act
because the teller(s) simply had no choice but to accept and validate the deposit as written in the
original deposit slip under the account number and name of Yabut's husband. Hence, the act of
validating the duplicate copy was not the proximate cause of RMC's injury but merely a remote
cause which an independent cause or agency merely took advantage of to accomplish something
which was not the probable or natural effect thereof. That explains why Yabut still had to tamper with
the account number of the duplicate deposit slip after filling in the name of RMC in the blank space.

Coming now to the doctrine of "last clear chance," it is my considered view that the doctrine
assumes that the negligence of the defendant was subsequent to the negligence of the plaintiff and
the same must be the proximate cause of the injury. In short, there must be a last and
a clear chance, not a last possible chance, to avoid the accident or injury. It must have been a
chance as would have enabled a reasonably prudent man in like position to have acted effectively to
avoid the injury and the resulting damage to himself.

In the case at bar, the bank was not remiss in its duty of sending monthly bank statements to private
respondent RMC so that any error or discrepancy in the entries therein could be brought to the
bank's attention at the earliest opportunity. Private respondent failed to examine these bank
statements not because it was prevented by some cause in not doing so, but because it was
purposely negligent as it admitted that it does not normally check bank statements given by banks.

It was private respondent who had the last and clear chance to prevent any further misappropriation
by Yabut had it only reviewed the status of its current accounts on the bank statements sent to it
monthly or regularly. Since a sizable amount of cash was entrusted to Yabut, private respondent
should, at least, have taken ordinary care of its concerns, as what the law presumes. Its negligence,
therefore, is not contributory but the immediate and proximate cause of its injury.

I vote to grant the petition.

Separate Opinions

PADILLA, J., dissenting:

I regret that I cannot join the majority in ruling that the proximate cause of the damage suffered by
Rommel's Marketing Corporation (RMC) is mainly "the wanton and reckless negligence of the
petitioner's employee in validating the incomplete duplicate deposit slips presented by Ms. Irene
Yabut" (Decision, p. 15). Moreover, I find it difficult to agree with the ruling that "petitioners are
entitled to claim reimbursement from her (the bank teller) for whatever they shall be ordered to pay
in this case."

It seems that an innocent bank teller is being unduly burdened with what should fall on Ms. Irene
Yabut, RMC's own employee, who should have been charged with estafa or estafa through
falsification of private document. Interestingly, the records are silent on whether RMC had ever filed
any criminal case against Ms. Irene Yabut, aside from the fact that she does not appear to have
been impleaded even as a party defendant in any civil case for damages. Why is RMC insulating
Ms. Irene Yabut from liability when in fact she orchestrated the entire fraud on RMC, her employer?

To set the record straight, it is not completely accurate to state that from 5 May 1975 to 16 July
1976, Miss Irene Yabut had transacted with PCIB (then PBC) through only one teller in the person of
Azucena Mabayad. In fact, when RMC filed a complaint for estafa before the Office of the Provincial
Fiscal of Rizal, it indicted all the tellers of PCIB in the branch who were accused of conspiracy to
defraud RMC of its current account deposits. (See Annex B, Rollo p. 22 and 47).

Even private respondent RMC, in its Comment, maintains that "when the petitioner's tellers" allowed
Irene Yabut to carry out her modus operandi undetected over a period of one year, "their negligence
cannot but be gross." (Rollo, p. 55; see also Rollo pp. 58 to 59). This rules out the possibility that
there may have been some form of collusion between Yabut and bank teller Mabayad. Mabayad
was just unfortunate that private respondent's documentary evidence showed that she was the
attending teller in the bulk of Yabut's transactions with the bank.

Going back to Yabut's modus operandi, it is not disputed that each time Yabut would transact
business with PBC's tellers, she would accomplish two (2) copies of the current account deposit slip.
PBC's deposit slip, as issued in 1975, had two parts. The upper part was called the depositor's stub
and the lower part was called the bank copy. Both parts were detachable from each other. The
deposit slip was prepared and signed by the depositor or his representative, who indicated therein
the current account number to which the deposit was to be credited, the name of the depositor or
current account holder, the date of the deposit, and the amount of the deposit either in cash or in
checks. (Rollo, p. 137)

Since Yabut deposited money in cash, the usual bank procedure then was for the teller to count
whether the cash deposit tallied with the amount written down by the depositor in the deposit slip. If it
did, then the teller proceeded to verify whether the current account number matched with the current
account name as written in the deposit slip.
In the earlier days before the age of full computerization, a bank normally maintained a ledger which
served as a repository of accounts to which debits and credits resulting from transactions with the
bank were posted from books of original entry. Thus, it was only after the transaction was posted in
the ledger that the teller proceeded to machine validate the deposit slip and then affix his signature
or initial to serve as proof of the completed transaction.

It should be noted that the teller validated the depositor's stub in the upper portion and the bank copy
on the lower portion on both the original and duplicate copies of the deposit slips presented by
Yabut. The teller, however, detached the validated depositor's stub on the original deposit slip and
allowed Yabut to retain the whole validated duplicate deposit slip that bore the same account
number as the original deposit slip, but with the account name purposely left blank by Yabut, on the
assumption that it would serve no other purpose but for a personal record to complement the original
validated depositor's stub.

Thus, when Yabut wrote the name of RMC on the blank account name on the validated duplicate
copy of the deposit slip, tampered with its account number, and superimposed RMC's account
number, said act only served to cover-up the loss already caused by her to RMC, or after the deposit
slip was validated by the teller in favor of Yabut's husband. Stated otherwise, when there is a clear
evidence of tampering with any of the material entries in a deposit slip, the genuineness and due
execution of the document become an issue in resolving whether or not the transaction had been fair
and regular and whether the ordinary course of business had been followed by the bank.

It is logical, therefore, to conclude that the legal or proximate cause of RMC's loss was when Yabut,
its employee, deposited the money of RMC in her husband's name and account number instead of
that of RMC, the rightful owner of such deposited funds. Precisely, it was the criminal act of Yabut
that directly caused damage to RMC, her employer, not the validation of the deposit slip by the teller
as the deposit slip was made out by Yabut in her husband's name and to his account.

Even if the bank teller had required Yabut to completely fill up the duplicate deposit slip, the original
deposit slip would nonetheless still be validated under the account of Yabut's husband. In fine, the
damage had already been done to RMC when Yabut deposited its funds in the name and account
number of her husband with petitioner bank. It is then entirely left to speculation what Yabut would
have done afterwards — like tampering both the account number and the account name on the stub
of the original deposit slip and on the duplicate copy — in order to cover up her crime.

Under the circumstances in this case, there was no way for PBC's bank tellers to reasonably foresee
that Yabut might or would use the duplicate deposit slip to cover up her crime. In the first place, the
bank tellers were absolutely unaware that a crime had already been consummated by Yabut when
her transaction by her sole doing was posted in the ledger and validated by the teller in favor of her
husband's account even if the funds deposited belonged to RMC.

The teller(s) in this case were not in any way proven to be parties to the crime either as accessories
or accomplices. Nor could it be said that the act of posting and validation was in itself a negligent act
because the teller(s) simply had no choice but to accept and validate the deposit as written in the
original deposit slip under the account number and name of Yabut's husband. Hence, the act of
validating the duplicate copy was not the proximate cause of RMC's injury but merely a remote
cause which an independent cause or agency merely took advantage of to accomplish something
which was not the probable or natural effect thereof. That explains why Yabut still had to tamper with
the account number of the duplicate deposit slip after filling in the name of RMC in the blank space.

Coming now to the doctrine of "last clear chance," it is my considered view that the doctrine
assumes that the negligence of the defendant was subsequent to the negligence of the plaintiff and
the same must be the proximate cause of the injury. In short, there must be a last and
a clear chance, not a last possible chance, to avoid the accident or injury. It must have been a
chance as would have enabled a reasonably prudent man in like position to have acted effectively to
avoid the injury and the resulting damage to himself.

In the case at bar, the bank was not remiss in its duty of sending monthly bank statements to private
respondent RMC so that any error or discrepancy in the entries therein could be brought to the
bank's attention at the earliest opportunity. Private respondent failed to examine these bank
statements not because it was prevented by some cause in not doing so, but because it was
purposely negligent as it admitted that it does not normally check bank statements given by banks.

It was private respondent who had the last and clear chance to prevent any further misappropriation
by Yabut had it only reviewed the status of its current accounts on the bank statements sent to it
monthly or regularly. Since a sizable amount of cash was entrusted to Yabut, private respondent
should, at least, have taken ordinary care of its concerns, as what the law presumes. Its negligence,
therefore, is not contributory but the immediate and proximate cause of its injury.

I vote to grant the petition.

G.R. No. 227005

BDO UNIBANK, INC., Petitioner

vs.
ENGR. SELWYN LAO, doing business under the name and style "SELWYN F. LAO
CONSTRUCTION" AND "WING AN CONSTRUCTION AND DEVELOPMENT CORPORATION"
and INTERNATIONAL EXCHANGE BANK (now UNION BANK OF THE PHILIPPINES),,
Respondents

DECISION

MENDOZA, J.:

This is a petition for review on certiorari seeking to reverse and set aside the October 14, 2015
Decision  and the September 5, 2016 Resolution  of the Court of Appeals (CA) in CA-G.R. CV No.
1 2

100351, which affirmed, with modification, the July 9, 2012 Decision  of the Regional Trial Court,
3

Branch 55, Manila (RTC) in Civil Case No. 99-93068, a case for collection of sum of money.

The Antecedents

On March 9, 1999, respondent Engineer Selwyn S. Lao (Lao) filed before the RTC a complaint for
collection of sum of money against Equitable Banking Corporation, now petitioner Banco de Oro
Unibank (BDO), Everlink Pacific Ventures, Inc. (Ever/ink), and Wu Hsieh a.k.a.George Wu (Wu).

In his complaint, Lao alleged that he was doing business under the name and style of "Selwyn Lao
Construction"; that he was a majority stockholder of Wing An Construction and Development
Corporation (WingAn); that he entered into a transaction with Ever link, through its
authorizedrepresentative Wu, under which, Everlink would supply him with "HCG sanitary wares";
and that for the down payment, he issued two (2) Equitable crossed checks payable to Everlink:
Check No. 0127-242249  and Check No. 0127-242250,  in the amounts of ₱273,300.00 and
4 5

₱336,500.00, respectively.

Lao further averred that when the checks were encashed, he contacted Everlink for the immediate
delivery of the sanitary wares, but the latter failed to perform its obligation. Later, Lao learned that
the checks were deposited in two different bank accounts at respondent International Exchange
Bank, now respondent Union Bank of the Philippines (UnionBank). He was later informed that the
two bank accounts belonged to Wuand a company named New Wave Plastic (New
Wave), represented by a certain Willy Antiporda (Antiporda). Consequently, Lao was prompted to file
a complaint against Everlink and Wu for their failure to comply with their obligation and against BDO
for allowing the encashment of the two (2) checks. He later withdrew his complaint against Everlink
as the corporation had ceased existing.

In its answer, BDO asserted that it had no obligation to ascertain the owner of the account/s to which
the checks were deposited because the instruction to deposit the said checks to the payee's account
only was directed to the payee and the collecting bank, which in this case was Union Bank; that as
the drawee bank, its obligations consist in examining the genuineness of the signatures appearing
on the checks, and paying the same if there were sufficient funds in the account under which the
checks were drawn; and that the subject checks were properly negotiated and paid in accordance
with the instruction of Lao in crossing them as they were deposited to the account of the payee Ever
link with Union Bank, which then presented them for payment with BDO.

On August 24, 2001, Lao filed an Amended Complaint, wherein he impleaded Union Bank as
additional defendant for allowing the deposit of the crossed checks in two bank accounts other than
the payee's, in violation of its obligation to deposit the same only to the payee's account.

In its answer, Union Bank argued that Check No. 0127-242249 was deposited in the account of
Everlink; that Check No. 0127-242250 was validly negotiated by Everlink to New Wave; that Check
No. 0127-242250 was presented for payment to BDO, and the proceeds thereof were credited to
New Wave's account; that it was under no obligation to deposit the checks only in the account of
Everlink because there was nothing on the checks which would indicate such restriction; and that a
crossed check continues to be negotiable, the only limitation being that it should be presented for
payment by a bank.

During trial, BDO presented as its witnesses Elizabeth P. Tinimbang (Tinimbang) and Atty. Carlos
Buenaventura (Atty. Buenaventura).

Tinimbang testified that Everlink was the payee of the two (2) crossed checks issued by their client,
Wing An; that the checks were deposited with Union Bank, which presented them to BDO for
payment. She further narrated that after the checks were cleared and that the drawer's signatures on
the checks were determined to be genuine, that there was sufficient fund to cover the amounts of the
checks, and that there was no order to stop payment, the checks were paid by BDO. Tinimbang
continued that sometime in July 1998, BDO received a letter from Wing An stating that the amounts
of the checks were not credited to Everlink's account. This prompted BDO to write a letter to Union
Bank demanding the latter to refund the amounts of the checks. In a letter-reply, Union Bank claimed
that the checks were deposited in the account of Everlink.

Atty. Buenaventura claimed that BDO gave credence to Union Bank's representation that the checks
were indeed credited to the account of Everlink. He stated that BDO's only obligations under the
circumstances were to ascertain the genuineness of the checks, to determine if the account was
sufficiently funded and to credit the proceeds to the collecting bank. On cross-examination, Atty.
Buenaventura clarified that Union Bank endorsed the crossed checks as could be seen on the dorsal
portion of the subject checks. According to him, such endorsement meant that the lack of prior
endorsement was guaranteed by Union Bank.

For its part, Union Bank presented as its witness Jojina Lourdes C. Vega (Vega), its Branch
Business Manager. Vega testified that the transaction history of Everlink's account with Union Bank
and the notation at the back of the check indicating Everlink's Account No. (005030000925) revealed
that the proceeds of Check No. 0127-242249 were duly credited to Everlink's account on September
22, 1997. As regards Check No. 0127-242250, Vega clarified that the proceeds of the same were
credited to New Wave's account. She explained that New Wave was a valued client of Union Bank.
As a form of accommodation extended to valued clients, Union Bank would request the signing of a
second endorsement agreement because the payee was not the same as the account holder. In this
case, Antiporda executed a Deed of Undertaking (Second Endorsed Checks) wherein he assumed
the responsibilities for the correctness, genuineness, and validity of the subject checks.

The RTC Ruling

In its Decision, dated July 9, 2012, the RTC absolved BDO from any liability, but ordered Union Bank
to pay Lao the amount of ₱336,500.00, representing the value of Check No. 0127-242250;
₱50,000.00 as moral damages; ₱l00,000.00 as exemplary damages; and ₱50,000.00 as attorney's
fees.

The RTC observed that there was nothing irregular with the transaction of Check No. 0127-242249
because the same was deposited in Everlink's account with Union Bank. It, however, found that
Check No. 0127-242250 was irregularly deposited and encashed because it was not issued for the
account of Everlink, the payee, but for the account of New Wave. The trial court noted further that
Check No. 0127-242250 was not even endorsed by Everlink to New Wave. Thus, it opined that
Union Bank was negligent in allowing the deposit and encashment of the said check without proper
endorsement. The R TC wrote that considering that the subject check was a crossed check, Union
Bank failed to take reasonable steps in order to determine the validity of the representations made
by Antiporda. In the end, it adjudged that BDO could not be held liable because of Union Bank's
warranty when it stamped on the check that "all prior endorsement and/or lack of endorsement
guaranteed." The dispositive portion of the decision reads:

WHEREFORE, premises considered, judgment is herebyrendered in FAVOR of the plaintiff Engr.

Selwyn F. Lao and AGAINST the defendant International Exchange Bank (now Union Bank)
ordering the latter to pay the former the following:

1. The amount of Three Hundred Thirty Six Thousand Five Hundred Pesos (₱336,500.oo)
representing the Equitable Bank Check No. 0127-242250;

2. The amount of Fifty Thousand Pesos (₱50,ooo.oo) representing moral damages;

3. The amount of One Hundred Thousand Pesos (₱100,ooo.oo) representing exemplary

damages; and,

4. The amount of Fifty Thousand Pesos (₱50,ooo.oo) as attorney's fees.

The Complaints against defendants Equitable Banking Corporation (now Banco de Oro) and Wu
Shu Chien a.k.a. George Wu are hereby ordered DISMISSED.

Costs against the defendant International and Exchange Bank (now Union Bank).

SO ORDERED.  6

Aggrieved, Union Bank elevated an appeal to the CA.  7

The CA Ruling

In its assailed Decision, dated October 14, 2015, the CA affirmed, with modification, the ruling of the
R TC. It ordered BDO to pay Lao the amount of ₱336,500.00, with legal interest from the time of
filing of the complaint until its full satisfaction. The appellate court further directed Union Bank to
reimburse BDO the aforementioned amount. It concurred with the RTC that Union Bank was liable
because of its negligence and its guarantee on the validity of all prior endorsements or lack of it.

With regard to BDO's liability, the CA explained that it violated its duty to charge to the drawer's
account only those authorized by the latter when it paid the value of Check No. 0127-242250. Thus,
it held that BDO was liable for the amount charged to the drawer's account. The fallo reads:
FOR THESE REASONS, the appeal is PARTLY GRANTED. The July 9, 2012 Decision of the
Regional Trial Court of Manila, Branch 55 is AFFIRMED with MODIFICATIONS that Equitable Bank
is ordered to pay Selwyn Lao the amount corresponding to Check No. 0127-242250, i.e.,
₱336,500.oo, with legal interest from the time of filing of the complaint until the amount is fully paid.
International Exchange Bank (now Union Bank of the Philippines) is ordered to reimburse Equitable
Bank the abovementioned amount. The award of damages and attorney's fees is DELETED. The
rest of the Decision stands.

SO ORDERED. 8

On November 5, 2012, BDO filed its Motion for Partial Reconsideration. It argued that neither Lao
nor Union Bank appealed the dismissal of the complaint against it, thus, the RTC decision had
already attained finality as far as it was concerned. It also prayed that Lao should be allowed to
recover directly from Union Bank.

In its assailed Resolution, dated September 6, 2016, the CA denied BDO's Motion for Partial
Reconsideration. It ratiocinated that in Bank ofAmerica, NT & SA v. Associated Citizens
Bank,   (Bank of America) thedrawee bank was adjudged liable for the amount charged to the
9

drawer's account, while the collecting bank was ordered to reimburse the drawee bank whatever
amount the latter was made to pay.

Hence, this petition anchored on the following:

GROUNDS

I.

ISSUES NOT RAISED BY THE PARTIES ON APPEAL CANNOT BE REVIEWED NOR RULED
UPON BY THE APPELLATE COURT.

II.

A COLLECTING BANK ASSUMES RESPONSIBILITY FOR A CROSSED CHECK AS A GENERAL

ENDORSER IN ACCORDANCE WITH SECTION 66 OF THE NEGOTIABLE INSTRUMENTS LAW.

III.

THE PARTY WHICH DID NOT EXERCISE THE REQUIRED DILIGENCE IS THE CAUSE OF THE
LOSS AND BEARS THE DAMAGES.  10

BDO argued that the CA's order for it to pay Lao was erroneous as the RTC had already adjudged
with finality that it was not liable. It posited that the appellate court could not resolve issues not
raised on appeal by both parties thereto. BDO pointed out that it was not a party in the appeal before
the CA. It further stressed that neither Lao nor Union Bank assailed the R TC decision with respect
to the dismissal of the complaint against it during the appeal before the CA, and even on motion for
reconsideration before the R TC. Thus, for failure to appeal therefrom, the R TC decision had
already attained finality as to BDO.

BDO further averred that Union Bank, as the collecting bank and last endorser, must suffer the loss
because it had the duty to ascertain the genuineness of all prior endorsement. It asserted that as the
drawee bank, it could not be held liable because it merely relied on Union Bank's express guarantee.
It added that the proximate cause of the loss suffered by Lao was the negligence of Union Bank
when it allowed the deposit of the crossed check intended for Everlink to New Wave's account.

In his Comment,   dated January 26,2017, Lao asserted that the CA did not commit any error when
11

it resolved the issue on the liability of BDO even if it was not raised on appeal. He was of the view
that the said issue was inextricably intertwined with the principal issue. Lao stated that the CA
correctly adjudged BDO liable, without prejudice to its right to seek reimbursement from Union Bank,
as it was the correct sequence in the enforcement of payment in cases where the collecting bank
allowed a crossed check to be deposited in the account of a person other than the payee.

Union Bank did not file any comment on BDO's petition.

The Court's Ruling

The petition is meritorious.

Ordinarily, this Court would have concurred with the CA as regards the applicability of Bank of
America. There is, however, a peculiar circumstance which would prevent the application of Bank of
America in the present case.

Sequence of Recovery in cases of unauthorized payment of checks

The Court agrees with the appellate court that in cases of unauthorized payment of checks to a
person other than the payee named therein, the drawee bank may be held liable to the drawer. The
drawee bank, in turn, may seek reimbursement from the collecting bank for the amount of the check.
This rule on the sequence of recovery in case of unauthorized check transactions had already been
deeply embedded in jurisprudence.  12

The liability of the drawee bank is based on its contract with the drawer and its duty to charge to the
latter's accounts only those payables authorized by him. A drawee bank is under strict liability to pay
the check only to the payee or to the payee's order. When the drawee bank pays a person other
than the payee named in the check, it does not comply with the terms of the check and violates its
duty to charge the drawer's account only for properly payable items.  13

On the other hand, the liability of the collecting bank is anchored on its guarantees as the last
endorser of the check. Under Section 66 of the Negotiable Instruments Law, an endorser warrants
"that the instrument is genuine and in all respects what it purports to be; that he has good title to it;
that all prior parties had capacity to contract; and that the instrument is at the time of his
endorsement valid and subsisting."

It has been repeatedly held that in check transactions, the collecting bank generally suffers the loss
because it has the duty to ascertain the genuineness of all prior endorsements considering that the
act of presenting the check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the endorsements. If any of the
warranties made by the collecting bank turns out to be false, then the drawee bank may recover
from it up to the amount of the check.  14

In the present case, BDO paid the value of Check No. 0127-242250 to Union Bank, which, in turn,
credited the amount to New Wave's account. The payment by BDO was in violation of Lao's
instruction because the same was not issued in favor of Everlink, the payee named in the check. It
must be pointed out that the subject check was not even endorsed by Everlink to New Wave.
Clearly, BDO violated its duty to charge to Lao's account only those payables authorized by him.

Nevertheless, even with such clear violation by BDO of its duty, the loss would have ultimately
pertained to Union Bank. By stamping at the back of the subject check the phrase "all prior
endorsements and/or lack of it guaranteed," Union Bank had, for all intents and purposes treated the
check as a negotiable instrument and, accordingly, assumed the warranty of an endorser. Without
such warranty, BDO would not have paid the proceeds of the check. Thus, Union Bank cannot now
deny liability after the aforesaid warranty turned out to be false. 
15

Union Bank was clearly negligent when it allowed the check to be presented by, and deposited in the
account of New Wave, despite knowledge that it was not the payee named therein. Further, it could
not have escaped its attention that the subject checks were crossed checks.

A crossed check is one where two parallel lines are drawn across its face or across the comer
thereof. A check may be crossed generally or specially. A check is crossed especially when the
name of a particular banker or company is written between the parallel lines drawn. It is crossed
generally when only the words "and company" are written at all between the parallel lines.  16

Jurisprudence dictates that the effects of crossing a check are: (1) that the check may not be
encashed but only deposited in the bank; (2) that the check may be negotiated only once - to one
who has an account with a bank; and (3) that the act of crossing the check serves as a warning to
the holder that the check has been issued for a definite purpose so that he must inquire if he has
received the check pursuant to that purpose.   The effects of crossing a check, thus, relate to the
17

mode of payment, meaning that the drawer had intended the check for deposit only by the rightful
person, i.e., the payee named therein. 18

It is undisputed that Check No. 0127-242250 had been crossed generally as nothing was written
between the parallel lines appearing on the face of the instrument. This indicated that Lao, the
drawer, had intended the same for deposit only to the account of Everlink, the payee named therein.
Despite this clear intention, however, Union Bank negligently allowed the deposit of the proceeds of
the said check in the account of New Wave.

Generally, BDO must be ordered to pay Lao the value of the subject check; whereas, Union Bank
would be ordered to reimburse BDO the amount of the check. The aforesaid sequence of recovery,
however, is not applicable in the present case due to the presence of certain factual peculiarities.

Simplification of the proceedings for Recovery

Although the rule on the sequence of recovery has been deeply engrained in jurisprudence, there
may be exceptional circumstances which would justify its simplification.  Stated differently, the
1âwphi1

aggrieved party may be allowed to recover directly from the person which caused the loss when
circumstances warrant. In Associated Bank v. Court of Appeals (AssociatedBank),   the person who
19

suffered the loss as a result of the unauthorizedencashment of crossed checks was allowed to
recover the loss directly from the negligent bank despite the latter's contention of lack of privity of
contract. The Court said:

There being no evidence that the crossed checks were actually received by the private respondent,
she would have a right of action against the drawer companies, which in turn could go against their
respective drawee banks, which in turn could sue the herein petitioner as collecting bank. In a similar
situation, it was held that, to simplify proceedings, the payee of the illegally encashed checks should
be allowed to recover directly from the bank responsible for such encashment regardless of whether
or not the checks were actually delivered to the payee. We approve such direct action in the case at
bar.20

A peculiar circumstance in Associated Bank is the fact that the drawer companies, which should
have been directly liable to the aggrieved payee, were not impleaded as parties in the suit. In this
regard, it is a fundamental principle in this jurisdiction that a person cannot be prejudiced by a ruling
rendered in an action or proceeding in which he has not been made a party. This principle conforms
to the constitutional guarantee of due process of law.  To the mind of the Court, this principle was a
21

foremost underlying consideration for allowing the direct recovery by the payee from the negligent
collecting bank.

Finality of the RTC decisionwith respecttoBDOjustifiesthe simplification of the proceedings for

recovery.

BDO argues that the appellate court erred in ordering it to pay the amount of the subject check to
Lao because it was no longer a party in the case, not being impleaded in the appeal, and that the
issue as regards its had liability already been settled with finality by the R TC.

The Court agrees.

It has been held that it is not the caption of the pleading, but the allegations therein that are
controlling. The non-inclusion of a party in the title of the pleading is not fatal to the case, provided
there is a statement in the body indicating that such non-included person is a party to the case. 22

BDO was not impleaded as a party in Union Bank's appeal before the CA. This is evident from the
title of the case before the CA, and the respective briefs of Union Bank and Lao, which mentioned
only Lao and Union Bank as parties thereto. Moreover, in their respective briefs before the appellate
court, neither Lao  nor Union Bank  made any statement or raised any issue on BDO's liability and
23 24

its inclusion as a party in the appeal.

Consequently, because of Lao and Union Bank's failure to appeal the July 9, 2012 Decision of the
RTC with respect to BDO's lack of liability, said decision became final as to the latter.

The finality of the July 9, 2012 RTC Decision as to BDO, which absolved it from any liability,
necessarily means that it could not be prejudiced or adversely affected by the decision rendered in
the appeal. It is elementary in this jurisdiction that a person cannot be bound by a decision wherein it
was not a party.  A contrary finding would violate BDO's constitutional right to due· process.
25

Needless to state, the appellate court erred in ordering BDO to pay the amount of the subject check
because the latter was not made a party in the appeal, and the issue as to its liability or lack thereof,
was not raised on appeal.

From the foregoing, the Court is of the considered view that the pronouncements made
in Associated Bank as regards the simplification of the recovery proceedings are applicable in the
present case. The factual milieu of this case are substantially similar with that of Associated Bank,
i.e., a crossed check was presented and deposited, without authority, in the account of a person
other than the payee named therein; the collecting bank endorsed the crossed check and warrant
the validity of all prior endorsements and/or lack of it; the warranty turned out to be false; and, a
party to the check transaction, which would otherwise be held liable to the party aggrieved, was not
made a party in the proceedings in court.
To summarize, Lao, the drawer of the subject check, has a right of action against BDO for its failure
to comply with its duty as the drawee bank. BDO, in turn, would have a right of action against Union
Bank because of the falsity of its warranties as the collecting bank. Considering, however, that BDO
was not made a party in the appeal, it could no longer be held liable to Lao. Thus,
following Associated Bank, the proceedings for recovery must be simplified and Lao should be
allowed to recover directly from Union Bank.

WHEREFORE, the petition is GRANTED. The October 14, 2015 Decision and the September 5,
2016 Resolution of the Court of Appeals in CA-G.R. CV No. 100351 are hereby REVERSED and
SET ASIDE insofar as it ordered petitioner BDO Unibank, Inc. to pay Selwyn Lao the amount of
Check No. 0127-242250. The rest of the decision is AFFIRMED.

The amount shall earn interest at the rate of twelve percent (12%) perannum from August 24, 2001,
the date of judicial demand, to June 30, 2013.From July 1, 2013, the rate shall be six percent
(6%) per annum until full satisfaction.
 G.R. No. 235511, June 20, 2018

METROPOLITAN BANK AND TRUST COMPANY, Petitioner, v. JUNNEL'S

MARKETING CORPORATION, PURIFICACION DELIZO, AND BANK OF
COMMERCE, Respondents.

G.R. No. 235565, June 20, 2018

BANK OF COMMERCE, Petitioner, v. JUNNEL'S MARKETING CORPORATION,

PURIFICACION DELIZO, AND METROPOLITAN BANK AND TRUST
COMPANY, Respondents.

DECISION

VELASCO JR., J.:

At bench are two appeals1 assailing the Decision2 dated 22 March 2017 and

Resolution3 dated 19 October 2017 of the Court of Appeals (CA) in CA-G.R. CV No.
102462. The first appeal was filed by the Metropolitan Bank and Trust Company
(Metrobank), while the second by the Bank of Commerce (Bankcom).

The facts are as follows:

Respondent Junnel's Marketing Corporation (JMC) is a domestic corporation engaged in

the business of selling wines and liquors. It has a current account with Metrobank 4 from
which it draws checks to pay its different suppliers. Among JMC's suppliers are Jardine
Wines and Spirits (Jardine) and Premiere Wines (Premiere).

In 2000, during an audit of its financial records, 5 JMC discovered an anomaly involving
eleven (11) checks (subject checks) it had issued to the orders of Jardine and Premiere
on various dates between October 1998 to May 1999. As it was, the subject checks had
already been charged against JMC's current account but were, for some reason, not
covered by any official receipt from Jardine or Premiere. The subject checks, which are
all crossed checks and amounting to P1,481,292.00 in total, are as follows:

Checks Payable to the Order of Jardine:

1. Check No. 3010048953 - issued on 11 October 1998 in the amount of

P181,440.00

2. Check No. 3010048955 - issued on 24 October 1998 in the amount of

P195,840.00

3. Check No. 3010069098 - issued on 18 May 1999 in the amount of P58,164.56

4. Check No. 3010069099 - issued on 18 May 1999 in the amount of P44,651.52

 5. Check No. 3010049551 - issued on 25 May 1999 in the amount of P103,680.00

6. Check No. 3010049550 - issued on 30 May 1999 in the amount of P103,680.00

7. Check No. 3010048954 - issued on 29 December 1998 in the amount of

P195,840.00

Checks Payable to the Order of Premiere:

1. Check No. 3010049149 - issued on 9 December 1998 in the amount of

P136,220.00

2. Check No. 3010049148 - issued on 16 December 1998 in the amount of

P136,220.00

3. Check No. 3010049410 - issued on 18 April 1999 in the amount of P189,336.00.

4. Check No. 3010049150 - issued on 27 November 1998 in the amount of

P136,220.00

Examination of the dorsal portion of the subject checks revealed that all had been
deposited with Bankcom, Dau branch, under Account No. 0015-32987-7. 6 Upon
inquiring with Jardine and Premiere, however, JMC was able to confirm that neither of
the said suppliers owns Bankcom Account No. 0015-32987-7.

Meanwhile, on 30 April 2000, respondent Purificacion Delizo (Delizo), a former

accountant of JMC, executed a handwritten letter7 addressed to one Nelvia Yusi,
President of JMC. In the said letter, Delizo confessed that, during her time as an
accountant for JMC, she stole several company checks drawn against JMC's current
account. She professed that the said checks were never given to the named payees but
were forwarded by her to one Lita Bituin (Bituin). Delizo further admitted that she,
Bituin and an unknown bank manager colluded to cause the deposit and encashing of
the stolen checks and shared in the proceeds thereof.

JMC surmised that the subject checks are among the checks purportedly stolen by
Delizo.

On 28 January 2002, JMC filed before the Regional Trial Court (RTC) of Pasay City a
complaint for sum of money8 against Delizo, Bankcom and Metrobank. The complaint
was raffled to Branch 115 and was docketed as Civil Case No. 02-0193.

In its complaint, JMC alleged that the wrongful conversion of the subject checks was
caused by a combination of the "tortious and felonious" scheme of Delizo and the
"negligent and unlawful acts" of Bankcom and Metrobank, to wit:9

1. Delizo, by her own admission, stole the company checks of JMC. Among these
checks, as confirmed by JMC's audit, are the subject checks.

2. After stealing the subject checks, Delizo and her accomplices, Bituin and an
unknown bank manager, caused the subject checks to be deposited in Bankcom,
 Dau branch, under Account No. 0015-32987-7. Bankcom, on the other hand,
negligently accepted the subject checks for deposit under the said account
despite the fact that they are crossed checks payable to the orders of Jardine
and Premiere and neither of them owns the concerned account.

3. Thereafter, Bankcom presented the subject checks for payment to Metrobank

which, also in negligence, decided to honor the said checks even though
Bankcom Account No. 0015-32987-7 belongs to neither Jardine nor Premiere.

On the basis of the foregoing averments, JMC prayed that Delizo, Bankcom and
Metrobank be held solidarily liable in its favor for the amount of the subject checks.

Delizo, Bankcom and Metrobank filed their individual answers denying

liability.10 Incorporated in Metrobank's answer, moreover, is a cross-claim against
Bankcom and Delizo wherein Metrobank asks for the right to be reimbursed in the
event it is ordered liable in favor of JMC. 11

On 28 May 2013, the RTC rendered a decision12 holding both Bankcom and Metrobank
liable to JMC-on a 2/3 to 1/3 ratio, respectively-for the amount of subject checks plus
interest as well as attorney's fees, but absolving Delizo from any liability.13 The trial
court, in the same decision, also dismissed Metrobank's cross-claim against Bankcom.
The dispositive portion of the decision reads: 14
WHEREFORE, judgment is rendered against defendants [Bankcom] and [Metrobank] for
the total value of the 11 checks. [Bankcom] and Metrobank are adjudged solidarily
liable to pay [JMC] at the ratios of 2/3 and 1/3, respectively:

1. The actual loss of P 1,481,292 including 6% legal interest from the filing of the
complaint;

2. Plus 12% interest on the principal of P 1,481,292 including 6% interest on the

principal, from the date this Decision becomes final and executory;

3. The attorney's fees of 15% of the total of number one and two above;

4. Costs against [Bankcom] and Metrobank.

Metrobank's cross-claim against [Bankcom] is DISMISSED, both being negligent.

SO ORDERED.
The RTC's decision was hinged on the following findings: 15

1. The subject checks were complete and not forged. They were, however, stolen
by unknown malefactors and were wrongfully encashed due to the negligence of
Bankcom and Metrobank.

2. Delizo's complicity in the acquisition and negotiation of the subject checks was
not proven. No direct evidence linking Delizo to the deeds was presented.
Moreover, Delizo's supposed handwritten confession must be discredited for
being made under duress, intimidation and threat. It was established during trial
that Delizo was only forced by Yusi to confess about the missing checks and to
 execute the handwritten confession. Hence, Delizo must be absolved from any
liability.

3. The involvement of Bankcom and Metrobank on the wrongful encashment of the

subject checks, however, were clearly established:
a. Bankcom accepted the subject checks for deposit under Account No.
0015-32987-7, endorsed them and sent them for clearance with the
Philippine Clearing House Corporation (PCHC). Bankcom did all these
despite the fact that the subject checks were ll crossed checks and that
Account No. 0015-32987-7 neither belongs to Jardine nor Premiere-the
payees named in the subject checks. In this regard, Bankcom was clearly
negligent.

b. Metrobank, on the other hand, is also negligent for its failure to scrutinize
the subject checks before clearing and honoring them. Had Metrobank
done so, it would have noticed that Bankcom's ID band stamped at the
back of the subject checks did not contain any initials and are, therefore,
defective. In this regard, Metrobank was remiss in its duty to ensure that
the subject checks are paid only to the named payees.

In view of the comparative negligence of Bankcom and Metrobank, they should

be held liable to JMC, on a 2/3 to 1/3 ratio, respectively, for the amount of
subject checks plus interest.

Bankcom and Metrobank filed their respective appeals with the CA.

On 22 March 2017, the CA rendered its decision16 affirming, albeit with modification, the
decision of the RTC. The disposition of the decision reads: 17
WHEREFORE, the Decision dated 28 May 2013 of the [RTC] in Civil Case NO. 02-0193 is
AFFIRMED with MODIFICATION in that: (a) the award of attorney's fees is DELETED;
and (b) [Bankcom] and [Metrobank] are ordered to pay interest at the rate of 12% per
annum on the principal of P 1,481,292 including 6% interest on the principal, from the
date of the Decision (28 May 2013) until June 2013 and 6% per annum from 1 July
2013 until full satisfaction. The Decision is affirmed in all other respects.

SO ORDERED.
The CA agreed with the RTC that Bankcom and Metrobank should be held liable to JMC,
on a 2/3 to 1/3 ratio, respectively, for the amount of subject checks. The appellate
court, however, differed with the trial court with respect to the basis of Metrobank's
liability. According to the CA, Metrobank's negligence consisted, not in its inability to
notice that Bankcom's ID band does not contain any initials, but in its failure to
ascertain that only four (4) out of the 11 subject checks were stamped by Bankcom
with the express guarantees "ALL PRIOR ENDORSEMENTS AND/OR LACK OF
ENDORSEMENT GUARANTEED" and "NON-NEGOTIABLE" as required by Section 17 of
the PCHC Rules and Regulations.18

The CA also sustained the ruling of the RTC anent the absolution of Delizo and the
dismissal of Metrobank's cross-claim.
Finally, the CA modified the rate of interest due on the amount of the subject checks
that was fixed by the RTC and also deleted the RTC's award of attorney's fees in favor
of JMC.19

Bankcom and Metrobank filed their motions for reconsideration, but the CA remained
steadfast. Hence the present consolidated appeals.

Both Metrobank and Bankcom pray for absolution but they differ in the arguments they
raise in support of their prayer:20

1. Metrobank posits that it should be absolved because it had exercised absolute

diligence in verifying the genuineness of the subject checks. Metrobank argues
that the RTC erred in holding it negligent on its failure to ascertain that only four
(4) out of the 11 subject checks were stamped with Bankcom's express
guarantees. Metrobank claims that while Section 17 of the PCHC Rules and
Regulations does require all checks cleared through the PCHC to contain the
collecting bank's express guarantees, the same provision precludes it, as a
drawee bank, to return any checks presented to it for payment just because the
same does not contain such express guarantees "for as long as there is evidence
appearing on the cheque itself that the same had been deposited with the
[collecting] [b]ank e.g., PCHC machine sprayed tracer/ID band." In this regard,
Metrobank points out that all the subject checks had been stamped in their
dorsal portion with PCHC's tracer ID for Bankcom.

Metrobank submits that, under the circumstances, it should be Bankcom-as the

last indorser of the subject checks-that should bear the loss and be held solely
liable to JMC.

2. Bankcom, on the other hand, argues that it should be absolved because it was
never a party to the wrongful encashment of the subject checks. It claims that
Account No. 0015-32987-7 does not exist in its system and, therefore, denies
that the subject checks were ever deposited with it.

Bankcom proffers the view that it is JMC that should bear the loss of the subject
checks. Bankcom argues that it was JMC's faulty accounting procedures which
led to the subject checks being stolen and misappropriated.

Our Ruling

The consolidated appeals must be denied as neither Metrobank nor Bankcom are
entitled to absolution.

Be that as it may, there is a need to modify the decision of the CA and the RTC with
respect to the manner by which Metrobank and Bankcom are held liable under the
circumstances. Instead of holding both Metrobank and Bankcom liable to JMC in
accordance with a fixed ratio, we find that the two banks should have been
ordered sequentially liable for the entire amount of the subject checks pursuant to the
seminal case of Bank of America v. Associated Citizens Bank.21

Accordingly, we rule: (1) Metrobank liable to return to JMC the entire amount of the
subject checks plus interest and (2) Bankcom liable to reimburse Metrobank the same
amount plus interest.

The Rule on Sequence of Recovery in Cases of Unauthorized Payment of

Checks; The Case of Bank of America

The instant case involves the unauthorized payment of valid checks, i.e., the payment
of checks to persons other than the payee named therein or his order. The subject
checks herein are considered valid because they are complete and bear genuine
signatures.

Bank of America is the leading jurisprudence that illustrates the respective liabilities of
a collecting bank and a drawee bank in cases of unauthorized payment of valid checks.
Notably, the facts of Bank America are parallel to the facts of the present case.
Both Bank of America and the present case involved crossed checks payable to the
order of a specified payee that were deposited in a collecting bank under an
account not belonging to the payee or his indorsee but which, upon presentment,
were subsequently honored by the drawee bank, thus:

1. Bank of America involved four (4) crossed checks drawn against the Bank of
America (the drawee bank) and made payable to the order of a Miller Offset
Press, Inc. (the designated payee). These checks were then deposited to the
Associated Citizens Bank (the collecting bank) under a joint bank account of one
Ching Uy Seng and a certain Uy Chung Guan Seng (an account that does not
belong to the payee or its indorsee). The checks were then presented to the
Bank of America, which honored it, resulting to loss on the part of BA Finance
Corporation (the drawer.)

2. The instant case involves eleven (11) crossed checks that were drawn against
Metrobank (the drawee bank) and made payable to the orders of Jardine and
Premiere (the designated payees). These checks were deposited with Bankcom
(the collecting bank) under Account No. 0015-32987-7 (an account that does not
belong to either payee or their indorsees). The checks were then presented to
Metrobank, which honored it, resulting to loss on the part of JMC (the drawer.)

Bank of America held that, in cases involving the unauthorized payment of valid

checks, the drawee bank becomes liable to the drawer for the amount of the
checks but the drawee bank, in turn, can seek reimbursement from the
collecting bank. The rationale of this rule on sequence of recovery lies in the very
basis and nature of the liability of a drawee bank and a collecting bank in said cases. As
the recent case of BDO Unibank v. Lao22 explains:
The liability of the drawee bank is based on its contract with the drawer and its duty to
charge to the latter's accounts only those payables authorized by him. A drawee bank is
under strict liability to pay the check only to the payee or to the payee's order. When
the drawee bank pays a person other than the payee named in the check, it does not
comply with the terms of the check and violates its duty to charge the drawer's account
only for properly payable items.

On the other hand, the liability of the collecting bank is anchored on its guarantees as
the last endorser of the check. Under Section 66 of the Negotiable Instruments Law, an
endorser warrants "that the instrument is genuine and in all respects what it purports
to be; that he has good title to it; that all prior parties had capacity to contract; and
that the instrument is at the time of his endorsement valid and subsisting."

It has been repeatedly held that in check transactions, the collecting bank generally
suffers the loss because it has the duty to ascertain the genuineness of all prior
endorsements considering that the act of presenting the check for payment to the
drawee is an assertion that the party making the presentment has done its duty to
ascertain the genuineness of the endorsements. If any of the warranties made by the
collecting bank turns out to be false, then the drawee bank may recover from it up to
the amount of the check. (Citations omitted).
This rule should have been applied to the case at bench.

Metrobank is Liable to JMC

Metrobank, as drawee bank, is liable to return to JMC the amount of the subject checks.

A drawee bank is contractually obligated to follow the explicit instructions of its drawer-
clients when paying checks issued by them. 23 The drawer's instructions-including the
designation of the payee or to whom the check should be paid-are reflected on the face
and by the terms thereof.24 When a drawee bank pays a person other than the payee
named on the check, it essentially commits a breach of its obligation and renders the
payment it made unauthorized.25 In such cases and under normal circumstances, the
drawee bank may be held liable to the drawer for the amount charged against the
latter's account.26

The liability of the drawee bank to the drawer in cases of unauthorized payment of
checks has been regarded in jurispn1dence to be strict by nature.27 This means that
once an unauthorized payment on a check has been made, the resulting liability of the
drawee bank to the drawer for such payment attaches even if the former had acted
merely upon the guarantees of a collecting bank. 28 Indeed, it is only when
the unauthorized payment of a check had been caused or was attended by the fault or
negligence of the drawer himself can the drawee bank be excused, whether wholly or
partially, from being held liable to the drawer for the said payment. 29

In the present case, it is apparent that Metrobank had breached JMC's instructions
when it paid the value of the subject checks to Bankcom for the benefit of a certain
Account No. 0015-32987-7. The payment to Account No. 0015-32987-7 was
unauthorized as it was established that the said account does not belong to Jardine or
Premiere, the payees of the subject checks, or to their indorsees. In addition, causal or
concurring negligence on the part of JMC had not been proven. Under such
circumstances, Metrobank is clearly liable to return to JMC the amount of the subject
checks.

Metrobank's insistence that it should be absolved for it merely complied with Section 17
of the PCHC Rules and Regulations and thereby only relied upon the concomitant
guarantees of Bankcom when it paid the subject checks, cannot stand insofar as JMC is
concerned. In Bank of America, we rejected a similar argument interposed by a drawee
bank (Bank of America) precisely on the ground of the latter's strict liability to its
drawer (BA-Finance) viz:30
Bank of America denies liability for paying the amount of the four checks issued by BA-
Finance to Miller, alleging that it (Bank of America) relied on the stamps made by
Associated Bank stating that all prior endorsement and/or lack of
endorsement guaranteed, through which Associated Bank assumed the liability
of a general endorser under Section 66 of the Negotiable Instruments Law.
Moreover, Bank of America contends that the proximate cause of BA-Finances
injury, if any, is the gross negligence of Associated Bank which allowed Ching Uy Seng
(Robert Ching) to deposit the four checks issued to Miller in the personal joint bank
account of Ching Uy Seng and Uy Chung Guan Seng.

We are not convinced.

The bank on which a check is drawn, known as the drawee bank, is under
strict liability, based on the contract between the bank and its customer
(drawer), to pay the check only to the payee or the payee's order. x x x.

xxxx

In this case, the four checks were drawn by BA-Finance and made payable to the Order
of Miller Offset Press, Inc. The checks were also crossed and issued For Payee's Account
Only. Clearly, the drawer intended the check for deposit only by Miller Offset Press, Inc.
in the latter's bank account. Thus, when a person other than Miller, i.e., Ching Uy
Seng, a.k.a. Robert Ching, presented and deposited the checks in his own
personal account (Ching Uy Sengs joint account with Uy Chung Guan Seng),
and the drawee bank, Bank of America, paid the value of the checks and
charged BA-Finances account therefor, the drawee Bank of America is deemed
to have violated the instructions of the drawer, and therefore, is liable for the
amount charged to the drawer's account (Citations omitted. Emphasis supplied).
Accordingly, we find Metrobank liable to return to JMC the amount of the subject
checks.

Bankcom is Liable to Metrobank

While Metrobank's reliance upon the guarantees of Bankcom does not excuse it from
being liable to JMC, such reliance does enable Metrobank to seek reimbursement from
Bankcom-the collecting bank.

A collecting or presenting bank-i.e., the bank that receives a check for deposit and that
presents the same to the drawee bank for payment-is an indorser of such
check.31 When a collecting bank presents a check to the drawee bank for payment, the
former thereby assumes the same warranties assumed by an indorser of a negotiable
instrument pursuant to Section 66 of the Negotiable Instruments Law. These warranties
are: (1) that the instrument is genuine and in all respects what it purports to be; (2)
that the indorser has good title to it; (3) that all prior parties had capacity to contract;
and (4) that the instrument is, at the time of the indorsement, valid and subsisting. 32 If
any of the foregoing warranties turns out to be false, a collecting hank becomes liable
to the drawee bank for payments made under such false warranty.

Here, it is clear that Bankcom had assumed the warranties of an indorser when it
forwarded the subject checks to PCHC for presentment to Metrobank. By such
presentment, Bankcom effectively guaranteed to Metrobank that the subject checks had
been deposited with it to an account that has good title to the same. This guaranty,
however, is a complete falsity because the subject checks were, in truth, deposited to
an account that neither belongs to the payees of the subject checks nor to their
indorsees. Hence, as the subject checks were paid under Bankcom's false guaranty, the
latter-as collecting bank-stands liable to return the value of such checks to Metrobank.

Bankcom's assertion that it should be absolved as the subject checks were allegedly
never deposited with it must fail. Such allegation is readily disproved by the fact that
the subject checks all contained, at their dorsal side, a stamp bearing Bankcom's
tracer/ID band.33 Under the PCHC Rules and Regulations, the stamped tracer/ID band
of Bankcom signifies that the checks had been deposited with it and that Bankcom
indorsed the said checks and sent them to PCHC. 34 As observed by the RTC:35
Record shows that the pieces of evidence presented by [JMC], particularly the 11
subject checks were endorsed and were allowed to be encashed by [Bankcom], as
indicated in the dorsal portion of the checks where [PCHC] machine's tracer, or the ID
band of [Bankcom] was stamped. And this stamped tracer ID band of [Bankcom]
signifies that [Bankcom] certified that the checks were deposited to [Bankcom] and
[Bankcom] endorsed these checks and sent them to PCHC.
Neither do we find the liability of Bankcom to be affected by the fact that only four (4)
out of the eleven (11) subject checks were actually stamped with the guarantees "ALL
PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENT GUARANTEED" and "NON-
NEGOTIABLE" as required under Section 17 of the PCHC Rules and Regulations. The
stamping of such guarantees is not necessary to fix the liability of Bankcom as an
indorser for all the subject checks.

To begin with, jurisprudence has it that a collecting bank's mere act of presenting a
check for payment to the drawee bank is itself an assertion, on the part of the former,
that it had done its duty to ascertain the validity of prior indorsements. Hence, in Banco
De Oro v. Equitable Banking Corporation,36 we stated:
Apropos the matter of forgery in endorsements, this Court has presently succinctly
emphasized that the collecting bank or last endorser generally suffers the loss because
it has the duty to ascertain the genuineness of all prior endorsements considering
that the act of presenting the check for payment to the drawee is an assertion
that the party making the presentment has done its duty to ascertain the
genuineness of the endorsements. This is laid down in the case of PNB v. National
City Bank. (Citations omitted. Emphasis supplied).
More than such pronouncement, however, Section 17 of the PCHC Rules and
Regulations expressly provides that checks "cleared through the PCHC" that do not bear
the mentioned guarantees shall nonetheless "be deemed guaranteed by the [collecting
bank] as to all prior endorsements and/or lack of endorsement" such that "no drawee
bank shall return any [check] received by it through clearing by reason only of the
absence or lack of such guarantee ... as long as there is evidence appearing on the
[check] itself that the same had been deposited with the [collecting bank] x x x." The
full provision reads:
Sec. 17. Bank Guarantee. All checks cleared through the PCHC shall bear the guarantee
affixed thereto by the Presenting Bank/Branch which shall read as follows:

Cleared thru the Philippine Clearing House Corporation all prior endorsements and/or
lack of endorsement guaranteed NAME OF BANK/BRANCH BRSTN (Date of
Clearing). Checks to which said guarantee has not been affixed shall,
nevertheless, be deemed guaranteed by the Presenting Bank as to all prior
endorsement and/or lack of endorsement.

No drawee bank shall return any cheque received by it through clearing by

reason only of the absence or lack of such guarantee stamped at the back of
said cheque, for as long as there is evidence appearing on the cheque itself
that the same had been deposited with the Presenting Bank, e.g. PCHC
machine sprayed tracer/ID band. (Emphasis supplied)
In the present case, all the subject checks have been transmitted by Bankcom to the
PCHC for clearing and presentment to Metrobank. As earlier adverted to, all of the said
checks also bear the PCHC machine sprayed tracer/ID band of Bankcom. Such
circumstances, pursuant to prevailing banking practices as laid out under the PCHC
Rules and Regulations, are enough to fix the liability of Bankcom as an indorser of the
subject checks even sans the stamp "ALL PRIOR ENDORSEMENTS AND/OR LACK OF
ENDORSEMENT GUARANTEED" and "NON-NEGOTIABLE." As the stamping of such
guarantees are not required before the warranties of an indorser could attach against
Bankcom, we find the latter liable to reimburse Metrobank the value of all the subject
checks.

Recourse of Bankcom

The sequence of recovery in cases of unauthorized payment of checks, however, does

not ordinarily stop with the collecting bank. In the event that it is made to reimburse
the drawee bank, the collecting bank can seek similar reimbursement from the very
persons who caused the checks to be deposited and received the unauthorized
payments.37 Such persons are the ones ultimately liable for the unauthorized payments
and their liability rests on their absolute lack of valid title to the checks that they were
able to encash.

Verily, Bankcom ought to have a right of recourse against the persons that caused the
anomalous deposit of the subject checks and received payments therefor.
Unfortunately-as none of such persons were impleaded in the case before us-no
pronouncement as to this matter can be made in favor of Bankcom.

At this juncture, we express our concurrence to the absolution of Delizo. The RTC and
the CA were uniform in their finding that the participation of Delizo-as the supposed
thief of the subject checks-had not been established in this case. We reviewed the
evidence on hand and saw no cogent reason to deviate from this factual finding.

Doctrine of Comparative Negligence Does Not Apply to the Instant Case

Instead of applying the rule on the sequence of recovery to the case at bench, the RTC
and the CA held both Metrobank and Bankcom liable to JMC in accordance with a fixed
ratio. In so doing, the RTC and the CA seemingly relied on the doctrine of comparative
negligence38 as applied in the cases of Bank of the Philippine Islands v. Court of
Appeals39 and Allied Banking Corporation v. Lio Sim Wan.40 In both cases, the Court
held the drawee bank and collecting bank liable for the wrongful encashment of checks
under a 60% and 40% ratio.
It must be emphasized, however, that the factual contexts of Bank of the Philippine
Islands and Allied Banking Corporation are starkly different from the instant case:
1. Bank of the Philippine Islands involved two (2) cashier's checks issued by the
Bank of the Philippine Islands (BPI) in favor of a certain Eligia Fernando (Eligia). The
checks are supposed to represent the proceeds of a pre-terminated money market
placement of Eligia with BPI. BPI issued the checks upon the mere phone request of a
person who introduced herself as Eligia. The checks were subsequently deposited with
the China Banking Corporation (CBC) under an account that was opened by a person
who identified herself as Eligia. This person thereafter encashed the checks.

It was later established, however, that Eligia never requested the pre-termination of
her money market placement nor opened an account with the CBC. It was an impostor
who did so.

2. Allied Banking Corporation, on the other hand, involved a manager's check issued

by the Allied Banking Corporation (ABC) in favor of a certain Lim Sio Wan (Lim). The
check is supposed to represent the proceeds of a pre-terminated money market
placement of Lim with ABC. ABC issued the checks upon the mere phone request of a
person who introduced herself as Lim. The checks, now bearing an indorsement of Lim,
were then deposited with the Metrobank under the account of a certain Filipinas Cement
Corporation. The checks were eventually encashed.

It was later established, however, that Lim never requested the pre-termination of his
money market placement and that his indorsement in the check was forged.
A glaring peculiarity in the cases of Bank of the Philippine Islands and Allied Banking
Corporation is that the drawee bank-which is essentially also the drawer in the
scenario-is not only guilty of wrongfully paying a check but also of negligence
in issuing such check. Indeed, this is the very reason why the drawee bank in the
two cases were adjudged co-liable with the collecting bank under a fixed ratio and the
former was not allowed to claim reimbursement from the latter. 41 The drawee bank
cannot claim that its participation in the wrongful payment of a check was merely
limited to its reliance on the guarantees of the collecting bank. In other words, the
drawee bank was held liable in its own right because it was the one that negligently
issued the checks in the first place.

That, however, is clearly not the situation in the case at bench. Here, no negligence
similar to that committed by the drawee banks in Bank of the Philippine
Islands and Allied Banking Corporation-whether in type or in magnitude-can be
attributed to Metrobank. Metrobank, though guilty of the unauthorized check payments,
only acted upon the guarantees deemed made by Bankcom under prevailing banking
practices. While Metrobank's reliance upon the guarantees of Bankcom did not excuse it
from being answerable to JMC, such reliance does enable Metrobank to seek
reimbursement from Bankcom on the ground of the breach in the latter's warranties as
a collecting bank. Under such circumstances, we cannot deny Metrobank's right to seek
reimbursement from Bankcom.

Hence, given the differences in the factual milieu between this case on one hand arid
the cases of Bank of the Philippine Islands and Allied Banking Corporation on the other,
we find that the doctrine of comparative negligence cannot be applied so as to
apportion the respective liabilities of Metrobank and Bankcom. The liabilities of
Metrobank and Bankcom, as already discussed in length, must be governed by the rule
on sequential recovery pursuant to Bank of America.

Interests

As a final matter, we also saw it fit to impose legal interest upon the respective
principal liabilities of Metrobank and Bankcom.

In Nacar v. Gallery Frames,42 wlaid out the following guidelines for the imposition and
computation of legal interests:
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern
Shipping Lines are accordingly modified to embody BSP MB Circular No. 799, as follows:

I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts,

delicts or quasi-delicts is breached, the contravener can be held liable for damages. The
provisions under Title XVIII on "Damages" of the Civil Code govern in determining the
measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed,
as follows:

1. When the obligation is breached, and it consists in the payment of

a sum of money, i.e., a loan or forbearance of money, the interest
due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from
the time it is judicially demanded. In the absence of stipulation, the
rate of interest shall be 6% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and subject to the provisions
of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of

money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate
of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages, except when or until the demand can be
established with reasonable certainty. Accordingly, where the demand
is established with reasonable certainty, the interest shall begin to
run from the time the claim is made judicially or extrajudicially
(Art. 1169, Civil Code), but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money

becomes final and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall be
6% per annum from such finality until its satisfaction, this interim
 period being deemed to be by then an equivalent to a forbearance
of credit.

And, in addition to the above, judgments that have become final and
executory prior to July 1, 2013, shall not be disturbed and shall continue
to be implemented applying the rate of interest fixed therein. (Citations
omitted. Emphasis supplied).

Applying the foregoing guidelines to the case at bench, we fix the legal interests due
against Metrobank and Bankcom thusly:

1. The liability of Metrobank to JMC consists in returning the amount it charged

against JMC's current account. Current accounts, like all bank deposits, are
considered under the law as loans.43 Normally, current accounts are interest-
bearing by express contract. However, the actual interest rate, if any, for the
current account opened by JMC with Metrobank was not given in evidence. 44

Under these circumstances, we find it proper to subject Metrobank's principal

liability to JMC to a legal interest of 6% per annum from 28 January 2002 until
full satisfaction.45 The date 28 January 2002 is the date when JMC filed its
complaint with the RTC.

2. The liability of Bankcom to Metrobank, on the other hand, consists in returning

the amount it was paid by Metrobank. This stems from a breach by Bankcom of
its warranties as a collecting bank.

Accordingly, we find it proper to subject Bankcom's principal liability to

Metrobank to a legal interest of 6% per annum from 5 March 2003 until full
satisfaction.46 The date 5 March 2003 is the date when Metrobank filed its
answer with cross-claim against Bankcom.

WHEREFORE, the consolidated appeals are DENIED. The Decision dated 22 March

2017 and Resolution dated 19 October 2017 of the Court of Appeals (CA) in CA-G.R. CV
No. 102462 are herein MODIFIED with respect to the individual liabilities of the
Metropolitan Bank and Trust Company and the Bank of Commerce, as follows:

1. The Metropolitan Bank and Trust Company is adjudged liable to pay respondent
Junnel's Marketing Corporation the following:
a. The principal amount of P 1,481,292.00, and

b. Interest on the said principal at the rate of 6% per annum from 28

January 2002 until full satisfaction.

2. The Bank of Commerce is adjudged liable to pay the Metropolitan Bank and Trust
Company the following:
a. The principal amount of P 1,481,292.00, and
 b. Interest on the said principal at the rate of 6% per annum from 5 March
2003 until full satisfaction.

Other findings and pronouncements of the Court of Appeals in its Decision dated 22
March 2017 and Resolution dated 19 October 2017 in CA-G.R. CV No. 102462 that are
not contrary to this Decision are AFFIRMED.

Costs against the Metropolitan Bank and Trust Company and the Bank of Commerce.