New Pacific Timber vs. Hon.

Seneris, December 19, 1980; Checks New Pacific Timber & Supply Company vs. Seneris Facts: New Pacific Timber & Supply Company, Inc. (NPTSCI) is the defendant in a complaint for collection of a sum of money filed by Ricardo A. Tong. On 19 July 1974, a compromise judgment was rendered by Judge Alberto V. Seneris in accordance with an amicable settlement entered into by the parties the terms and conditions of which are (1) that NPTSCI will pay to Tong the amount of P54,500.00 at 6% interest per annum to be reckoned from 25 August 1972; (2) that NPTSCI will pay to Tong the amount of P6,000.00 as attorneys fees for which P5,000.00 had been acknowledged received by Tong under Consolidated Bank and Trust Corporation Check 16135022 amounting to P5,000.00 having a balance of P1,000.00; (3) that the entire amount of P54,500.00 plus interest, plus the balance of P1,000.00 for attorneys fees will be paid by NPTSCI to Tong within 5 months from 19 July 1974; and (4) that failure on the part of NPTSCI to comply with any of the conditions, a writ of execution may be issued by the Court for the satisfaction of the obligation. For failure of NPTSCI to comply with his judgment obligation, Judge Seneris, upon motion of Tong, issued an order for the issuance of a writ of execution on 21 December 1974. Accordingly, writ of execution was issued for the amount of P63,130.00 pursuant to which, the Ex-Officio Sheriff (Hakim S. Abdulwahid) levied upon personal properties of NPTSCI, i.e. a unit of American Lathe 24, 1 Unit of American Lathe 18 Cracker Wheeler, and 1 Unit Rockford Shaper 24; and set the auction sale thereof on 15 January 1975. The auction sale was then postponed on the following day, 16 January 1975 at 10:00 a.m. In the course of the proceedings, Deputy Sheriff Castro sold the levied properties item by item to Tong as the highest bidder in the amount of P50,000.00. As a result thereof, the Ex-Officio Sheriff declared a deficiency of P13,130.00. Thereafter, on 16 January 1975, the Ex-Officio Sheriff issued a Sheriffs Certificate of Sale in favor of Tong for the total amount of P50,000.00 only. Subsequently, on 17 January 1975, NPTSCI filed an ex-parte motion for issuance of certificate of satisfaction of judgment. This motion was denied by Judge Seneris in his order dated 28 August 1975. In view thereof, NPTSCI filed the petition for certiorari with preliminary injunction. Issue: Whether Tong can validly refuse acceptance of the payment of the judgment obligation made by NPTSCI consisting of P50,000.00 in Cashiers Check and P13,130.00 in cash which it deposited with the Ex-Officio Sheriff before the date of the scheduled auction sale. Held: The check deposited by NPTSCI in the amount of P50,000.00 is not an ordinary check but a Cashiers Check of the Equitable Banking Corporation, a

bank of good standing and reputation. As testified to by the Ex-Officio Sheriff with whom it has been deposited, it is a certified crossed check. It is a wellknown and accepted practice in the business sector that a Cashiers Check is deemed as cash. Moreover, since the said check had been certified by the drawee bank, by the certification, the funds represented by the check are transferred from the credit of the maker to that of the payee or holder, and for all intents and purposes, the latter becomes the depositor of the drawee bank, with rights and duties of one in such situation. Where a check is certified by the bank on which it is drawn, the certification is equivalent to acceptance. Said certification implies that the check is drawn upon sufficient funds in the hands of the drawee, that they have been set apart for its satisfaction, and that they shall be so applied whenever the check is presented for payment. It is an understanding that the check is good then, and shall continue good, and this agreement is as binding on the bank as its notes in circulation, a certificate of deposit payable to the order of the depositor, or any other obligation it can assume. The object of certifying a check, as regards both parties, is to enable the holder to use it as money. When the holder procures the check to be certified, the check operates as an assignment of a part of the funds to the creditors. Hence, the exception to the rule enunciated under Section 63 of the Central Bank Act to the effect that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor in cash in an amount equal to the amount credited to his account shall apply in the present case. Considering that the whole amount deposited by NPTSCI consisting of Cashiers Check of P50,000.00 and P13,130.00 in cash covers the judgment obligation of P63,000.00 as mentioned in the writ of execution, then, the Court sees no valid reason for Tong to have refused acceptance of the payment of the obligation in his favor. The auction sale, therefore, was uncalled for. NPTSCIs motion for the issuance of a certificate of satisfaction of judgment is clearly meritorious and Judge Seneris gravely abused his discretion in not granting the same under the circumstances.

PNB vs. National City Bank of New York, 63 Phil 711;

Philippine National Bank vs. National City Bank of New York Facts: On April 7 and 9, 1933, an unknown person or persons negotiated with Motor Service Company, Inc. (MSCI), two checks in payment for automobile tires purchased from MSCIs stores, purporting to have been issued by the Pangasinan Transportation Co., Inc. (Pantranco) by J.L. Klar, Manager and Treasurer, against the Philippine National Bank (PNB) and in favor of the International Auto Repair Shop, for P144.50 and P215.75. Said checks were

indorsed by said unknown persons in the manner indicated at the back thereof, the MSCI, believing at the time that the signatures of J.L. Klar, Manager and Treasurer of Pantranco on both checks were genuine. The checks were then indorsed for deposit by MSCI at the National City Bank of New York and the former was accordingly credited with the amounts thereof, or P144.50 and P215.75. On April 8 and 10, 1933, the said checks were cleared at the clearing house and PNB credited the National City Bank for the amounts thereof, believing at the time that the signatures of the drawer were genuine, that the payee is an existing entity and the endorsements at the bank thereof regular and genuine. The PNB then found out that the purported signatures of J.L. Klar, as Manager and Treasurer of Pantranco were forged when so informed by the said Company, and it accordingly demanded from the National City Bank and MSCI and the reimbursement of the amounts for which it credited the National City Bank at the clearing house and for which the latter credited MSCI, but MSCI and National City Bank refused, and continue to refuse, to make such reimbursements. Pantranco objected to have the proceeds of said check deducted from their deposit. PNB filed the case in the municipal court of Manila against National City Bank and MSCI. Upon PNBs motion, the case was dismissed before trial as to the National City Bank. A decision was thereafter rendered giving PNB judgment for the total amount of P360.25, with interest and costs. From this decision MSCI appealed. Issue [1]: Whether the payment of the checks in question made by the drawee bank constitutes an acceptance, and, consequently, the case should be governed by the provisions of section 62 of the Negotiable Instruments Law. Held [1]: A check is a bill of exchange payable on demand and only the rules governing bills of exchange payable on demand are applicable to it, according to section 185 of the Negotiable Instruments Law. In view of the fact that acceptance is a step unnecessary in so far as bills of exchange payable on demand are concerned, it follows that the provisions relative to acceptance are without application to checks. Acceptance implies, in effect, subsequent negotiation of the instrument, which is not true in case of the payment of a check because from the moment a check is paid it is withdrawn from circulation. The warranty established by section 62, is in favor of holders of the instrument after its acceptance. When the drawee bank cashes or pays a check, the cycle of negotiation is terminated, and it is illogical thereafter to speak of subsequent holders who can invoke the warranty provided in section 62 against the drawee. Moreover, according to section 191, acceptance means an acceptance completed by delivery or notification and this concept is entirely incompatible with payment, because when payment is made the check is retained by the bank, and there is no such thing as delivery or notification to the party receiving the payment. There can be no such thing as acceptance in the ordinary sense of the

term. A check being payable immediately and on demand, the bank can fulfill its duty to the depositor only by paying the amount demanded. The holder has no right to demand from the bank anything but payment of the check, and the bank has no right, as against the drawer, to do anything but pay it. A check is not an instrument which in the ordinary course of business calls for acceptance. The holder can never claim acceptance as his legal right. He can present for payment, and only for payment. Issue [2]: Whether the law or business practice prevents the presentation of checks for acceptance before they are paid. Held [2]: There is nothing in the law or in business practice against the presentation of checks for acceptance, before they are paid, in which case there is a certification equivalent to acceptance according to section 187, which provides that where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance, and it is then that the warranty under section 62 exists. This certification or acceptance consists in the signification by the drawee of his assent to the order of the drawer, which must not express that the drawee will perform his promise by any other means than the payment of money. When the holder of a check procures it to be accepted or certified, the drawer will perform his promise by any other means than the payment of money. When the holder of a check procedures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon, and then the check operates as an assignment of a part of the funds to the credit of the drawer with the bank. There is nothing in the nature of the check which intrinsically precludes its acceptance, in like manner and with like effect as a bill of exchange or draft may be accepted. The bank may accept if it chooses; and it is frequently induced by convenience, by the exigencies of business, or by the desire to oblige customers, voluntarily to incur the obligation. The act by which the bank places itself under obligation to pay to the holder the sum called for by a check must be the expressed promise or undertaking of the bank signifying its intent to assume the obligation, or some act from which the law will imperatively imply such valid promise or undertaking. The most ordinary form which such an act assumes is the acceptance by the bank of the check, or, as it is perhaps more often called, the certifying of the check. Issue [3]: Whether MSCIs negligence in purchasing the checks in question is such as to give PNB the right to recover upon said checks, and on the other hand, whether PNB was not itself negligent, except for its constructive fault in now knowing the signature of the drawer and detecting the forgery. Held [3]: Check number 637023-D was dated 6 April 1933, whereas check number 637020-D and is dated 7 April 1933. Therefore, the later check, which is prior in number to the former check, is however, issued on a later date. This circumstance must have aroused at least the curiosity of MSCI.

MSCI further accepted the two checks from unknown persons. Furthermore, check 637023-D was indorsed by a subagent of the agent of the payee, International Auto Repair Shop. MSCI made no inquiry whatsoever as to the extent of the authority of these unknown persons. Check 637020-D, aside from having been indorsed by a supposed agent of the International Auto Repair Shop is crossed generally. The existence of two parallel lines transversally drawn on the face of this check was a warning that the check could only be collected through a banking institution. Yet MSCI accepted the check in payment for merchandise. The facts of case do not make it one between two equally innocent persons, the drawee bank and the holder. Section 23 of the Negotiable Instruments Act provides that when a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. It not appearing that PNB did not warrant to MCSI the genuineness of the checks in question, by its acceptance thereof, nor did it perform any act which would have induced MSCI to believe in the genuineness of said instruments before MSCI purchased them for value, it can not be said that PNB is precluded from setting up the forgery and, therefore, MSCI is not entitled to retain the amount of the forged check paid to it by PNB. Issue [4]: Whether the drawee bank should be allowed recovery, as MSCIs position would not become worse than if the drawee had refused the payment of these checks upon their presentation. Held [4]: A drawee of a check, who is deceived by a forgery of the drawers signature may recover the payment back, unless his mistake has placed an innocent holder of the paper in a worse position than he would have been in if the discover of the forgery had been made on presentation. Forgeries often deceived the eye of the most cautions experts; and when a bank has been so deceived, it is a harsh rule which compels it to suffer although no one has suffered by its being deceived. Herein, MSCI has lost nothing by anything which the drawee has done. It had in its hands some forged worthless papers. It did not purchase or acquire these papers because of any representation made to it by the drawee. It purchased them from unknown persons and under suspicious circumstances. It had no valid title to them, because the persons from whom it received them did not have such title. MSCI could not have compelled the drawee to pay them, and the drawee could have refused payment had it been able to detect the forgery. By making a refund, MSCI would only be returning what it had received without any title or right. And when MCSI pays back the money it has received it will be entitled to have restored to it the forged papers it parted with. There is no good reason why the accidental payment made by PNB should inure to the

benefit of MSCI. If there were injury to MCSI said injury was caused not by the failure of PNB to detect the forgery but by the very negligence of MCSI in purchasing commercial papers from unknown persons without making inquiry as to their genuineness. (The court held in the case (1) That where a check is accepted or certified by the bank on which it is drawn, the bank is estopped to deny the genuineness of the drawers signature and his capacity to issue the instrument; (2) That if a drawee bank pays a forged check which was previously accepted or certified by the said bank it cannot recover from a holder who did not participate in the forgery and did not have actual notice thereof; (3) That the payment of a check does not include or imply its acceptance in the sense that this word is used in section 62 of the Negotiable Instruments Law; (4) That in the case of the payment of a forged check, even without former acceptance, the drawee can not recover from a holder in due course not chargeable with any act of negligence or disregard of duty; (5) That to entitle the holder of a forged check to retain the money obtained thereon, there must be a showing that the duty to ascertain the genuineness of the signature rested entirely upon the drawee, and that the constructive negligence of such drawee in failing to detect the forgery was not affected by any disregard of duty on the part of the holder, or by failure of any precaution which, from his implied assertion in presenting the check as a sufficient voucher, the drawee had the right to believe he had taken; (6) That in the absence of actual fault on the part of the drawee, his constructive fault in not knowing the signature of the drawer and detecting the forgery will not preclude his recovery from one who took the check under circumstances of suspicion and without proper precaution, or whose conduct has been such as to mislead the drawee or induce him to pay the check without the usual scrutiny or other precautions against mistake or fraud; (7) That one who purchases a check or draft is bound to satisfy himself that the paper is genuine, and that by indorsing it or presenting it for payment or putting it into circulation before presentation he impliedly asserts that he performed his duty; (8) That while the foregoing rule, chosen from a welter of decisions on the issue as the correct one, will not hinder the circulation of two recognized mediums of exchange by which the great bulk of business is carried on, namely, drafts and checks, on the other hand, it will encourage and demand prudent business methods on the part of those receiving such mediums of exchange; (9) That it being a matter of record in the present case, that PNB is no more chargeable with the knowledge of the drawers signature than MCSI is, as the drawer was as much the customer of MSCI as of PNB, the presumption that a drawee bank is bound to know more than any indorser the signature nature of its depositor does not hold; (1) that according to the undisputed facts of the case MSCI in purchasing the papers in question from unknown persons without making any inquiry as to the identity and authority of the said persons negotiating and indorsing them, acted negligently and contributed to PNBs constructive negligence in failing

to detect the forgery; and (11) that under the circumstances of the case, if PNB is allowed to recover, there will be no change of position as to the injury or prejudice of MCSI.)

Bataan cigar vs. CA, 230 SCRA 648; G.R. No. 93048 March 3, 1994 Lessons Applicable: Rights of a holder (Negotiable Instruments Law)

FACTS:

Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a corporation involved in the manufacturing of cigarettes purchased from King Tim Pua George (George King) 2,000 bales of tobacco leaf to be delivered starting October 1978. o July 13, 1978: it issued crossed checks post dated sometime in March 1979 in the total amount of P820K George represented that he would complete delivery w/in 3 months from Dec 5 1978 so BCCFI agreed to purchase additional 2,500 bales of tobacco leaves, despite the previous failure in delivery o It issued post dated crossed checks in the total amount of P1.1M payable sometime in September 1979. July 19, 1978: George sold to SIHI at a discount check amounting to P164K, post dated March 31, 1979, drawn by BCCFI w/ George as payee. December 19 and 26, 1978: George sold 2 checks both in the amount of P100K, post dated September 15 & 30, 1979 respectively, drawn by BCCFI w/ George as payee Upon failure to deliver, BCCFI issued on March 30, 1979 and September 14 & 28, 1979 a stop payment order for all checks SIHI failing to claim, filed a claim against BCCFI RTC: SIHI = holder in due course. Non-inclusion of Gearoge as party is immaterial to the case

ISSUE: W/N SIHI is a holder in due course beign a second indorser and a holder of crossed checks HELD: YES. GRANTED. RTC reversed.

Sec. 52

1. That it is complete and regular upon its face

2. That he became the holder of it before it was overdue, and without

notice that it had been previously dishonored, if such was the fact
3. That he took it in good faith and for value 4. That at the time it was negotiated to him he had no notice of any

infirmity in the instrument or defect in the title of the person negotiating it

Sec. 59 o every holder is deemed prima facie a holder in due course o However, when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims, acquired the title as holder in due course. effect of crossing of a check

1. check may not be encashed but only deposited in the bank 2. check may be negotiated only once to one who has an account with

a bank 3. act of crossing the check serves as warning to the holder that the check has been issued for a definite purpose - he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due course

crossing of checks should put the holder on inquiry and upon him devolves the duty to ascertain the indorser's title to the check or the nature of his possession - failure = guilty of gross negligence amounting to legal absence of good faith, contrary to Sec. 52(c) of the Negotiable Instruments Law SIHI is not a holder in due course. Consequently, BCCFI cannot be obliged to pay the checks. However, that SIHI could not recover from the checks. The only disadvantage of a holder who is not a holder in due course is that the instrument is subject to defenses as if it were non-negotiable. Hence, SIHI can collect from the immediate indorser, George

Stelco Marketing Corporation vs. CA, June 17, 1992;

Stelco Marketing vs. CA GR 96160, 17 June 1992 Second Division, Narvasa (J) Facts: Stelco Marketing Corporation sold steel bars and GI wires to R Y L C o n s t r u c t i o n I n c . w o r t h P126,859.61. RYL gave Stelcos sister corporation, Armstrong Industries, a MetroBank check fromSteelweld Corporation (The check was issued apparently by Steelwelds President Peter Rafael Limson toRomeo Lim, President of RYL and Limson friend, by way of accommodation, as a guaranty and not inpayment of an obligation). When Armstrong deposited the check at its bank, it was dishonored because it wasdrawn against insufficient funds. When so deposited, the check bore 2 indorsements, i.e. RYL and Armstrong.A criminal case was instituted against Limson, etc. for violation of BP 22, Subsequently, Stelco filed a civilcase against RYL and Steelweld to recover the value of the steel products. Issue: Whether Stelco was a holder in due course of the check issued by Steelweld. Held: The records do not show any intervention or participation by Stelco in any manner or form whatsoeverin the transaction involving the check, or any communication of any sort between Steelweld and Stelco, orbetween either of them and Armstrong Industries, at any time before the dishonor of the check. The recorddoes show that after the check was deposited and dishonored, Stelco came into possession of it in some way.Stelco cannot thus be deemed a holder of the check for value as it does not meet two essential requisitesprescribed by the statute, i.e. that it did not become the holder of it before it was overdue, and without noticethat it had been previously dishonored, and that it did not take the check in good faith and for value. State Investment House vs. CA, 175 SCRA 311;

State Investment House vs. CA GR 101163, 11 January 1993 First Division, Bellosillo (J) Facts: Nora B. Moulic issued to Corazon Victoriano checks, as security for pieces of jewelry sold oncommission. Victoriano negotiated the checks to the State Investment House Inc. (SIHI). Moulic failed to sellthe pieces of

jewelry, so he returned them to the payee before the maturity of the checks. The checks,however, could not be retrieved as they had already been negotiated. Before the checks maturity dates,Moulic withdrew her funds from the drawee bank. Upon presentment of the checks for payment, they weredishonored for insufficiency of funds. SIHI sued to recover the value of the checks. Issue: Whether the personal defense of failure or absence of consideration is available, or conversely, whetherSIHI is a holder in due course. Held: On their faces, the post-dated checks were complete and regular; SIHI bought the checks from thepayee (Victoriano) before their due dates; SIHI took the checks in good faith and for value, albeit at adiscounted price; and SIHI was never informed not made aware that the checks were merely issued to payeeas security and not for value. Complying with the requisites of Section 52 of the Negotiable Instruments Law,SIHI is a holder in due course. As such, it holds the instruments free from any defect of title of prior parties,and from defenses available to prior parties among themselves. SIHI may enforce full payment of the checks.The defense of failure or absence of consideration is not available as SIHI was not privy to the purpose forwhich the checks were issued.That the post-dated checks were merely issued as security is not a ground for the discharge of the instrumentas against a holder in due course. It is not one of the grounds outlined in Section 119 of the NegotiableInstrument Law, for the instrument to be discharged.It must be noted that the drawing and negotiation of a check have certain effects aside from the transfer oftitle or the incurring of liability in regard to the instrument by the transferor. The holder who takes then e g o t i a t e d p a p e r m a k e s a c o n t r a c t w i t h the parties on the face of the instrument. There is an i m p l i e d representation that funds or credit are available for the payment of the instrument in the bank upon which it isdrawn. Consequently, the withdrawal of the money from the drawee bank to avoid liability on the checkscannot prejudice the rights of holders in due course.The drawer, Moulic, is liable to the holder in due course, SIHI. Papa vs. A.U. Valencio, 284 SCRA 643;

PAPA vs. VALENCIA G.R. No. 105188 January 23, 1998 Facts:

Sometime in June 1982, A.U. Valencia and Co., Inc. and Felix Pearroyo, filed with the Regional Trial Court of Pasig, Branch 151, a complaint for specific performance against Myron C. Papa, in his capacity as administrator of the Testate Estate of one Angela M. Butte. The complaint alleged that Papa, acting as attorney-in-fact of Angela M. Butte, sold to Pearroyo, through Valencia, a parcel of land. Prior to the alleged sale, the said property had been mortgaged by her to the Associated Banking Corporation. After the alleged sale to Valencia and Penarroyo, but before the title to the subject property had been released, Butte passed away. Despite representations made by Valencia to the bank to release the title to the property sold to Pearroyo, the bank refused to release it unless and until all the mortgaged properties of the late Butte were also redeemed. In order to protect his rights and interests over the property, Pearroyo caused the annotation on the title of an adverse claim. Sometime in April 1977, that Valencia and Pearroyo discovered that the mortgage rights of the bank had been assigned to Tomas L. Parpana, as special administrator of the Estate of Ramon Papa. Jr. Since then, Papa 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 Valencia and Pearroyo. Despite repeated demands from said respondents, Papa refused and failed to deliver the title to the property. Valencia and Pearroyo prayed that Papa be ordered to deliver to Pearroyo the title to the subject property RTC rendered a decision, allowing Papa to redeem from the Reyes spouses, who bought the land at a public auction because of tax delinquency and ordering Papa to execute a Deed of Absolute Sale in favor of Pearroyo. Papas defense: The sale was never consummated as he did not encash the check (in the amount of P40,000.00) given by Valencia and Pearroyo in payment of the full purchase price of the subject lot. He maintained that what Valencia and Pearroyo had actually paid was only the amount of P5,000.00 (in cash) as earnest money. Issue: Was there valid payment although Papa failed to encash the check? Held: Yes. Valencia and Pearroyo had given Papa the amounts of P5,000.00 in cash on 24 May 1973, and P40,000.00 in check on 15 June 1973, in payment of the purchase price of the subject lot. Papa himself admits having received

said amounts, and having issued receipts therefor. Papas assertion that he never encashed the aforesaid check is not 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 10 years from the payment in part by cash and in part by check, the presumption is that the check had been encashed. Granting that Papa had never encashed the check, his failure to do so for more than 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 Article 1249 of the Civil Code, the rule is otherwise if the debtor is prejudiced by the creditors 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. If no 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 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 nonpayment 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. Considering that Valencia and Pearroyo had fulfilled their part of the contract of sale by delivering the payment of the purchase price, they, therefore, had the right to compel Papa to deliver to them the owners duplicate of TCT 28993 of Angela M. Butte and the peaceful possession and enjoyment of the lot in question.

Villanueva vs. Nite, G.R. No. 148211, 25 July 2006;

G.R. No. 148211 July 25, 2006 Lessons Applicable: Liabilities of Parties (Negotiable Instruments Law) FACTS:

Nite loaned from Villanueva P409,000

as a sceurity he issued an Asian Bank Corporation (ABC) check of P325,500 dated February 8, 1994 o it was consented to be changed to June 8, 1994 check was dishonored due to a material alteration August 24, 1994: Nite while abroad partially paid P235K through her representative Emily P. Abojada The balance of P174K was due on or before December 8, 1994. August 24, 1994: Villanueva filed an action for a sum of money and damages against ABC for the full amount of the dishonored check (despite the loan not being due and Nite away) RTC: favored Villanueva June 30, 1997: Nite went to ABC to withdraw but she was not able to because of the RTC order August 25, 1997: ABC remitted to the sheriff a managers check amounting to P325,500 drawn on Nite's account CA: favored Nite's appeal
o

ISSUE: W/N ABC should be liable to Villanueva HELD: NO. DENIED

Negotiable Instruments Law o SEC. 185. Check, defined. A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a check o SEC. 189. When check operates as an assignment. A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank, and the bank is not liable to the holder, unless and until it accepts or certifies the check Rule 3, Sec. 7 of the Rules of Court states:

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

The contract of loan was between Villanueva and Nite. No collection suit could prosper without Nite who was an indispensable party

Equitable PCI vs. Ong, 15 September 2006;

G.R. No. 156207 September 15, 2006 Lessons Applicable: Promissory Notes and Checks FACTS:

Warliza Sarande deposited in her account at Philippine Commercial International (PCI) Bank a PCI Bank TCBT Check of P225K. December 5 1991: Upon inquiry by Serande at PCI Bank on whether the TCBT Check had been cleared, she received an affirmative answer. Relying on this assurance, she issued 2 checks drawn against the proceeds of TCBT Check. o PCI Bank Check No. 073661 dated 5 December 1991 for P132K which Sarande issued to respondent Rowena Ong owing to a business transaction. On the same day, Ong presented to PCI Bank requesting PCI Bank to convert the proceeds into a manager's check, which the PCI Bank obliged. December 6 1991: Ong deposited PCI Bank Manager's Check in her account with Equitable Banking Corporation December 9 1991: she received a check return-slip informing her that PCI Bank had stopped the payment of the check on the ground of irregular issuance. o Despite several demands made, it was refused o Ong was constrained to file a Complaint for sum of money, damages and attorney's fees against PCI Bank CA affirmed RTC: favored Ong

ISSUE: W/N Ong can hold PCI liable HELD: YES. Petition is DENIED. CA affirmed.

By admitting it committed an error, clearing the check of Sarande and issuing in favor of Ong not just any check but a manager's check for that matter, PCI Bank's liability is fixed certification = acceptance, o Equitable PCI as drawee bank is bound on the instrument upon certification and it is immaterial to such liability in favor of Ong who is a holder in due course whether the drawer (Warliza Sarande) had funds or not with the Equitable PCI Bank No unjust enrichment

SECTION 52. What constitutes a holder in due course. A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice it had been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. The same law provides further: Sec. 24. Presumption of consideration. Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value. Sec. 26. What constitutes holder for value. Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time. Sec. 28. Effect of want of consideration. Absence or failure of consideration is a matter of defense as against any person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise.

manager's check o an order of the bank to pay, drawn upon itself, committing in effect its total resources, integrity and honor behind its issuance o regarded substantially to be as good as the money it represents o same footing as a certified check The object of certifying a check, as regards both parties, is to enable the holder to use it as money. check operates as an assignment of a part of the funds to the creditors

Sec. 187. Certification of check; effect of. Where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance Section 63 of the Central Bank Act to the effect "that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor in cash in an amount equal to the amount credited to his account Sec. 62. Liability of acceptor. The acceptor by accepting the instruments engages that he will pay it according to the tenor of his acceptance; and admits (a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and (b) The existence of the payee and his then capacity to indorse.

Security Bank & Trust Company vs. RCBC, G.R. Nos. 170984 & 170987, January 30, 2009;

SECOND DIVISION SECURITY BANK AND TRUST COMPANY, Petitioner, - versus RIZAL COMMERCIAL BANKING CORPORATION, Respondent. G.R. No. 170984 x-------------------------x RIZAL COMMERCIAL BANKING CORPORATION, Petitioner, - versus SECURITY BANK AND TRUST COMPANY, Respondent. G.R. No. 170987 Promulgated: January 30, 2009 x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x DECISION

QUISUMBING, Acting C.J.:

Before us are opposing parties petitions for review of the Decision[1] dated March 29, 2005 and Resolution[2] dated December 12, 2005 of the Court of Appeals in CA-G.R. CV No. 67387. The two petitions are herein consolidated as they stem from the same set of factual circumstances.

The facts, as found by the trial and appellate courts, are as follows:

On January 9, 1981, Security Bank and Trust Company (SBTC) issued a managers check for P8 million, payable to CASH, as proceeds of the loan granted to Guidon Construction and Development Corporation (GCDC). On the same day, the P8-million check, along with other checks, was deposited by Continental Manufacturing Corporation (CMC) in its Current Account No. 0109-022888 with Rizal Commercial Banking Corporation (RCBC).

Immediately, RCBC honored the P8-million check and allowed CMC to withdraw the same.[3]

On the next banking day, January 12, 1981, GCDC issued a Stop Payment Order to SBTC, claiming that the P8-million check was released to a third party by mistake. Consequently, SBTC dishonored and returned the managers check to RCBC. Thereafter, the check was returned back and forth between the two banks, resulting in automatic debits and credits in each banks clearing balance.[4]

On February 13, 1981, RCBC filed a complaint[5] for damages against SBTC with the then Court of First Instance of Rizal, Branch XXII. Said case was docketed as Civil Case No. 1081 and later transferred to the Regional Trial Court (RTC) of Makati City, Branch 143.

Meanwhile, following the rules of the Philippine Clearing House, RCBC and SBTC stopped returning the checks to each other. By way of a temporary arrangement pending resolution of the case, the P8-million check was equally divided between, and credited to, RCBC and SBTC.[6]

On May 9, 2000, the RTC of Makati City, Branch 143, rendered a Decision[7] in favor of RCBC. The dispositive portion of the decision reads:

PREMISES CONSIDERED, the Court renders judgment in favor of plaintiff [RCBC] and finds defendant SBTC justly liable to [RCBC] and sentences [SBTC] to pay [RCBC] the amount of:

1.

PhP4,000,000.00 as and for actual damages;

2.

PhP100,000.00 as and for attorneys fees; and,

3.

the costs.

SO ORDERED.[8]

On appeal, the Court of Appeals affirmed with modification the above Decision, to wit:

WHEREFORE, the appealed Decision is AFFIRMED with MODIFICATION. Appellant Security Bank and Trust Co. shall pay appellee Rizal Commercial Banking Corporation not only the principal amount of P4,000,000.00 but also interest thereon at (6%) per annum covering appellees unearned income on interest computed from the time of filing of the complaint on February 13, 1981 to the date of finality of this Decision. For lack of factual and legal basis, the award of attorneys fees is DELETED.

SO ORDERED.[9]

Now for our resolution are the opposing parties petitions for review on certiorari of the abovecited decision. On its part, SBTC alleges the following to support its petition:

I.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN REFUSING TO APPLY THE LAW BECAUSE, IN ITS OPINION, TO DO SO WOULD RESULT IN AN INJUSTICE.

II.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT TO DETERMINE WHETHER OR NOT A BANK IS A HOLDER IN DUE COURSE, ONLY THE NEGOTIABLE INSTRUMENTS LAW NEED BE APPLIED TO THE EXCLUSION OF CENTRAL BANK RULES AND REGULATIONS.

III.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN FAILING TO NOTE THAT THE MANAGERS CHECK IN QUESTION WAS ACCEPTED FOR DEPOSIT BY THE RCBC AND WAS NOT ENCASHED BY THE PAYEE.

IV.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN FAILING TO CONSIDER THAT PRIOR TO THE DEPOSIT OF THE CHECKS WORTH PhP53 MILLION, RCBC WAS HOLDING 43 CHECKS TOTALING P49,017,669.66 DRAWN BY CONTINENTAL MANUFACTURING CORPORATION AGAINST ITS CURRENT ACCOUNT WHEN THE BALANCE OF THAT ACCOUNT WAS A MERE P573.62.

V.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN FAILING TO CONSIDER THAT THE CHECKS DEPOSITED WITH RCBC THE PROCEEDS OF WHICH WERE IMMEDIATELY WITHDRAWN TO HONOR THE 43 CHECKS TOTALING P49,017,669.66 DRAWN BY CONTINENTAL MANUFACTURING CORPORATION ON ITS CURRENT ACCOUNT WERE NOT ALL MANAGERS CHECK[S] BUT INCLUDED ORDINARY CHECKS IN THE TOTAL AMOUNT OF PhP15,436,140.81.

VI.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN FAILING TO CONSIDER THAT EACH OF THE 43 CHECKS DRAWN BY THE CONTINENTAL MANUFACTURING CORPORATION WERE ALL HONORED BY RCBC ON THE BASIS OF A MIXTURE OF ALL THE MANAGERS AND ORDINARY CHECKS DEPOSITED ON THAT DAY OF 9 JANUARY 1981.

VII.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT THE RCBC IS A HOLDER IN DUE COURSE.

VIII.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT SBTC WAITED FOR THREE (3) DAYS TO NOTIFY THE RCBC OF THE STOP PAYMENT ORDER.

IX.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT SBTC SHOULD HAVE FIRST ACQUIRED PERSONAL KNOWLEDGE OF THE FACTS WHICH GAVE RISE TO THE REQUEST FOR THE STOP PAYMENT ORDER BEFORE HONORING SUCH REQUEST.

X.

THE HONORABLE COURT OF APPEALS RULED CORRECTLY IN REFUSING TO HOLD SBTC LIABLE FOR DAMAGE CLAIMS BASED SOLELY ON SPECULATION, CONJECTURE AND GUESSWORK.

XI.

THE HONORABLE COURT OF APPEALS RULED CORRECTLY IN HOLDING THAT RCBC IS NOT ENTITLED TO EXEMPLARY DAMAGES.

XII.

THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN HOLDING SBTC LIABLE FOR THE ATTORNEYS FEES OF RCBC [SIC].[10]

On RCBCs part, the following issues are submitted for resolution:

I. WHETHER OR NOT SBTC IS LIABLE FOR THE MANAGERS CHECK IT ISSUED.

II. WHETHER OR NOT RCBC IS ENTITLED TO COMPENSATORY DAMAGES EQUIVALENT TO THE INTEREST INCOME LOST AS A RESULT OF THE ILLEGAL REFUSAL OF SBTC TO HONOR ITS OWN MANAGERS CHECK, AS WELL AS FOR EXEMPLARY DAMAGES AND ATTORNEYS FEES.[11]

Simply stated, we find that in these consolidated petitions, the legal issues for our resolution are: (1) Is SBTC liable to RCBC for the remaining P4 million? and (2) Is SBTC liable to pay for lost interest income on the remaining P4 million, exemplary damages and attorneys fees?

RCBC avers that the managers check issued by SBTC is substantially as good as the money it represents because by its peculiar character, its issuance has the effect of an advance acceptance. RCBC claims that it is a holder in due course when it credited the P8-million managers check to

CMCs account. Accordingly, RCBC asserts that SBTCs refusal to honor its obligation justifies RCBC claim for lost interest income, exemplary damages and attorneys fees.

On the other hand, SBTC contends that RCBC violated Monetary Board Resolution No. 2202 of the Central Bank of the Philippines mandating all banks to verify the genuineness and validity of all checks before allowing drawings of the same. SBTC insists that RCBC should bear the consequences of allowing CMC to withdraw the amount of the check before it was cleared. [12]

We shall rule on the issues seriatim.

At the outset, it must be noted that the questioned check issued by SBTC is not just an ordinary check but a managers check. A managers check is one drawn by a banks manager upon the bank itself. It stands on the same footing as a certified check,[13] which is deemed to have been accepted by the bank that certified it.[14] As the banks own check, a managers check becomes the primary obligation of the bank and is accepted in advance by the act of its issuance.[15]

In this case, RCBC, in immediately crediting the amount of P8 million to CMCs account, relied on the integrity and honor of the check as it is regarded in commercial transactions. Where the questioned check, which was payable to Cash, appeared regular on its face, and the bank found nothing unusual in the transaction, as the drawer usually issued checks in big amounts made payable to cash, RCBC cannot be faulted in paying the value of the questioned check.[16]

In our considered view, SBTC cannot escape liability by invoking Monetary Board Resolution No. 2202 dated December 21, 1979, prohibiting drawings against uncollected deposits. For we must point out that the Central Bank at that time issued a Memorandum dated July 9, 1980, which interpreted said Monetary Board Resolution No. 2202. In its pertinent portion, said Memorandum reads:

MEMORANDUM TO ALL BANKS

July 9, 1980

For the guidance of all concerned, Monetary Board Resolution No. 2202 dated December 31, 1979 prohibiting, as a matter of policy, drawing against uncollected deposit effective July 1, 1980, uncollected deposits representing managers cashiers/ treasurers checks, treasury warrants, postal money orders and duly funded on us checks which may be permitted at the discretion of each bank, covers drawings against demand deposits as well as withdrawals from savings deposits.[17]

Thus, it is clear from the July 9, 1980 Memorandum that banks were given the discretion to allow immediate drawings on uncollected deposits of managers checks, among others. Consequently, RCBC, in allowing the immediate withdrawal against the subject managers check, only exercised a prerogative expressly granted to it by the Monetary Board.

Moreover, neither Monetary Board Resolution No. 2202 nor the July 9, 1980 Memorandum alters the extraordinary nature of the managers check and the relative rights of the parties thereto. SBTCs liability as drawer remains the same by drawing the instrument, it admits the existence of the payee and his then capacity to indorse; and engages that on due presentment, the instrument will be accepted, or paid, or both, according to its tenor.[18]

Concerning RCBCs claim for lost interest income on the remaining P4 million, this is already covered by the amount of damages in the form of legal interest of 6%, based on Article 2200[19] and 2209[20] of the Civil Code of the Philippines, as awarded by the Court of Appeals in its decision.

In addition to the above-mentioned award of compensatory damages, we also find merit in the need to award exemplary damages in order to set an example for the public good. The banking system has become an indispensable institution in the modern world and plays a vital role in the economic life of every civilized society. Whether as mere passive entities for the safe-keeping and saving of money or as active instruments of business

and commerce, banks have attained an ubiquitous presence among the people, who have come to regard them with respect and even gratitude and, above all, trust and confidence. In this connection, it is important that banks should guard against injury attributable to negligence or bad faith on its part. As repeatedly emphasized, since the banking business is impressed with public interest, the trust and confidence of the public in it is of paramount importance. Consequently, the highest degree of diligence is expected, and high standards of integrity and performance are required of it. SBTC having failed in this respect, the award of exemplary damages to RCBC in the amount of P50,000.00 is warranted.[21]

Pursuant to current jurisprudence, with the finding of liability for exemplary damages, attorneys fees in the amount of P25,000.00[22] must also be awarded against SBTC and in favor of RCBC.

WHEREFORE, the assailed Decision dated March 29, 2005 and Resolution dated December 12, 2005 of the Court of Appeals in CA-G.R. CV No. 67387 is hereby AFFIRMED with MODIFICATION. Security Bank and Trust Company is ordered to pay Rizal Commercial Banking Corporation: (1) the remaining P4,000,000.00, with legal interest thereon at six percent (6%) per annum from the time of filing of the complaint on February 13, 1981 to the date of finality of this Decision; (2) exemplary damages of P50,000.00; and (3) attorneys fees of P25,000.00.

No pronouncement as to costs.

SO ORDERED.

Salazar vs. JY Brothers, 20 October 2010. Negotiable Instruments Law Dishonor; acceptance as resulting in novation. Petitioners claim that respondents acceptance of the Solid Bank check which replaced the dishonored Prudential bank check resulted to novation which discharged the latter check is unmeritorious. In Nyco Sales Corporation v. BA Finance Corporation, we found untenable

petitioner Nycos claim that novation took place when the dishonored BPI check it endorsed to BA Finance Corporation was subsequently replaced by a Security Bank check. In this case, respondents acceptance of the Solid Bank check, which replaced the dishonored Prudential Bank check, did not result to novation as there was no express agreement to establish that petitioner was already discharged from his liability to pay respondent the amount of P214,000.00 as payment for the 300 bags of rice. As we said, novation is never presumed, there must be an express intention to novate. In fact, when the Solid Bank check was delivered to respondent, the same was also indorsed by petitioner which shows petitioners recognition of the existing obligation to respondent to pay P214,000.00 subject of the replaced Prudential Bank check. Anamer Salazar vs. J.Y. Brothers Marketing Corporation, G.R. No. 171998, October 20, 2010. Dishonor; liability of accommodation indorser. Among the different types of checks issued by a drawer is the crossed check. The Negotiable Instruments Law is silent with respect to crossed checks, although the Code of Commerce makes reference to such instruments. We have taken judicial cognizance of the practice that a check with two parallel lines in the upper left hand corner means that it could only be deposited and could not be converted into cash. Thus, the effect of crossing a check relates to the mode of payment, meaning that the drawer had intended the check for deposit only by the rightful person, i.e., the payee named therein. The change in the mode of paying the obligation was not a change in any of the objects or principal condition of the contract for novation to take place. Considering that when the Solid Bank check, which replaced the Prudential Bank check, was presented for payment, the same was again dishonored; thus, the obligation which was secured by the Prudential Bank check was not extinguished and the Prudential Bank check was not discharged. Thus, we found no reversible error committed by the CA in holding petitioner liable as an accommodation indorser for the payment of the dishonored Prudential Bank check. Anamer Salazar vs. J.Y. Brothers Marketing Corporation, G.R. No. 171998, October 20, 2010. ANAMER SALAZAR, Petitioner, versus J.Y. BROTHERS MARKETING CORPORATION, Respondent. G.R. No. 171998 October 20, 2010 x-----------------------------------------------------------------------------------------x

Before us is a petition for review seeking to annul and set aside the Decision[1] dated September 29, 2005 and the Resolution[2] dated March 2, 2006 of the Court of Appeals (CA) in CA-G.R. CV No. 83104. The facts, as found by the Court of Appeals, are not disputed, thus: J.Y. Brothers Marketing (J.Y. Bros., for short) is a corporation engaged in the business of selling sugar, rice and other commodities. On October 15, 1996, Anamer Salazar, a freelance sales agent, was approached by Isagani Calleja and Jess Kallos, if she knew a supplier of rice. Answering in the positive, Salazar accompanied the two to J.Y. Bros. As a consequence, Salazar with Calleja and Kallos procured from J. Y. Bros. 300 cavans of rice worth P214,000.00. As payment, Salazar negotiated and indorsed to J.Y. Bros. Prudential Bank Check No. 067481 dated October 15, 1996 issued by Nena Jaucian Timario in the amount of P214,000.00 with the assurance that the check is good as cash. On that assurance, J.Y. Bros. parted with 300 cavans of rice to Salazar. However, upon presentment, the check was dishonored due to closed account. Informed of the dishonor of the check, Calleja, Kallos and Salazar delivered to J.Y. Bros. a replacement cross Solid Bank Check No. PA365704 dated October 29, 1996 again issued by Nena Jaucian Timario in the amount of P214,000.00 but which, just the same, bounced due to insufficient funds. When despite the demand letter dated February 27, 1997, Salazar failed to settle the amount due J.Y. Bros., the latter charged Salazar and Timario with the crime of estafa before the Regional Trial Court of Legaspi City, docketed as Criminal Case No. 7474. After the prosecution rested its case and with prior leave of court, Salazar submitted a demurrer to evidence. On November 19, 2001, the court a quo rendered an Order, the dispositive portion of which reads: WHEREFORE, premises considered, the accused Anamer D. Salazar is hereby ACQUITTED of the crime charged but is hereby held liable for the value of the 300 bags of rice. Accused Anamer D. Salazar is therefore ordered to pay J.Y. Brothers Marketing Corporation the sum of P214,000.00. Costs against the accused. SO ORDERED. Aggrieved, accused attempted a reconsideration on the civil aspect of the order and to allow her to present evidence thereon. The motion was denied. Accused went up to the Supreme Court on a petition for review on certiorari

under Rule 45 of the Rules of Court. Docketed as G.R. 151931, in its Decision dated September 23, 2003, the High Court ruled: IN LIGHT OF ALL THE FOREGOING, the Petition is GRANTED. The Orders dated November 19, 2001 and January 14, 2002 are SET ASIDE and NULLIFIED. The Regional Trial Court of Legaspi City, Branch 5, is hereby DIRECTED to set Criminal Case No. 7474 for the continuation of trial for the reception of the evidence-in-chief of the petitioner on the civil aspect of the case and for the rebuttal evidence of the private complainant and the surrebuttal evidence of the parties if they opt to adduce any. SO ORDERED.[3] The Regional Trial Court (RTC) of Legaspi City, Branch 5, then proceeded with the trial on the civil aspect of the criminal case. On April 1, 2004, the RTC rendered its Decision,[4] the dispositive portion of which reads: WHEREFORE, Premises Considered, judgment is rendered DISMISSING as against Anamer D. Salazar the civil aspect of the aboveentitled case. No pronouncement as to costs. Place into the files (archive) the record of the above-entitled case as against the other accused Nena Jaucian Timario. Let an alias (bench) warrant of arrest without expiry dated issue for her apprehension, and fix the amount of the bail bond for her provisional liberty at 59,000.00 pesos. SO ORDERED.[5] The RTC found that the Prudential Bank check drawn by Timario for the amount of P214,000.00 was payable to the order of respondent, and such check was a negotiable order instrument; that petitioner was not the payee appearing in the check, but respondent who had not endorsed the check, much less delivered it to petitioner. It then found that petitioners liability should be limited to the allegation in the amended information that she endorsed and negotiated said check, and since she had never been the holder of the check, petitioner's signing of her name on the face of the dorsal side of the check did not produce the technical effect of an indorsement arising from negotiation. The RTC ruled that after the Prudential Bank check was dishonored, it was replaced by a Solid Bank check which, however, was also subsequently dishonored; that since the Solid Bank check was a crossed check, which meant that such check was only for

deposit in payees account, a condition that rendered such check nonnegotiable, the substitution of a non-negotiable Solid Bank check for a negotiable Prudential Bank check was an essential change which had the effect of discharging from the obligation whoever may be the endorser of the negotiable check. The RTC concluded that the absence of negotiability rendered nugatory the obligation arising from the technical act of indorsing a check and, thus, had the effect of novation; and that the ultimate effect of such substitution was to extinguish the obligation arising from the issuance of the Prudential Bank check. Respondent filed an appeal with the CA on the sole assignment of error that: IN BRIEF, THE LOWER COURT ERRED IN RULING THAT ACCUSED ANAMER SALAZAR BY INDORSING THE CHECK (A) DID NOT BECOME A HOLDER OF THE CHECK, (B) DID NOT PRODUCE THE TECHNICAL EFFECT OF AN INDORSEMENT ARISING FROM NEGOTIATION; AND (C) DID NOT INCUR CIVIL LIABILITY.[6] After petitioner filed her appellees' brief, the case was submitted for decision. On September 29, 2005, the CA rendered its assailed Decision, the decretal portion of which reads: IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED, the challenged Decision is REVERSED and SET ASIDE, and a new one entered ordering the appellee to pay the appellant the amount of P214,000.00, plus interest at the legal rate from the written demand until full payment. Costs against the appellee.[7] In so ruling, the CA found that petitioner indorsed the Prudential Bank check, which was later replaced by a Solid Bank check issued by Timario, also indorsed by petitioner as payment for the 300 cavans of rice bought from respondent. The CA, applying Sections 63,[8] 66[9] and 29[10] of the Negotiable Instruments Law, found that petitioner was considered an indorser of the checks paid to respondent and considered her as an accommodation indorser, who was liable on the instrument to a holder for value, notwithstanding that such holder at the time of the taking of the instrument knew her only to be an accommodation party. Respondent filed a motion for reconsideration, which the CA denied in a Resolution dated March 2, 2006. Hence this petition, wherein petitioner raises the following assignment of errors:

1. THE COURT OF APPEALS ERRED IN IGNORING THE RAMIFICATIONS OF THE ISSUANCE OF THE SOLIDBANK CHECK IN REPLACEMENT OF THE PRUDENTIAL BANK CHECK WHICH WOULD HAVE RESULTED TO THE NOVATION OF THE OBLIGATION ARISING FROM THE ISSUANCE OF THE LATTER CHECK. 2. THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE REGIONAL TRIAL COURT OF LEGASPI CITY, BRANCH 5, DISMISSING AS AGAINST THE PETITIONER THE CIVIL ASPECT OF THE CRIMINAL ACTION ON THE GROUND OF NOVATION OF OBLIGATION ARISING FROM THE ISSUANCE OF THE PRUDENTIAL BANK CHECK. 3. THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK OR EXCESS OF JURISDICTION WHEN IT DENIED THE MOTION FOR RECONSIDERATION OF THE PETITIONER ON THE GROUND THAT THE ISSUE RAISED THEREIN HAD ALREADY BEEN PASSED UPON AND CONSIDERED IN THE DECISION SOUGHT TO BE RECONSIDERED WHEN IN TRUTH AND IN FACT SUCH ISSUE HAD NOT BEEN RESOLVED AS YET.[11] Petitioner contends that the issuance of the Solid Bank check and the acceptance thereof by the respondent, in replacement of the dishonored Prudential Bank check, amounted to novation that discharged the latter check; that respondent's acceptance of the Solid Bank check, notwithstanding its eventual dishonor by the drawee bank, had the effect of erasing whatever criminal responsibility, under Article 315 of the Revised Penal Code, the drawer or indorser of the Prudential Bank check would have incurred in the issuance thereof in the amount of P214,000.00; and that a check is a contract which is susceptible to a novation just like any other contract. Respondent filed its Comment, echoing the findings of the CA. Petitioner filed her Reply thereto. We find no merit in this petition. Section 119 of the Negotiable Instrument Law provides, thus: SECTION 119. Instrument; how discharged. A negotiable instrument is discharged:

(a)

By payment in due course by or on behalf of the principal debtor;

(b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation; (c) By the intentional cancellation thereof by the holder;

(d) By any other act which will discharge a simple contract for the payment of money; (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right. (Emphasis ours) And, under Article 1231 of the Civil Code, obligations are extinguished: xxxx (6) By novation. Petitioner's claim that respondent's acceptance of the Solid Bank check which replaced the dishonored Prudential bank check resulted to novation which discharged the latter check is unmeritorious. In Foundation Specialists, Inc. v. Betonval Ready Concrete, Inc. and Stronghold Insurance Co., Inc.,[12] we stated the concept of novation, thus: x x x Novation is done by the substitution or change of the obligation by a subsequent one which extinguishes the first, either by changing the object or principal conditions, or by substituting the person of the debtor, or by subrogating a third person in the rights of the creditor. Novation may: [E]ither be extinctive or modificatory, much being dependent on the nature of the change and the intention of the parties. Extinctive novation is never presumed; there must be an express intention to novate; in cases where it is implied, the acts of the parties must clearly demonstrate their intent to dissolve the old obligation as the moving consideration for the emergence of the new one. Implied novation necessitates that the incompatibility between the old and new obligation be total on every point such that the old obligation is completely superceded by the new one. The test of incompatibility is whether they can stand together, each one having an independent existence; if they cannot and are irreconcilable, the subsequent obligation would also extinguish the first.

An extinctive novation would thus have the twin effects of, first, extinguishing an existing obligation and, second, creating a new one in its stead. This kind of novation presupposes a confluence of four essential requisites: (1) a previous valid obligation, (2) an agreement of all parties concerned to a new contract, (3) the extinguishment of the old obligation, and (4) the birth of a valid new obligation. Novation is merely modificatory where the change brought about by any subsequent agreement is merely incidental to the main obligation (e.g., a change in interest rates or an extension of time to pay; in this instance, the new agreement will not have the effect of extinguishing the first but would merely supplement it or supplant some but not all of its provisions.) The obligation to pay a sum of money is not novated by an instrument that expressly recognizes the old, changes only the terms of payment, adds other obligations not incompatible with the old ones or the new contract merely supplements the old one.[13] In Nyco Sales Corporation v. BA Finance Corporation,[14] we found untenable petitioner Nyco's claim that novation took place when the dishonored BPI check it endorsed to BA Finance Corporation was subsequently replaced by a Security Bank check,[15] and said: There are only two ways which indicate the presence of novation and thereby produce the effect of extinguishing an obligation by another which substitutes the same. First, novation must be explicitly stated and declared in unequivocal terms as novation is never presumed. Secondly, the old and the new obligations must be incompatible on every point. The test of incompatibility is whether or not the two obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the first. In the instant case, there was no express agreement that BA Finance's acceptance of the SBTC check will discharge Nyco from liability. Neither is there incompatibility because both checks were given precisely to terminate a single obligation arising from Nyco's sale of credit to BA Finance. As novation speaks of two distinct obligations, such is inapplicable to this case.[16] In this case, respondents acceptance of the Solid Bank check, which replaced the dishonored Prudential Bank check, did not result to novation as there was no express agreement to establish that petitioner was already discharged from his liability to pay respondent the amount of P214,000.00 as payment for the 300 bags of rice. As we said, novation is never presumed,

there must be an express intention to novate. In fact, when the Solid Bank check was delivered to respondent, the same was also indorsed by petitioner which shows petitioners recognition of the existing obligation to respondent to pay P214,000.00 subject of the replaced Prudential Bank check. Moreover, respondents acceptance of the Solid Bank check did not result to any incompatibility, since the two checks Prudential and Solid Bank checks were precisely for the purpose of paying the amount of P214,000.00, i.e., the credit obtained from the purchase of the 300 bags of rice from respondent. Indeed, there was no substantial change in the object or principal condition of the obligation of petitioner as the indorser of the check to pay the amount of P214,000.00. It would appear that respondent accepted the Solid Bank check to give petitioner the chance to pay her obligation. Petitioner also contends that the acceptance of the Solid Bank check, a non-negotiable check being a crossed check, which replaced the dishonored Prudential Bank check, a negotiable check, is a new obligation in lieu of the old obligation arising from the issuance of the Prudential Bank check, since there was an essential change in the circumstance of each check. Such argument deserves scant consideration. Among the different types of checks issued by a drawer is the crossed check. [17] The Negotiable Instruments Law is silent with respect to crossed checks,[18] although the Code of Commerce makes reference to such instruments.[19] We have taken judicial cognizance of the practice that a check with two parallel lines in the upper left hand corner means that it could only be deposited and could not be converted into cash.[20] Thus, the effect of crossing a check relates to the mode of payment, meaning that the drawer had intended the check for deposit only by the rightful person, i.e., the payee named therein.[21] The change in the mode of paying the obligation was not a change in any of the objects or principal condition of the contract for novation to take place.[22] Considering that when the Solid Bank check, which replaced the Prudential Bank check, was presented for payment, the same was again dishonored; thus, the obligation which was secured by the Prudential Bank check was not extinguished and the Prudential Bank check was not discharged. Thus, we found no reversible error committed by the CA in holding petitioner liable as

an accommodation indorser for the payment of the dishonored Prudential Bank check. WHEREFORE, the petition is DENIED. The Decision dated September 29, 2005 and the Resolution dated March 2, 2006, of the Court of Appeals in CA-G.R. CV No. 83104, are AFFIRMED. SO ORDERED.