IV.

Defenses and Equities
1. Material Alteration a. In general
Sec. 124. Alteration of instrument; effect of. - Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers. But when an instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration, he may enforce payment thereof according to its original tenor. Sec. 125. What constitutes a material alteration. - Any alteration which changes: (a) The date; (b) The sum payable, either for principal or interest; (c) The time or place of payment: (d) The number or the relations of the parties; (e) The medium or currency in which payment is to be made; (f) Or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration.
Effect of Alteration. Avoided | Void Situation: negotiable instrument materially altered w/o assent of all parties liable Exceptions – liable as to altered terms 1) Except as to a party (MAA) a. Made b. Authorized or c. Assented to alteration 2) Subsequent indorsers – Sec. 66 warrants that the instrument is in all respects what it purports to be, valid and subsisting at the time of her indorsement Exception – liable as to original terms o HIDC, not party to alteration may enforce payment according to its original tenor o Sec. 52 Provided, alteration not apparent on the face, otherwise irregular What Constitutes Material Alteration. Date Sum payable Time or place of payment Number or the relations of the parties Medium or currency o Adds a place of payment Any other change or addition which alters the effect of the instrument in a material manner o Changes the contract Defense to Deny Liability. Personal defense: deny liability accdg to original tenor Real defense: deny liability accdg to the altered terms Alteration Made Before Issuance Erasure/alteration not material Spoliation. Spoliation or material alteration by a stranger

o o

Does not affect instrument Provided original meaning can be ascertained

MONTINOLA v PNB Facts: Held: PNB v CA, Capitol City Dev’t Bank, PBCom and F. Abante Mktg Negotiable Instrument: Check; P97,650 Drawer: Ministry of Education and Culture Drawee: PNB Payee: F. Abante Marketing Collecting Banks: Capitol City Dev’t Bank; PBCom Facts: PNB cleared the check as good but returned it to PBCom the reason being that there was a “material alteration” of the check number. PBCom, as collecting agent of Capitol, debited its acct. Capitol could not, in turn, debit F. Abante Marketing’s account since it had withdrawn the amount already. Capitols demands from PBCom were not heeded, it filed a civil rd suit against PBCom, which filed a 3 party complaint against PNB, th which filed a 4 party complaint against F. Abante Marketing. Issue: W/N an alteration of the serial number of a check is a material alteration under the NIL [NO] PNB alleges that under Sec. 125(f), any change that alters the effect of the instrument is a material alteration. Held: An alteration is said to be material if it alters the effect of the instrument. It means an unauthorized change in an instrument that purports to modify in any respect the obligation of a party or an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party. 8 In other words, a material alteration is one which changes the items which are required to be stated under Section 1 of the Negotiable Instruments Law. Section 1 of the Negotiable Instruments Law provides:
Sec. 1. — Form of negotiable instruments. An instrument to be negotiable must conform to the following requirements: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.

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In his book entitled "Pandect of Commercial Law and Jurisprudence," Justice Jose C. Vitug opines that "an innocent alteration (generally, changes on items other than those required to be stated under Sec. 1, N.I.L.) and spoliation (alterations done by a stranger) will not avoid the instrument, but the holder may enforce it only according to its original tenor." The case at bench is unique in the sense that what was altered is the serial number of the check in question, an item which, it can readily be observed, is not an essential requisite for negotiability under Section 1 of the Negotiable Instruments Law. The aforementioned alteration did not change the relations between the parties. The name of the drawer and the drawee were not altered. The intended payee was the same. The sum of money due to the payee remained the same. PNB contends that it is through the serial numbers that a TCAA Check is determined to have been issued by a particular office or agency of the government.

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SC: The check's serial number is not the sole indication of its origin.. As succinctly found by the Court of Appeals, the name of the government agency which issued the subject check was prominently printed therein. The check's issuer was therefore sufficiently identified, rendering the referral to the serial number redundant and inconsequential. CA: If the purpose of the serial number is merely to identify the issuing government office or agency, its alteration in this case had no material effect whatsoever on the integrity of the check. The identity of the issuing government office or agency was not changed thereby and the amount of the check was not charged against the account of another government office or agency which had no liability under the check. PNB, thus cannot refuse to accept the check in question on the ground that the serial number was altered, the same being an immaterial or innocent one.

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3 party complaint against Westmont bank was dismissed on the ground of litis pendentia. In the case at bar, the check was altered so that the amount was increased from P1,000.00 to P91,000.00 and the date was changed from 24 November 1994 to 14 November 1994. Apparently, since the entries altered were among those enumerated under Section 1 and 125, namely, the sum of money payable and the date of the check, the instant controversy therefore squarely falls within the purview of material alteration.

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Issue: What is the effect of a materially altered instrument; what are the rights and obligations of the parties? Held: Indubitably, Cabilzo was not the one who made nor authorized the alteration. Neither did he assent to the alteration by his express or implied acts. There is no showing that he failed to exercise such reasonable degree of diligence required of a prudent man which could have otherwise prevented the loss. As correctly ruled by the appellate court, Cabilzo was never remiss in the preparation and issuance of the check, and there were no indicia of evidence that would prove otherwise. Indeed, Cabilzo placed asterisks before and after the amount in words and figures in order to forewarn the subsequent holders that nothing follows before and after the amount indicated other than the one specified between the asterisks. In fact, he was wary enough that he filled with asterisks the spaces between and after the amounts, not only those stated in words, but also those in numerical figures, in order to prevent any fraudulent insertion, but unfortunately, the check was still successfully altered, indorsed by the collecting bank, and cleared by the drawee bank, and encashed by the perpetrator of the fraud, to the damage and prejudice of Cabilzo. The appropriate degree of diligence required of a bank must be a high degree of diligence, if not the utmost diligence. It is obvious that Metrobank was remiss in that duty and violated that relationship. There are material alterations on the check that are visible to the naked eye. This negligence was exacerbated by the fact that the check in question was examined by the cash custodian whose functions do not include the examinations of checks indorsed for payment against drawer’s accounts. Payment made under materially altered instrument is not payment done in accordance with the instruction of the drawer. What is even more deplorable is that, having been informed of the alteration, Metrobank did not immediately re-credit the amount that was erroneously debited from Cabilzo’s account but permitted a full blown litigation to push through, to the prejudice of its client. Anyway, Metrobank is not left with no recourse for it can still run after the one who made the alteration or with the collecting bank, which it had already done. It bears repeating that the records are bare of evidence to prove that Cabilzo was negligent. Slapped with exemplary damages!

INTERNATIONAL CORPORATE BANK, INC. v CA & PNB Negotiable Instrument: 15 checks Drawer: Ministry of Education and Culture Drawee: PNB Collecting Bank: International Corporate Bank, Inc Facts: PNB cleared the checks submitted by ICB but PNB, beyond 24 hours, returned all the checks to ICB without clearing them on the ground that they were materially altered. The alterations in the checks were made on their serial numbers. Issue: W/N an alteration of the serial number of a check is a material alteration under the NIL [NO] Held: PNB v CA: alteration on the serial number of a check is not a material alteration The check in the PNB case appears to belong ot the same batch of checks as in the present case. PNB is liable to ICB for the value of the checks, with legal interest from the time of filing of the complaint until full payment. METROPOLITAN BANK AND TRUST COMPANY v RENATO CABILZO Negotiable Instrument: Check, payable to cash, postdated 24 Nov 94 Drawer: Cabilzo Drawee: Metrobank Payee: Marquez (sales commission) Collecting Bank: Westmont Bank Facts: On 16 November 1994, Cabilzo’s representative was at Metrobank Pasong Tamo Branch to make some transaction when he was asked by a bank personnel if Cabilzo had issued a check in the amount of P91,000.00 to which the former replied in the negative. On the afternoon of the same date, Cabilzo himself called Metrobank to reiterate that he did not issue a check in the amount of P91,000.00 and requested that the questioned check be returned to him for verification, to which Metrobank complied. Cabilzo discovered that the amount was altered to P91k and the date changed to 14 Nov 1994. Cabilzo demanded re-credit but Metrobank refused. Cabilzo filed a case for damages. Metrobank contends that Westmont Bank, being a collecting bank and last indorser should be held liable for the value of the check. Also, it claimed that Cabilzo was partly responsible in leaving spaces on the check, which made the fraudulent insertion of the amount and figures possible.

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