[G.R. No. 141278.

March 23, 2004]

MICHAEL A. OSMEA, petitioner, vs. CITIBANK, N.A., ASSOCIATED BANK and FRANK
TAN, respondents.
D E C I S I O N
CALLEJO, SR., J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court, as amended,
of the Decision
[1]
of the Court of Appeals in CA-G.R. CV No. 49529 which affirmed in toto the
Decision
[2]
of the Regional Trial Court of Makati City, Branch 38, in Civil Case No. 91-538.
As culled from the records, the appeal at bench stemmed from the following factual
backdrop:
On February 22, 1991, the petitioner filed with the Regional Trial Court of Makati an
action for damages against the respondents Citibank, N.A. and Associated Bank.
[3]
The case
was docketed as Civil Case No. 91-538. The complaint materially alleged that, on or about
August 25, 1989, the petitioner purchased from the Citibank Managers Check No. 20-015301
(the check for brevity) in the amount of P1,545,000 payable to respondent Frank Tan; the
petitioner later received information that the aforesaid managers check was deposited with
the respondent Associated Bank, Rosario Branch, to the account of a certain Julius Dizon under
Savings Account No. 19877; the clearing and/or payment by the respondents of the check to
an improper party and the absence of any indorsement by the payee thereof, respondent
Frank Tan, is a clear violation of the respondents obligations under the Negotiable
Instruments Law and standard banking practice; considering that the petitioners intended
payee for the check, the respondent Frank Tan, did not receive the value thereof, the
petitioner demanded from the respondents Citibank and the Associated Bank the payment or
reimbursement of the value of the check; the respondents, however, obstinately refused to
heed his repeated demands for payment and/or reimbursement of the amount of the check;
hence, the petitioner was compelled to file this complaint praying for the restitution of the
amount of the check, and for moral damages and attorneys fees.
On June 17, 1991, the petitioner, with leave of court, filed an Amended
Complaint
[4]
impleading Frank Tan as an additional defendant. The petitioner averred therein
that the check was purchased by him as a demand loan to respondent Frank Tan. Since
apparently respondent Frank Tan did not receive the proceeds of the check, the petitioner
might have no right to collect from respondent Frank Tan and is consequently left with no
recourse but to seek payment or reimbursement from either or both respondents Citibank
and/or Associated Bank.
In its answer to the amended complaint,
[5]
the respondent Associated Bank alleged that
the petitioner was not the real party-in-interest but respondent Frank Tan who was the payee
of the check. The respondent also maintained that the check was deposited to the account of
respondent Frank Tan, a.k.a. Julius Dizon, through its Ayala Head Office and was credited to
the savings account of Julius Dizon; the Ayala office confirmed with the Rosario Branch that the
account of Julius Dizon is also in reality that of respondent Frank Tan; it never committed any
violation of its duties and responsibilities as the proceeds of the check went and was credited
to respondent Frank Tan, a.k.a. Julius Dizon; the petitioners affirmative allegation of non-
payment to the payee is self-serving; as such, the petitioners claim for damages is baseless,
unfounded and without legal basis.
On the other hand, the respondent Citibank, in answer to the amended
complaint,
[6]
alleged that the payment of the check was made by it in due course and in the
exercise of its regular banking function. Since a managers check is normally purchased in
favor of a third party, the identity of whom in most cases is unknown to the issuing bank, its
only responsibility when paying the check was to examine the genuineness of the check. It had
no way of ascertaining the genuineness of the signature of the payee respondent Frank Tan
who was a total stranger to it. If at all, the petitioner had a cause of action only against the
respondent Associated Bank which, as depository or collecting bank, was obliged to make sure
that the check in question was properly endorsed by the payee. It is not expected of the
respondent Citibank to ascertain the genuineness of the indorsement of the payee or even the
lack of indorsement by him, most especially when the check was presented for payment with
the respondent Associated Banks guaranteeing all prior indorsements or lack thereof.
On March 16, 1992, the trial court declared Frank Tan in default for failure to file his
answer.
[7]
On June 10, 1992, the pre-trial conference was concluded without the parties
reaching an amicable settlement.
[8]
Hence, trial on the merits ensued.
After evaluating the evidence adduced by the parties, the trial court resolved that the
preponderance of evidence supports the claim of the petitioner as against respondent Frank
Tan only but not against respondents Banks. Hence, on February 21, 1995, the trial court
rendered judgment in favor of the petitioner and against respondent Frank Tan. The
complaints against the respondents Banks were dismissed. The dispositive portion of the
decision reads:
WHEREFORE, judgment is hereby rendered as follows :
1. Ordering defendant Frank Tan to pay plaintiff Michael Osmea the amount of One Million
Five Hundred Forty-Five Thousand (P1,545,000.00) Pesos, Philippine Currency, with interest
thereon at 12% per annum from January 1990, date of extra-judicial demand until the full
amount is paid;
2. Dismissing the complaint against defendants Citibank and Associated Bank;
3. Dismissing the counter-claims and the cross-claim of Citibank against Associated Bank for
lack of merit.
With costs against defendant Frank Tan.
[9]

The petitioner appealed the decision,
[10]
while respondent Frank Tan did not. On
November 26, 1999, the appellate court rendered judgment affirming in toto the decision of
the trial court. Aggrieved, the petitioner assailed the decision in his petition at bar.
The petitioner contends that:
I. RESPONDENT COURT ERRED IN NOT HOLDING CITIBANK AND ASSOCIATED BANK
LIABLE TO PETITIONER FOR THE ENCASHMENT OF CITIBANK MANAGERS CHECK
NO. 20015301 BY JULIUS DIZON.
II. RESPONDENT COURT ERRED IN HOLDING THAT FRANK TAN AND JULIUS DIZON
ARE ONE AND THE SAME PERSON.
III. THE IDENTITY OF FRANK TAN AS JULIUS DIZON WAS KNOWN ONLY TO
ASSOCIATED BANK AND WAS NOT BINDING ON PETITIONER.
[11]

The petition is denied.
The petitioner asserts that the check was payable to the order of respondent
Tan. However, the respondent Associated Bank ordered the check to be deposited to the
account of one Julius Dizon, although the check was not endorsed by respondent Tan. As
Julius Dizon was not a holder of the check in due course, he could not validly negotiate the
check. The latter was not even a transferee in due course because respondent Tan, the payee,
did not endorse the said check. The position of the respondent Bank is akin to that of a bank
accepting a check for deposit wherein the signature of the payee or endorsee has been forged.
The contention of the petitioner does not hold water.
The fact of the matter is that the check was endorsed by Julius Dizon and was
deposited and credited to Savings Account No. 19877 with the respondent Associated
Bank. But the evidence on record shows that the said account was in the name of Frank Tan
Guan Leng, which is the Chinese name of the respondent Frank Tan, who also uses the alias
Julius Dizon. As correctly ruled by the Court of Appeals:
On the other hand, Associated satisfactorily proved that Tan is using and is also known by his
alias of Julius Dizon. He signed the Agreement On Bills Purchased (Exh. 1) and Continuing
Suretyship Agreement (Exh. 2) both acknowledged on January 16, 1989, where his full name is
stated to be FRANK Tan Guan Leng (aka JULIUS DIZON). Exh. 1 also refers to his Account
No. SA#19877, the very same account to which the P1,545,000.00 from the managers check
was deposited. Osmea countered that such use of an alias is illegal. That is but an irrelevant
casuistry that does not detract from the fact that the payee Tan as Julius Dizon has encashed
and deposited the P1,545,000.00.
[12]

The respondent Associated Bank presented preponderant evidence to support its
assertion that respondent Tan, the payee of the check, did receive the proceeds of the
check. It adduced evidence that Julius Dizon and Frank Tan are one and the same
person. Respondent Tan was a regular and trusted client or depositor of the respondent
Associated Bank in its branch at Rosario, Binondo, Manila. As such, respondent Tan was
allowed to maintain two (2) savings accounts therein.
[13]
The first is Savings Account No.
20161-3 under his name Frank Tan.
[14]
The other is Savings Account No. 19877 under his
assumed Filipino name Julius Dizon,
[15]
to which account the check was deposited in the
instant case. Both witnesses for the respondent Associated Bank, Oscar Luna (signature
verifier) and Luz Lagrimas (new accounts clerk), testified that respondent Tan was using the
alias Julius Dizon, and that both names referred to one and the same person, as Frank Tan
himself regularly transacted business at the bank under both names.
[16]
This is also evidenced
by the Agreement on Bills Purchased
[17]
and the Continuing Suretyship
Agreement
[18]
executed between Frank Tan and the respondent Associated Bank on January
16, 1989. Frank Tans name appears in said document as FRANK TAN GUAN LENG (a.k.a.
JULIUS DIZON).
[19]
The same documentary evidence also made reference to Savings Account
No. 19877,
[20]
the very same account to which the check was deposited and the
entire P1,545,000 was credited. Additionally, Citibank Check No. 075713
[21]
which was
presented by the petitioner to prove one of the loans previously extended to respondent Tan
showed that the endorsement of respondent Tan at the dorsal side thereof
[22]
is strikingly
similar to the signatures of Frank Tan appearing in said agreements.
By seeking to recover the loan from respondent Tan, the petitioner admitted that
respondent Tan received the amount of the check. This apprehension was not without any
basis at all, for after the petitioner attempted to communicate with respondent Tan on January
or February 1990, demanding payment for the loan, respondent Tan became elusive of the
petitioner.
[23]
As a matter of fact, respondent Tan did not file his answer to the amended
complaint and was never seen or heard of by the petitioner.
[24]
Besides, if it were really a fact
that respondent Tan did not receive the proceeds of the check, he could himself have initiated
the instant complaint against respondents Banks, or in the remotest possibility, joined the
petitioner in pursuing the instant claim.
The petitioner initially sought to recover from the respondents Banks the amount
of P1,545,000 corresponding to the loan obtained by respondent Tan from him, obviously
because respondent Tan had no intent to pay the amount. The petitioner alleges that the
respondents Banks were negligent in paying the amount to a certain Julius Dizon, in relation to
the pertinent provisions of the Negotiable Instruments Law, without the proper indorsement
of the payee, Frank Tan. The petitioner cites the ruling of the Court in Associated Bank v. Court
of Appeals,
[25]
in which we outlined the respective responsibilities and liabilities of a drawee
bank, such as the respondent Citibank, and a collecting bank, such as the defendant Associated
Bank, in the event that payment of a check to a person not designated as the payee, or who is
not a holder in due course, had been made. However, the ruling of the Court therein does not
apply to the present case for, as has been amply demonstrated, the petitioner failed to
establish that the proceeds of the check was indeed wrongfully paid by the respondents Banks
to a person other than the intended payee. In addition, the Negotiable Instruments Law was
enacted for the purpose of facilitating, not hindering or hampering transactions in commercial
paper. Thus, the said statute should not be tampered with haphazardly or lightly. Nor should
it be brushed aside in order to meet the necessities in a single case.
[26]

Moreover, the chain of events following the purported delivery of the check to
respondent Tan renders even more dubious the petitioners claim that respondent Tan had not
received the proceeds of the check. Thus, the petitioner never bothered to find out from the
said respondent whether the latter received the check from his messenger. And if it were to
be supposed that respondent Tan did not receive the check, given that his need for the money
was urgent, it strains credulity that respondent Tan never even made an effort to get in touch
with the petitioner to inform the latter that he did not receive the check as agreed upon, and
to inquire why the check had not been delivered to him. The petitioner and respondent Tan
saw each other during social gatherings but they never took the chance to discuss details on
the loan or the check.
[27]
Their actuations are not those to be usually expected of friends of 15
years who, as the petitioner would want to impress upon this Court, were transacting business
on the basis of confidence.
[28]
In fact, the first time that the petitioner attempted to
communicate with respondent Tan was on January or February 1990, almost five or six months
after the expected delivery of the check, for the purpose of demanding payment for the
loan. And it was only on that occasion that respondent Tan, as the petitioner insinuates,
informed him that he (Frank Tan) had not received the proceeds of the check and refused to
pay his loan.
[29]
All told, the petitioners allegation that respondent Tan did not receive the
proceeds of the check
[30]
is belied by the evidence on record and attendant circumstances.
Conversely, the records would disclose that even the petitioner himself had misgivings
about the truthfulness of his allegation that respondent Tan did not receive the amount of the
check. This is made implicit by respondent Tans being made a party-defendant to the case
when the petitioner filed his amended complaint. In his memorandum in the case below, the
petitioner averred inter alia that:
The amount of P1,545,000.00 is sought to be recovered from:
1. Frank Tan for his failure to pay the loan extended by plaintiff; and
2. Associated Bank and Citibank for having accepted for deposit and/or paid the Citibank
managers check despite the absence of any signature/endorsement by the named payee,
Frank Tan.
The claim of the petitioner that respondent Tans use of an alias is illegal does not detract
a whit from the fact that respondent Tan had been credited by the respondent Associated
Bank for the amount of the check. Respondent Tan did not appeal the decision of the RTC.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The Decision dated November
26, 1999 of the Court of Appeals in CA-G.R. CV No. 49529 is hereby AFFIRMED. Costs against
the petitioner.
SO ORDERED.























G.R. No. 120639 September 25, 1998
BPI EXPRESS CARD CORPORATION, petitioner,
vs.
COURT OF APPEALS and RICARDO J. MARASIGAN, respondents.

KAPUNAN, J.:
The question before this Court is whether private respondent can recover moral damages
arising from the cancellation of his credit card by petitioner credit card corporation.
The facts of the case are as stated in the decision of the respondent court,
1
to wit:
The case arose from the dishonor of the credit card of the plaintiff Atty. Ricardo J.
Marasigan by Caf Adriatico, a business establishment accredited with the defendant-
appellate BPI Express Card Corporation (BECC for brevity), on December 8, 1989 when the
plaintiff entertained some guests thereat.
The records of this case show that plaintiff, who is a lawyer by profession, was a
complimentary member of BECC from February 1988 to February 1989 and was issued
Credit Card No. 100-012-5534 with a credit limit of P3,000.00 and with a monthly billing
every 27th of the month (Exh. N), subject to the terms and conditions stipulated in the
contract (Exh. 1-b). His membership was renewed for another year or until February 1990
and the credit limit was increased to P5,000.00 (Exh. A). The plaintiffs oftentimes
exceeded his credit limits (Exhs. I, I-1 to I-12) but this was never taken against him by the
defendant and even his mode of paying his monthly bills in check was tolerated. Their
contractual relations went on smoothly until his statement of account for October 1989
amounting to P8,987.84 was not paid in due time. The plaintiff admitted having
inadvertently failed to pay his account for the said month because he was in Quezon
province attending to some professional and personal commitments. He was informed by
his secretary that defendant was demanding immediate payment of his outstanding
account, was requiring him to issue a check for P15,000.00 which would include his future
bills, and was threatening to suspend his credit card. Plaintiff issued Far East Bank and
Trust Co. Check No. 494675 in the amount of P15,000.00, postdated December 15, 1989
which was received on November 23, 1989 by Tess Lorenzo, an employee of the
defendant (Exhs. J and J-1), who in turn gave the said check to Jeng Angeles, a co-
employee who handles the account of the plaintiff. The check remained in the custody of
Jeng Angeles. Mr. Roberto Maniquiz, head of the collection department of defendant was
formally informed of the postdated check about a week later. On November 28, 2989,
defendant served plaintiff a letter by ordinary mail informing him of the temporary
suspension of the privileges of his credit card and the inclusion of his account number in
their Caution List. He was also told to refrain from further use of his credit card to avoid
any inconvenience/embarrassment and that unless he settles his outstanding account
with the defendant within 5 days from receipt of the letter, his membership will be
permanently cancelled (Exh. 3). There is no showing that the plaintiff received this letter
before December 8, 1989. Confidential that he had settled his account with the issuance
of the postdated check, plaintiff invited some guests on December 8, 1989 and
entertained them at Caf Adriatico. When he presented his credit card to Caf Adriatico
for the bill amounting to P735.32, said card was dishonored. One of his guests, Mary Ellen
Ringler, paid the bill by using her own credit card a Unibankard (Exhs. M, M-1 and M-2).
In a letter addressed to the defendant dated December 12, 1989, plaintiff requested that
he be sent the exact billing due him as of December 15, 1989, to withhold the deposit of
his postdated check and that said check be returned to him because he had already
instructed his bank to stop the payment thereof as the defendant violated their
agreement that the plaintiff issue the check to the defendant to cover his account
amounting to only P8,987.84 on the condition that the defendant will not suspend the
effectivity of the card (Exh. D). A letter dated December 16, 1989 was sent by the plaintiff
to the manager of FEBTC, Ramada Branch, Manila requesting the bank to stop the
payment of the check (Exhs. E, E-1). No reply was received by plaintiff from the defendant
to his letter dated December 12, 1989. Plaintiff sent defendant another letter dated March
12, 1990 reminding the latter that he had long rescinded and cancelled whatever
arrangement he entered into with defendant and requesting for his correct billing, less the
improper charges and penalties, and for an explanation within five (5) days from receipt
thereof why his card was dishonored on December 8, 1989 despite assurance to the
contrary by defendant's personnel-in-charge, otherwise the necessary court action shall
be filed to hold defendant responsible for the humiliation and embarrassment suffered by
him (Exh. F). Plaintiff alleged further that after a few days, a certain Atty. Albano,
representing himself to be working with the office of Atty. Lopez, called him inquiring as to
how the matter can be threshed out extrajudicially but the latter said that such is a serious
matter cannot be discussed over the phone. The defendant served its final demand to the
plaintiff dated March 21, 1990 requiring him to pay in full his overdue account, including
stipulated fees and charges, within 5 days from receipt thereof or face court action and
also to replace the postdated check with cash within the same period or face criminal suit
for violation of Bouncing Check Law (Exh. G/Exh. 13). The plaintiff in a reply letter dated
April 5, 1990 (Exh. H), demanded defendant's compliance with his request in his first letter
dated March 12, 1990 within three (3) days from receipt, otherwise the plaintiff will file a
case against them, . . . .
2

Thus, on May 7, 1990 private respondent filed a complaint for damages against petitioner
before the Regional Trial Court of Makati, Branch 150, docketed as Civil Case No. 90-1174.
After trial the trial court ruled for private respondent, finding that herein petitioner abused its
right in contravention of Article 19 of the Civil Code.
3
The dispositive portion of the decision
reads:
Wherefore, judgment is hereby rendered ordering the defendant to pay plaintiff the
following:
1. P 100,000.00 as moral damages;
2. P 50,000.00 as exemplary damages; and
3. P 20,000.00 by way of attorney's fees.
On the other hand, plaintiff is ordered to pay defendant its outstanding obligation in
the amount of P14,439.41, amount due as of December 15, 1989.
4

The trial court's ruling was based on its findings and conclusions, to wit:
There is no question that plaintiff had been in default in the payment of his billings for
more than two months, prompting defendant to call him and reminded him of his
obligation. Unable to personally talk with him, this Court is convinced that somehow one
or another employee of defendant called him up more that once.
However, while it is true that as indicated in the terms and conditions of the application
for BPI credit card upon failure of the cardholder to pay his outstanding obligation for
more that thirty (30) days, the defendant can automatically suspend or cancel the credit
card, that reserved right should not have been abused as it was in fact abused, in plaintiff's
case. What is more peculiar here is that there have been admitted communications
between plaintiff and defendant prior to the suspension or cancellation of plaintiff's credit
card and his inclusion in the cautions list. However, nowhere in any of these
communications was there ever a hint given to plaintiff that his card had already been
suspended or cancelled. In fact, the Court observed that while defendant was trying its
best to persuade plaintiff to update its account and pay its obligation, it had already taken
steps to suspend/cancel plaintiff's card and include him in the caution list. While the Court
admires defendant's diplomacy in dealing with its clients, it cannot help but frown upon
the backhanded way defendant deal with plaintiff's case. For despite Tess Lorenzo's
denial, there is reason to believe that plaintiff was indeed assured by defendant of the
continued honoring of his credit card so long as he pays his obligation of P15,000.00.
Worst, upon receipt of the postdated check, defendant kept the same until a few days
before it became due and said check was presented to the head of the collection
department, Mr. Maniquiz, to take steps thereon, resulting to the embarrassing situations
plaintiff found himself in on December 8, 1989. Moreover, Mr. Maniquiz himself admitted
that his request for plaintiff to replace the check with cash was not because it was a
postdated check but merely to tally the payment with the account due.
Likewise, the Court is not persuaded by the sweeping denials made by Tess Lorenzo and
her claim that her only participation was to receive the subject check. Her immediate
superior, Mr. Maniquiz testified that he had instructed Lorenzo to communicate with
plaintiff once or twice to request the latter to replace the questioned check with cash,
thus giving support to the testimony of plaintiff's witness, Dolores Quizon, that it was one
Tess Lorenzo whom she had talked over the phone regarding plaintiff's account and
plaintiff's own statement that it was this woman who assured him that his card has not yet
been and will not be cancelled/suspended if he would pay defendant the sum of
P15,000.00.
Now, on the issue of whether or not upon receipt of the subject check
defendant had agreed that the card shall remain effective the Court takes
note of the following:
1. An employee of defendant corporation unconditionally accepted the subject check
upon its delivery despite its being a postdated one; and the amount did not tally with
plaintiff's obligation;
2. Defendant did not deny nor controvert plaintiff's claim that all of his payments were
made in checks;
3. Defendant's main witness, Mr. Maniquiz, categorically stated that the request for
plaintiff to replace his postdated check with a cash was merely for the purpose of tallying
plaintiff's outstanding obligation with his payment and not to question the postdated
check;
4. That the card was suspended almost a week after receipt of the postdated check;
5. That despite the many instances that defendant could have informed plaintiff over the
phone of the cancellation or suspension of his credit card, it did not do so, which could
have prevented the incident of December 8, 1989, the notice allegedly sent thru ordinary
mail is not only unreliable but takes a long time. Such action as suspension of credit card
must be immediately relayed to the person affected so as to avoid embarrassing
situations.
6. And that the postdated check was deposited on December 20, 1989.
In view of the foregoing observations, it is needless to say that there was indeed an
arrangement between plaintiff and the defendant, as can be inferred from the acts of the
defendant's employees, that the subject credit card is still good and could still be used by
the plaintiff as it would be honored by the duly accredited establishment of defendant.
Not satisfied with the Regional Trial Court's decision, petitioner appealed to the Court of
Appeals, which in a decision promulgated on March 9, 1995 ruled in its dispositive portion.
WHEREFORE, premises considered the decision appealed from is hereby AFFIRMED with
the MODIFICATION that the defendant-appellant shall pay the plaintiff-appellee the
following: P50,000.00 as moral damages: P25,000.00 as exemplary damages; and
P10,000.00 by way of attorney's fees.
SO ORDERED.
6

Hence, the present petition on the following assignment of errors:
I
THE LOWER COURT ERRED IN DECLARING THAT THERE WAS INDEED AN AGREEMENT OR
ARRANGEMENT ENTERED INTO BETWEEN THE PARTIES WHEREIN THE DEFENDANT
REQUIRED THE PLAINTIFF TO ISSUE A POSTDATED CHECK IN ITS FAVOR IN THE AMOUNT
OF P15,000.00 AS PAYMENT FOR HIS OVERDUE ACCOUNTS, WITH THE CONDITION THAT
THE PLAINTIFF'S CREDIT CARD WILL NOT BE SUSPENDED OR CANCELLED.
II
THE LOWER COURT ERRED IN HOLDING DEFENDANT LIABLE FOR DAMAGES AND
ATTORNEY'S FEES ARISING OUT FROM THE DISHONOR OF THE PLAINTIFF'S CREDIT CARD.
7

We find the petition meritorious.
The first issue to be resolved is whether petitioner had the right to suspend the credit card of
the private respondent.
Under the terms and conditions of the credit card, signed by the private respondent, any card
with outstanding balances after thirty (30) days from original billing/statement shall
automatically be suspended, thus:
PAYMENT OF CHARGES BECC shall furnish the Cardholder a monthly statement of
account made through the use of the CARD and the Cardholder agrees that all charges
made through the use of the CARD shall be paid by the Cardholder on or before the last
day for payment, which is twenty (20) days from the date of the said statement of
account; and such payment due date may be changed to an earlier date if the Cardholder's
account is considered overdue and/or with balances in excess of the approved credit limit;
or to such other date as may be deemed proper by the CARD issuer with notice to the
Cardholder on the same monthly statement of account. If the last day for payment falls on
a Saturday, Sunday or Holiday, the last day for payment automatically becomes the last
working day prior to the said payment date. However, notwithstanding the absence or
lack of proof of service of the statement of charges to the Cardholder, the latter shall pay
any or all charges made through the use of the CARD within thirty (30) days from the date
or dates thereof. Failure of Cardholder to pay any and all charges made through the CARD
within the payment period as stated in the statement of charges or with in thirty (30) days
from actual date or dates whichever occur earlier, shall render him in default without the
necessity of demand from BECC, which the Cardholder expressly waives. These charges or
balance thereof remaining unpaid after the payment due date indicated on the monthly
statement of account shall bear interest of 3% per month and an additional penalty fee
equivalent to another 3% of the amount due for every month or a fraction of a month's
delay. PROVIDED, that if there occurs any changes on the prevailing market rates BECC
shall have the option to adjust the rate of interest and/or penalty fee due on the
outstanding obligation with prior notice to the Cardholder.
xxx xxx xxx
Any CARD with outstanding balances unpaid after thirty (30) days from original
billing/statement date shall automatically be suspended and those with accounts unpaid
after sixty (60) days from said original billing/statement date shall automatically be
cancelled without prejudice to BECC's right to suspend or cancel any CARD any time and for
whatever reason. In case of default in his obligation as provided for in the preceding
paragraph, Cardholder shall surrender his CARD to BECC and shall in addition to the
interest and penalty charges aforementioned, pay the following liquidated damages
and/or fees (a) a collection fee of 25% of the amount due if the account is referred to a
collection agency or attorney; (b) a service fee of P100 for every dishonored check issued
by the Cardholder's in payment of his account, without prejudice; however to BECC's right
of considering Cardholder's obligation unpaid; cable cost for demanding payment or
advising cancellation of membership shall also be for Cardholder's account; and (c) a final
fee equivalent to 25% of the unpaid balance, exclusive of litigation expenses and judicial
costs, if the payment of the account is enforced through court action.
8

The aforequoted provision of the card cannot be any clearer. By his own admission private
respondent no payment within thirty days for his billing/statement dated 27 September 1989.
Neither did he make payment for his original billing/statement dated 27 October 1989.
Consequently as early as 28 October 1989 thirty days from the non-payment of his billing
dated 27 September 1989, petitioner corporation could automatically suspend his credit card.
The next issue is whether prior to the suspension of private respondent's credit card on 28
November 1989 the parties entered into an agreement whereby the card could still be used
and would be duly honored by duly accredited establishments.
We agree with the findings of the respondent court, that there was an arrangement between
the parties, wherein the petitioner required the private respondent to issue a check worth
P15,000.00 as payment for the latter's billings. However we find that the private respondent
was not able to comply with this obligation.
As the testimony of private respondent himself bears out, the agreement was for the
immediate payment of the outstanding account:
Q In said statement of account that you are supposed to pay the P8,974.84 the charge of
interest and penalties, did you note that?
A Yes, sir I noted the date.
Q When?
A When I returned from the Quezon province, sir
Q When?
A I think November 22, sir.
Q So that before you used again the credit card you were not able to pay immediately this
P8,987.84 in cash?
A I paid P15,000.00, sir.
Q My question Mr. witness is, did you pay this P8,987.84 in charge of interest and
penalties immediately in cash?
A In cash no, but in check, sir.
Q You said that you noted the word "immediately" in bold letters in your statement of
accounts, why did not pay immediately?
A Because I received that late, sir.
Q Yes, on November 22 when you received from the secretary of the defendant telling you
to pay the principal amount of P8,987.84, why did you not pay?
A There was a communication between me and the defendant, I was required to pay
P8,000.00 but I paid in check for P15,000.00, sir.
Q Do you have any evidence to show that the defendant required you to pay in check for
P15,000.00?
A Yes, sir.
Q Where is it?
A It was telecommunication, sir.
Q So there is no written communication between you and the defendant?
A There was none, sir.
Q There is no written agreement which says that P8,987.84 should be paid for P15,000.00
in check, there is none?
A Yes, no written agreement, sir.
Q And you as a lawyer you know that a check is not considered as cash specially when it is
postdated sent to the defendant?
A That is correct, sir.
Clearly the purpose of the arrangement between the parties on November 22, 1989, was for
the immediate payment of the private respondent's outstanding account, in order that his
credit card would not be suspended.
As agreed upon by the parties, on the following day, private respondent did issue a check for
P15,000.00. However, the check was postdated 15 December 1989. Settled is the doctrine that
a check is only a substitute for money and not money, the delivery of such an instrument does
not, by itself operate as payment.
9
This is especially true in the case of a postdated check.
Thus, the issuance by the private respondent of the postdated check was not effective
payment. It did not comply with his obligation under the arrangement with Miss Lorenzo.
Petitioner corporation was therefore justified in suspending his credit card.
Finally, we find no legal and factual basis for private respondent's assertion that in canceling
the credit card of the private respondent, petitioner abused its right under the terms and
conditions of the contract.
To find the existence of an abuse of right Article 19 the following elements must be present (1)
There is a legal right or duty; (2) which is exercised in bad faith; (3) for the sole intent of
prejudicing or injuring another.
10

Time and again this Court has held that good faith is presumed and the burden of proving bad
faith is on the party alleging it.
11
This private respondent failed to do. In fact, the action of the
petitioner belies the existence of bad faith. As early as 28 October 1989, petitioner could have
suspended private respondent's card outright. Instead, petitioner allowed private respondent
to use his card for several weeks. Petitioner had even notified private respondent of the
impending suspension of his credit card and made special accommodations for him for setting
his outstanding account. As such, petitioner cannot be said to have capriciously and arbitrarily
canceled the private respondent's credit card.
We do not dispute the findings of the lower court that private respondent suffered damages as
a result of the cancellation of his credit card. However, there is a material distinction between
damages and injury. Injury is the illegal invasion of a legal right; damage is the loss, hurt or
harm which results from the injury; and damages are the recompense or compensation
awarded for the damage suffered. Thus, there can be damage without injury in those instances
in which the loss or harm was not the results of a violation of a legal duty. In such cases, the
consequences must be borne by the injured person alone, the law affords no remedy for
damages resulting from an act which does not amount to a legal injury or wrong. These
situations are often called damnum absque
injuria.
12

In other words, in order that the plaintiff may maintain an action for the injuries of which he
complaints, he must establish that such injuries resulted from a breach of duty which the
defendant owed to the plaintiff a concurrence of injury to the plaintiff and legal responsibility
by the person causing it. The underlying basis for the award of tort damages is the premise
that an individual was injured in contemplation of law. Thus, there must first be a breach of
some duty and the imposition of liability for that breach before damages may be
awarded;
13
and the breach of such duty should be the proximate cause of the injury.
We therefore disagree with the ruling of the respondent court that the dishonor of the credit
card of the private respondent by Caf Adriatico is attributable to petitioner for its willful or
gross neglect to inform the private respondent of the suspension of his credit card, the
unfortunate consequence of which brought social humiliation and embarrassment to the
private respondent.
14

It was petitioner's failure to settle his obligation which caused the suspension of his credit card
and subsequent dishonor at Caf Adriatico. He can not now pass the blame to the petitioner
for not notifying him of the suspension of his card. As quoted earlier, the application contained
the stipulation that the petitioner could automatically suspend a card whose billing has not
been paid for more than thirty days. Nowhere is it stated in the terms and conditions of the
application that there is a need of notice before suspension may be affected as private
respondent claims.
15

This notwithstanding on November 28, 1989, the day of the suspension of private respondent's
card, petitioner sent a letter by ordinary mail notifying private respondent that his card had
been temporarily suspended. Under the Rules on Evidence, there is a disputable presumption
that letters duly directed and mailed were received on the regular course of mail.
16
Aside from
the private respondent's bare denial he failed to present evidence to rebut the presumption
that he received said notice. In fact upon cross examination private respondent admitted that
he did receive the letter notifying him of the cancellation:
Q Now you were saying that there was a first letter sent to you by the defendant?
A Your letter, sir.
Q Was that the first letter that you received?
A Yes, sir.
Q It is that there was a communication first between you and the defendant?
A There was none, sir. I received a cancellation notice but that was after November 27.
17

As it was private respondent's own negligence which was the proximate cause of his
embarrassing and humiliating experience, we find the award of damages by the respondent
court clearly unjustified. We take note of the fact that private respondent has not yet paid his
outstanding account with petitioner.
IN VIEW OF THE FOREGOING, the decision of the Court of Appeals ordering petitioner to pay
private respondent P100,000.00 as moral damages P50,000.00 as exemplary damages and
P20,000.00 as attorney's fees, is SET ASIDE. Private respondent is DIRECTED to pay his
outstanding obligation with the petitioner in the amount of P14,439.41.
SO ORDERED.







G.R. No. 97753 August 10, 1992
CALTEX (PHILIPPINES), INC., petitioner,
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofilea & Guingona for private.
REGALADO, J.:
This petition for review on certiorari impugns and seeks the reversal of the decision
promulgated by respondent court on March 8, 1991 in CA-G.R. CV No. 23615
1
affirming with
modifications, the earlier decision of the Regional Trial Court of Manila, Branch XLII,
2
which
dismissed the complaint filed therein by herein petitioner against respondent bank.
The undisputed background of this case, as found by the court a quo and adopted by
respondent court, appears of record:
1. On various dates, defendant, a commercial banking institution, through its Sucat Branch
issued 280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz who
deposited with herein defendant the aggregate amount of P1,120,000.00, as follows:
(Joint Partial Stipulation of Facts and Statement of Issues, Original Records, p. 207;
Defendant's Exhibits 1 to 280);
CTD CTD
Dates Serial Nos. Quantity Amount
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000

Total 280 P1,120,000
===== ========
2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in
connection with his purchased of fuel products from the latter (Original Record, p. 208).
3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat
Branch Manger, that he lost all the certificates of time deposit in dispute. Mr. Tiangco
advised said depositor to execute and submit a notarized Affidavit of Loss, as required by
defendant bank's procedure, if he desired replacement of said lost CTDs (TSN, February 9,
1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the
required Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit of loss,
280 replacement CTDs were issued in favor of said depositor (Defendant's Exhibits 282-
561).
5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant
bank in the amount of Eight Hundred Seventy Five Thousand Pesos (P875,000.00). On the
same date, said depositor executed a notarized Deed of Assignment of Time Deposit
(Exhibit 562) which stated, among others, that he (de la Cruz) surrenders to defendant
bank "full control of the indicated time deposits from and after date" of the assignment
and further authorizes said bank to pre-terminate, set-off and "apply the said time
deposits to the payment of whatever amount or amounts may be due" on the loan upon
its maturity (TSN, February 9, 1987, pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.)
Inc., went to the defendant bank's Sucat branch and presented for verification the CTDs
declared lost by Angel dela Cruz alleging that the same were delivered to herein plaintiff
"as security for purchases made with Caltex Philippines, Inc." by said depositor (TSN,
February 9, 1987, pp. 54-68).
7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from
herein plaintiff formally informing it of its possession of the CTDs in question and of its
decision to pre-terminate the same.
8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the
former "a copy of the document evidencing the guarantee agreement with Mr. Angel dela
Cruz" as well as "the details of Mr. Angel dela Cruz" obligation against which plaintiff
proposed to apply the time deposits (Defendant's Exhibit 564).
9. No copy of the requested documents was furnished herein defendant.
10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of
the value of the CTDs in a letter dated February 7, 1983 (Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell
due and on August 5, 1983, the latter set-off and applied the time deposits in question to
the payment of the matured loan (TSN, February 9, 1987, pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant
bank be ordered to pay it the aggregate value of the certificates of time deposit of
P1,120,000.00 plus accrued interest and compounded interest therein at 16% per annum,
moral and exemplary damages as well as attorney's fees.
After trial, the court a quo rendered its decision dismissing the instant complaint.
3

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

The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to provide a better
understanding of the issues involved in this recourse.
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR
THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine
Currency, repayable to said depositor 731 days. after date, upon presentation and
surrender of this certificate, with interest at the rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)

AUTHORIZED SIGNATURES
5

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

We disagree with these findings and conclusions, and hereby hold that the CTDs in question
are negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable
Instruments Law, enumerates the requisites for an instrument to become negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for negotiability. The
parties' bone of contention is with regard to requisite (d) set forth above. It is noted that Mr.
Timoteo P. Tiangco, Security Bank's Branch Manager way back in 1982, testified in open court
that the depositor reffered to in the CTDs is no other than Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are saying that per books of the bank, the
depositor referred (sic) in these certificates states that it was Angel dela Cruz?
witness:
a Yes, your Honor, and we have the record to show that Angel dela Cruz was the one
who cause (sic) the amount.
Atty. Calida:
q And no other person or entity or company, Mr. Witness?
witness:
a None, your Honor.
7

xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor identified in all of these certificates of time
deposit insofar as the bank is concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is
determined from the writing, that is, from the face of the instrument itself.
9
In the
construction of a bill or note, the intention of the parties is to control, if it can be legally
ascertained.
10
While the writing may be read in the light of surrounding circumstances in order
to more perfectly understand the intent and meaning of the parties, yet as they have
constituted the writing to be the only outward and visible expression of their meaning, no
other words are to be added to it or substituted in its stead. The duty of the court in such case
is to ascertain, not what the parties may have secretly intended as contradistinguished from
what their words express, but what is the meaning of the words they have used. What the
parties meant must be determined by what they said.
11

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

The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer
is in the negative. The records reveal that Angel de la Cruz, whom petitioner chose not to
implead in this suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to
petitioner without informing respondent bank thereof at any time. Unfortunately for
petitioner, although the CTDs are bearer instruments, a valid negotiation thereof for the true
purpose and agreement between it and De la Cruz, as ultimately ascertained, requires both
delivery and indorsement. For, although petitioner seeks to deflect this fact, the CTDs were in
reality delivered to it as a security for De la Cruz' purchases of its fuel products. Any doubt as
to whether the CTDs were delivered as payment for the fuel products or as a security has been
dissipated and resolved in favor of the latter by petitioner's own authorized and responsible
representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr.,
Caltex Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr.
Angel dela Cruz to guarantee his purchases of fuel products" (Emphasis ours.)
13
This admission
is conclusive upon petitioner, its protestations notwithstanding. Under the doctrine of
estoppel, an admission or representation is rendered conclusive upon the person making it,
and cannot be denied or disproved as against the person relying thereon.
14
A party may not go
back on his own acts and representations to the prejudice of the other party who relied upon
them.
15
In the law of evidence, whenever a party has, by his own declaration, act, or omission,
intentionally and deliberately led another to believe a particular thing true, and to act upon
such belief, he cannot, in any litigation arising out of such declaration, act, or omission, be
permitted to falsify it.
16

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

Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs.
Philippine National Bank, et al.
20
is apropos:
. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom:
The character of the transaction between the parties is to be determined by their
intention, regardless of what language was used or what the form of the transfer was. If
it was intended to secure the payment of money, it must be construed as a pledge; but
if there was some other intention, it is not a pledge. However, even though a transfer, if
regarded by itself, appears to have been absolute, its object and character might still be
qualified and explained by contemporaneous writing declaring it to have been a deposit
of the property as collateral security. It has been said that a transfer of property by the
debtor to a creditor, even if sufficient on its face to make an absolute conveyance,
should be treated as a pledge if the debt continues in inexistence and is not discharged
by the transfer, and that accordingly the use of the terms ordinarily importing
conveyance of absolute ownership will not be given that effect in such a transaction if
they are also commonly used in pledges and mortgages and therefore do not
unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and
unambiguous language or other circumstances excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the
Negotiable Instruments Law, an instrument is negotiated when it is transferred from one
person to another in such a manner as to constitute the transferee the holder thereof,
21
and a
holder may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer
thereof.
22
In the present case, however, there was no negotiation in the sense of a transfer of
the legal title to the CTDs in favor of petitioner in which situation, for obvious reasons, mere
delivery of the bearer CTDs would have sufficed. Here, the delivery thereof only as security for
the purchases of Angel de la Cruz (and we even disregard the fact that the amount involved
was not disclosed) could at the most constitute petitioner only as a holder for value by reason
of his lien. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of
the instrument since, necessarily, the terms thereof and the subsequent disposition of such
security, in the event of non-payment of the principal obligation, must be contractually
provided for.
The pertinent law on this point is that where the holder has a lien on the instrument arising
from contract, he is deemed a holder for value to the extent of his lien.
23
As such holder of
collateral security, he would be a pledgee but the requirements therefor and the effects
thereof, not being provided for by the Negotiable Instruments Law, shall be governed by the
Civil Code provisions on pledge of incorporeal rights,
24
which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be
pledged. The instrument proving the right pledged shall be delivered to the creditor, and if
negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description of the thing
pledged and the date of the pledge do not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of
respondent court quoted at the start of this opinion show that petitioner failed to produce any
document evidencing any contract of pledge or guarantee agreement between it and Angel de
la Cruz.
25
Consequently, the mere delivery of the CTDs did not legally vest in petitioner any
right effective against and binding upon respondent bank. The requirement under Article 2096
aforementioned is not a mere rule of adjective law prescribing the mode whereby proof may
be made of the date of a pledge contract, but a rule of substantive law prescribing a condition
without which the execution of a pledge contract cannot affect third persons adversely.
26

On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of
respondent bank was embodied in a public instrument.
27
With regard to this other mode of
transfer, the Civil Code specifically declares:
Art. 1625. An assignment of credit, right or action shall produce no effect as against third
persons, unless it appears in a public instrument, or the instrument is recorded in the
Registry of Property in case the assignment involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily, petitioner,
whether as purchaser, assignee or lien holder of the CTDs, neither proved the amount of its
credit or the extent of its lien nor the execution of any public instrument which could affect or
bind private respondent. Necessarily, therefore, as between petitioner and respondent bank,
the latter has definitely the better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question of whether or
not private respondent observed the requirements of the law in the case of lost negotiable
instruments and the issuance of replacement certificates therefor, on the ground that
petitioner failed to raised that issue in the lower court.
28

On this matter, we uphold respondent court's finding that the aspect of alleged negligence of
private respondent was not included in the stipulation of the parties and in the statement of
issues submitted by them to the trial court.
29
The issues agreed upon by them for resolution in
this case are:
1. Whether or not the CTDs as worded are negotiable instruments.
2. Whether or not defendant could legally apply the amount covered by the CTDs against
the depositor's loan by virtue of the assignment (Annex "C").
3. Whether or not there was legal compensation or set off involving the amount covered
by the CTDs and the depositor's outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the
maturity date provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney's fees and litigation expenses
from each other.
As respondent court correctly observed, with appropriate citation of some doctrinal
authorities, the foregoing enumeration does not include the issue of negligence on the part of
respondent bank. An issue raised for the first time on appeal and not raised timely in the
proceedings in the lower court is barred by estoppel.
30
Questions raised on appeal must be
within the issues framed by the parties and, consequently, issues not raised in the trial court
cannot be raised for the first time on appeal.
31

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

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

Still, even assuming arguendo that said issue of negligence was raised in the court below,
petitioner still cannot have the odds in its favor. A close scrutiny of the provisions of the Code
of Commerce laying down the rules to be followed in case of lost instruments payable to
bearer, which it invokes, will reveal that said provisions, even assuming their applicability to
the CTDs in the case at bar, are merely permissive and not mandatory. The very first article
cited by petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it may
be, may apply to the judge or court of competent jurisdiction, asking that the
principal, interest or dividends due or about to become due, be not paid a
third person, as well as in order to prevent the ownership of the instrument
that a duplicate be issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory but discretionary
on the part of the "dispossessed owner" to apply to the judge or court of competent
jurisdiction for the issuance of a duplicate of the lost instrument. Where the provision reads
"may," this word shows that it is not mandatory but discretional.
34
The word "may" is usually
permissive, not mandatory.
35
It is an auxiliary verb indicating liberty, opportunity, permission
and possibility.
36

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













G.R. No. 93397 March 3, 1997
TRADERS ROYAL BANK, petitioner,
vs.
COURT OF APPEALS, FILRITERS GUARANTY ASSURANCE CORPORATION and CENTRAL BANK
of the PHILIPPINES, respondents.
TORRES, JR., J.:
Assailed in this Petition for Review on Certiorari is the Decision of the respondent Court of
Appeals dated January 29, 1990,
1
affirming the nullity of the transfer of Central Bank
Certificate of Indebtedness (CBCI) No. D891,
2
with a face value of P500,000.00, from the
Philippine Underwriters Finance Corporation (Philfinance) to the petitioner Trader's Royal Bank
(TRB), under a Repurchase Agreement
3
dated February 4, 1981, and a Detached
Assignment
4
dated April 27, 1981.
Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila, Branch 32, the
action was originally filed as a Petition for Mandamus
5
under Rule 65 of the Rules of Court, to
compel the Central Bank of the Philippines to register the transfer of the subject CBCI to
petitioner Traders Royal Bank (TRB).
In the said petition, TRB stated that:
3. On November 27, 1979, Filriters Guaranty Assurance Corporation (Filriters) executed a
"Detached Assignment" . . ., whereby Filriters, as registered owner, sold, transferred,
assigned and delivered unto Philippine Underwriters Finance Corporation (Philfinance) all
its rights and title to Central Bank Certificates of Indebtedness of PESOS: FIVE HUNDRED
THOUSAND (P500,000) and having an aggregate value of PESOS: THREE MILLION FIVE
HUNDRED THOUSAND (P3,500,000.00);
4. The aforesaid Detached Assignment (Annex "A") contains an express authorization
executed by the transferor intended to complete the assignment through the registration
of the transfer in the name of PhilFinance, which authorization is specifically phrased as
follows: '(Filriters) hereby irrevocably authorized the said issuer (Central Bank) to transfer
the said bond/certificates on the books of its fiscal agent;
5. On February 4, 1981, petitioner entered into a Repurchase Agreement with PhilFinance
. . ., whereby, for and in consideration of the sum of PESOS: FIVE HUNDRED THOUSAND
(P500,000.00), PhilFinance sold, transferred and delivered to petitioner CBCI 4-year, 8th
series, Serial No. D891 with a face value of P500,000.00 . . ., which CBCI was among those
previously acquired by PhilFinance from Filriters as averred in paragraph 3 of the Petition;
6. Pursuant to the aforesaid Repurchase Agreement (Annex "B"), Philfinance agreed to
repurchase CBCI Serial No. D891 (Annex "C"), at the stipulated price of PESOS: FIVE
HUNDRED NINETEEN THOUSAND THREE HUNDRED SIXTY-ONE & 11/100 (P519,361.11) on
April 27, 1981;
7. PhilFinance failed to repurchase the CBCI on the agreed date of maturity, April 27, 1981,
when the checks it issued in favor of petitioner were dishonored for insufficient funds;
8. Owing to the default of PhilFinance, it executed a Detached Assignment in favor of the
Petitioner to enable the latter to have its title completed and registered in the books of
the respondent. And by means of said Detachment, Philfinance transferred and assigned
all, its rights and title in the said CBCI (Annex "C") to petitioner and, furthermore, it did
thereby "irrevocably authorize the said issuer (respondent herein) to transfer the said
bond/certificate on the books of its fiscal agent." . . .
9. Petitioner presented the CBCI (Annex "C"), together with the two (2) aforementioned
Detached Assignments (Annexes "B" and "D"), to the Securities Servicing Department of
the respondent, and requested the latter to effect the transfer of the CBCI on its books
and to issue a new certificate in the name of petitioner as absolute owner thereof;
10. Respondent failed and refused to register the transfer as requested, and continues to
do so notwithstanding petitioner's valid and just title over the same and despite repeated
demands in writing, the latest of which is hereto attached as Annex "E" and made an
integral part hereof;
11. The express provisions governing the transfer of the CBCI were substantially complied
with the petitioner's request for registration, to wit:
"No transfer thereof shall be valid unless made at said office (where the Certificate has
been registered) by the registered owner hereof, in person or by his attorney duly
authorized in writing, and similarly noted hereon, and upon payment of a nominal
transfer fee which may be required, a new Certificate shall be issued to the transferee of
the registered holder thereof."
and, without a doubt, the Detached Assignments presented to respondent were sufficient
authorizations in writing executed by the registered owner, Filriters, and its transferee,
PhilFinance, as required by the above-quoted provision;
12. Upon such compliance with the aforesaid requirements, the ministerial duties of
registering a transfer of ownership over the CBCI and issuing a new certificate to the
transferee devolves upon the respondent;
Upon these assertions, TRB prayed for the registration by the Central Bank of the subject CBCI
in its name.
On December 4, 1984, the Regional Trial Court the case took cognizance of the defendant
Central Bank of the Philippines' Motion for Admission of Amended Answer with Counter Claim
for Interpleader
6
thereby calling to fore the respondent Filriters Guaranty Assurance
Corporation (Filriters), the registered owner of the subject CBCI as respondent.
For its part, Filriters interjected as Special Defenses the following:
11. Respondent is the registered owner of CBCI No. 891;
12. The CBCI constitutes part of the reserve investment against liabilities required of
respondent as an insurance company under the Insurance Code;
13. Without any consideration or benefit whatsoever to Filriters, in violation of law and
the trust fund doctrine and to the prejudice of policyholders and to all who have present
or future claim against policies issued by Filriters, Alfredo Banaria, then Senior Vice-
President-Treasury of Filriters, without any board resolution, knowledge or consent of the
board of directors of Filriters, and without any clearance or authorization from the
Insurance Commissioner, executed a detached assignment purportedly assigning CBCI No.
891 to Philfinance;
xxx xxx xxx
14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar Jacobe,
Vice-President-Treasury of Filriters (both of whom were holding the same positions in
Philfinance), without any consideration or benefit redounding to Filriters and to the grave
prejudice of Filriters, its policy holders and all who have present or future claims against its
policies, executed similar detached assignment forms transferring the CBCI to plaintiff;
xxx xxx xxx
15. The detached assignment is patently void and inoperative because the assignment is
without the knowledge and consent of directors of Filriters, and not duly authorized in
writing by the Board, as requiring by Article V, Section 3 of CB Circular No. 769;
16. The assignment of the CBCI to Philfinance is a personal act of Alfredo Banaria and not
the corporate act of Filriters and such null and void;
a) The assignment was executed without consideration and for that reason, the
assignment is void from the beginning (Article 1409, Civil Code);
b) The assignment was executed without any knowledge and consent of the board of
directors of Filriters;
c) The CBCI constitutes reserve investment of Filriters against liabilities, which is a
requirement under the Insurance Code for its existence as an insurance company and the
pursuit of its business operations. The assignment of the CBCI is illegal act in the sense
of malum in se or malum prohibitum, for anyone to make, either as corporate or personal
act;
d) The transfer of dimunition of reserve investments of Filriters is expressly prohibited by
law, is immoral and against public policy;
e) The assignment of the CBCI has resulted in the capital impairment and in the solvency
deficiency of Filriters (and has in fact helped in placing Filriters under conservatorship), an
inevitable result known to the officer who executed assignment.
17. Plaintiff had acted in bad faith and with knowledge of the illegality and invalidity of the
assignment.
a) The CBCI No. 891 is not a negotiable instrument and as a certificate of indebtedness is
not payable to bearer but is a registered in the name of Filriters;
b) The provision on transfer of the CBCIs provides that the Central Bank shall treat the
registered owner as the absolute owner and that the value of the registered certificates
shall be payable only to the registered owner; a sufficient notice to plaintiff that the
assignments do not give them the registered owner's right as absolute owner of the
CBCI's;
c) CB Circular 769, Series of 1980 (Rules and Regulations Governing CBCIs) provides that
the registered certificates are payable only to the registered owner (Article II, Section 1).
18. Plaintiff knew full well that the assignment by Philfinance of CBCI No. 891 by Filriters is
not a regular transaction made in the usual of ordinary course of business;
a) The CBCI constitutes part of the reserve investments of Filriters against liabilities
requires by the Insurance Code and its assignment or transfer is expressly prohibited by
law. There was no attempt to get any clearance or authorization from the Insurance
Commissioner;
b) The assignment by Filriters of the CBCI is clearly not a transaction in the usual or regular
course of its business;
c) The CBCI involved substantial amount and its assignment clearly constitutes disposition
of "all or substantially all" of the assets of Filriters, which requires the affirmative action of
the stockholders (Section 40, Corporation [sic] Code.
7

In its Decision
8
dated April 29, 1988, the Regional Trial Court of Manila, Branch XXXIII found
the assignment of CBCI No. D891 in favor of Philfinance, and the subsequent assignment of the
same CBCI by Philfinance in favor of Traders Royal Bank null and void and of no force and
effect. The dispositive portion of the decision reads:
ACCORDINGLY, judgment is hereby rendered in favor of the respondent Filriters Guaranty
Assurance Corporation and against the plaintiff Traders Royal Bank:
(a) Declaring the assignment of CBCI No. 891 in favor of PhilFinance, and the subsequent
assignment of CBCI by PhilFinance in favor of the plaintiff Traders Royal Bank as null and
void and of no force and effect;
(b) Ordering the respondent Central Bank of the Philippines to disregard the said
assignment and to pay the value of the proceeds of the CBCI No. D891 to the Filriters
Guaranty Assurance Corporation;
(c) Ordering the plaintiff Traders Royal Bank to pay respondent Filriters Guaranty
Assurance Corp. The sum of P10,000 as attorney's fees; and
(d) to pay the costs.
SO ORDERED.
9

The petitioner assailed the decision of the trial court in the Court of Appeals
10
, but their
appeals likewise failed. The findings of the fact of the said court are hereby reproduced:
The records reveal that defendant Filriters is the registered owner of CBCI No. D891.
Under a deed of assignment dated November 27, 1971, Filriters transferred CBCI No. D891
to Philippine Underwriters Finance Corporation (Philfinance). Subsequently, Philfinance
transferred CBCI No. D891, which was still registered in the name of Filriters, to appellant
Traders Royal Bank (TRB). The transfer was made under a repurchase agreement dated
February 4, 1981, granting Philfinance the right to repurchase the instrument on or before
April 27, 1981. When Philfinance failed to buy back the note on maturity date, it executed
a deed of assignment, dated April 27, 1981, conveying to appellant TRB all its right and the
title to CBCI No. D891.
Armed with the deed of assignment, TRB then sought the transfer and registration of CBCI
No. D891 in its name before the Security and Servicing Department of the Central Bank
(CB). Central Bank, however, refused to effect the transfer and registration in view of an
adverse claim filed by defendant Filriters.
Left with no other recourse, TRB filed a special civil action for mandamus against the
Central Bank in the Regional Trial Court of Manila. The suit, however, was subsequently
treated by the lower court as a case of interpleader when CB prayed in its amended
answer that Filriters be impleaded as a respondent and the court adjudge which of them is
entitled to the ownership of CBCI No. D891. Failing to get a favorable judgment. TRB now
comes to this Court on appeal.
11

In the appellate court, petitioner argued that the subject CBCI was a negotiable instrument,
and having acquired the said certificate from Philfinance as a holder in due course, its
possession of the same is thus free fro any defect of title of prior parties and from any defense
available to prior parties among themselves, and it may thus, enforce payment of the
instrument for the full amount thereof against all parties liable thereon.
12

In ignoring said argument, the appellate court that the CBCI is not a negotiable instrument,
since the instrument clearly stated that it was payable to Filriters, the registered owner, whose
name was inscribed thereon, and that the certificate lacked the words of negotiability which
serve as an expression of consent that the instrument may be transferred by negotiation.
Obviously, the assignment of the certificate from Filriters to Philfinance was fictitious, having
made without consideration, and did not conform to Central Bank Circular No. 769, series of
1980, better known as the "Rules and Regulations Governing Central Bank Certificates of
Indebtedness", which provided that any "assignment of registered certificates shall not be
valid unless made . . . by the registered owner thereof in person or by his representative duly
authorized in writing."
Petitioner's claimed interest has no basis, since it was derived from Philfinance whose interest
was inexistent, having acquired the certificate through simulation. What happened was
Philfinance merely borrowed CBCI No. D891 from Filriters, a sister corporation, to guarantee its
financing operations.
Said the Court:
In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for
and on behalf of Filriters, did not have the necessary written authorization from the Board
of Directors of Filriters to act for the latter. For lack of such authority, the assignment did
not therefore bind Filriters and violated as the same time Central Bank Circular No. 769
which has the force and effect of a law, resulting in the nullity of the transfer (People v.
Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue, 165
SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign or
transfer to Traders Royal Bank and which the latter can register with the Central Bank.
WHEREFORE, the judgment appealed from is AFFIRMED, with costs against plaintiff-
appellant.
SO ORDERED.
13

Petitioner's present position rests solely on the argument that Philfinance owns 90% of Filriters
equity and the two corporations have identical corporate officers, thus demanding the
application of the doctrine or piercing the veil of corporate fiction, as to give validity to the
transfer of the CBCI from registered owner to petitioner TRB.
14
This renders the payment by
TRB to Philfinance of CBCI, as actual payment to Filriters. Thus, there is no merit to the lower
court's ruling that the transfer of the CBCI from Filriters to Philfinance was null and void for
lack of consideration.
Admittedly, the subject CBCI is not a negotiable instrument in the absence of words of
negotiability within the meaning of the negotiable instruments law (Act 2031).
The pertinent portions of the subject CBCI read:
xxx xxx xxx
The Central Bank of the Philippines (the Bank) for value received, hereby promises to pay
bearer, of if this Certificate of indebtedness be registered, to FILRITERS GUARANTY
ASSURANCE CORPORATION, the registered owner hereof, the principal sum of FIVE
HUNDRED THOUSAND PESOS.
xxx xxx xxx
Properly understood, a certificate of indebtedness pertains to certificates for the creation and
maintenance of a permanent improvement revolving fund, is similar to a "bond," (82 Minn.
202). Being equivalent to a bond, it is properly understood as acknowledgment of an obligation
to pay a fixed sum of money. It is usually used for the purpose of long term loans.
The appellate court ruled that the subject CBCI is not a negotiable instrument, stating that:
As worded, the instrument provides a promise "to pay Filriters Guaranty Assurance
Corporation, the registered owner hereof." Very clearly, the instrument is payable only to
Filriters, the registered owner, whose name is inscribed thereon. It lacks the words of
negotiability which should have served as an expression of consent that the instrument
may be transferred by negotiation.
15

A reading of the subject CBCI indicates that the same is payable to FILRITERS GUARANTY
ASSURANCE CORPORATION, and to no one else, thus, discounting the petitioner's submission
that the same is a negotiable instrument, and that it is a holder in due course of the certificate.
The language of negotiability which characterize a negotiable paper as a credit instrument is its
freedom to circulate as a substitute for money. Hence, freedom of negotiability is the
touchtone relating to the protection of holders in due course, and the freedom of negotiability
is the foundation for the protection which the law throws around a holder in due course (11
Am. Jur. 2d, 32). This freedom in negotiability is totally absent in a certificate indebtedness as it
merely to pay a sum of money to a specified person or entity for a period of time.
As held in Caltex (Philippines), Inc. v. Court of Appeals,
16
:
The accepted rule is that the negotiability or non-negotiability of an instrument is
determined from the writing, that is, from the face of the instrument itself. In the
construction of a bill or note, the intention of the parties is to control, if it can be legally
ascertained. While the writing may be read in the light of surrounding circumstance in
order to more perfectly understand the intent and meaning of the parties, yet as they
have constituted the writing to be the only outward and visible expression of their
meaning, no other words are to be added to it or substituted in its stead. The duty of the
court in such case is to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the meaning of the words
they have used. What the parties meant must be determined by what they said.
Thus, the transfer of the instrument from Philfinance to TRB was merely an assignment, and is
not governed by the negotiable instruments law. The pertinent question then is, was the
transfer of the CBCI from Filriters to Philfinance and subsequently from Philfinance to TRB, in
accord with existing law, so as to entitle TRB to have the CBCI registered in its name with the
Central Bank?
The following are the appellate court's pronouncements on the matter:
Clearly shown in the record is the fact that Philfinance's title over CBCI No. D891 is
defective since it acquired the instrument from Filriters fictitiously. Although the deed of
assignment stated that the transfer was for "value received", there was really no
consideration involved. What happened was Philfinance merely borrowed CBCI No. D891
from Filriters, a sister corporation. Thus, for lack of any consideration, the assignment
made is a complete nullity.
What is more, We find that the transfer made by Filriters to Philfinance did not conform to
Central Bank Circular No. 769, series of 1980, otherwise known as the "Rules and
Regulations Governing Central Bank Certificates of Indebtedness", under which the note
was issued. Published in the Official Gazette on November 19, 1980, Section 3 thereof
provides that any assignment of registered certificates shall not be valid unless made . . .
by the registered owner thereof in person or by his representative duly authorized in
writing.
In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for
and on behalf of Filriters, did not have the necessary written authorization from the Board
of Directors of Filriters to act for the latter. For lack of such authority, the assignment did
not therefore bind Filriters and violated at the same time Central Bank Circular No. 769
which has the force and effect of a law, resulting in the nullity of the transfer (People vs.
Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue, 165
SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign or
transfer to Traders Royal Bank and which the latter can register with the Central Bank
Petitioner now argues that the transfer of the subject CBCI to TRB must upheld, as the
respondent Filriters and Philfinance, though separate corporate entities on paper, have used
their corporate fiction to defraud TRB into purchasing the subject CBCI, which purchase now is
refused registration by the Central Bank.
Says the petitioner;
Since Philfinance own about 90% of Filriters and the two companies have the same
corporate officers, if the principle of piercing the veil of corporate entity were to be
applied in this case, then TRB's payment to Philfinance for the CBCI purchased by it could
just as well be considered a payment to Filriters, the registered owner of the CBCI as to
bar the latter from claiming, as it has, that it never received any payment for that CBCI
sold and that said CBCI was sold without its authority.
xxx xxx xxx
We respectfully submit that, considering that the Court of Appeals has held that the CBCI
was merely borrowed by Philfinance from Filriters, a sister corporation, to guarantee its
(Philfinance's) financing operations, if it were to be consistent therewith, on the issued
raised by TRB that there was a piercing a veil of corporate entity, the Court of Appeals
should have ruled that such veil of corporate entity was, in fact, pierced, and the payment
by TRB to Philfinance should be construed as payment to Filriters.
17

We disagree with Petitioner.
Petitioner cannot put up the excuse of piercing the veil of corporate entity, as this merely an
equitable remedy, and may be awarded only in cases when the corporate fiction is used to
defeat public convenience, justify wrong, protect fraud or defend crime or where a corporation
is a mere alter ego or business conduit of a person.
18

Peiercing the veil of corporate entity requires the court to see through the protective shroud
which exempts its stockholders from liabilities that ordinarily, they could be subject to, or
distinguished one corporation from a seemingly separate one, were it not for the existing
corporate fiction. But to do this, the court must be sure that the corporate fiction was misused,
to such an extent that injustice, fraud, or crime was committed upon another, disregarding,
thus, his, her, or its rights. It is the protection of the interests of innocent third persons dealing
with the corporate entity which the law aims to protect by this doctrine.
The corporate separateness between Filriters and Philfinance remains, despite the petitioners
insistence on the contrary. For one, other than the allegation that Filriters is 90% owned by
Philfinance, and the identity of one shall be maintained as to the other, there is nothing else
which could lead the court under circumstance to disregard their corporate personalities.
Though it is true that when valid reasons exist, the legal fiction that a corporation is an entity
with a juridical personality separate from its stockholders and from other corporations may be
disregarded,
19
in the absence of such grounds, the general rule must upheld. The fact that
Filfinance owns majority shares in Filriters is not by itself a ground to disregard the
independent corporate status of Filriters. In Liddel & Co., Inc. vs. Collector of Internal
Revenue,
20
the mere ownership by a single stockholder or by another corporation of all or
nearly all of the capital stock of a corporation is not of itself a sufficient reason for disregarding
the fiction of separate corporate personalities.
In the case at bar, there is sufficient showing that the petitioner was not defrauded at all when
it acquired the subject certificate of indebtedness from Philfinance.
On its face the subject certificates states that it is registered in the name of Filriters. This
should have put the petitioner on notice, and prompted it to inquire from Filriters as to
Philfinance's title over the same or its authority to assign the certificate. As it is, there is no
showing to the effect that petitioner had any dealings whatsoever with Filriters, nor did it
make inquiries as to the ownership of the certificate.
The terms of the CBCI No. D891 contain a provision on its TRANSFER. Thus:
TRANSFER. This Certificate shall pass by delivery unless it is registered in the owner's name
at any office of the Bank or any agency duly authorized by the Bank, and such registration
is noted hereon. After such registration no transfer thereof shall be valid unless made at
said office (where the Certificates has been registered) by the registered owner hereof, in
person, or by his attorney, duly authorized in writing and similarly noted hereon and upon
payment of a nominal transfer fee which may be required, a new Certificate shall be
issued to the transferee of the registered owner thereof. The bank or any agency duly
authorized by the Bank may deem and treat the bearer of this Certificate, or if this
Certificate is registered as herein authorized, the person in whose name the same is
registered as the absolute owner of this Certificate, for the purpose of receiving payment
hereof, or on account hereof, and for all other purpose whether or not this Certificate
shall be overdue.
This is notice to petitioner to secure from Filriters a written authorization for the transfer or to
require Philfinance to submit such an authorization from Filriters.
Petitioner knew that Philfinance is not registered owner of the CBCI No. D891. The fact that a
non-owner was disposing of the registered CBCI owned by another entity was a good reason
for petitioner to verify of inquire as to the title Philfinance to dispose to the CBCI.
Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1990
21
, known as the
Rules and Regulations Governing Central Bank Certificates of Indebtedness, Section 3, Article V
of which provides that:
Sec. 3. Assignment of Registered Certificates. Assignment of registered certificates shall
not be valid unless made at the office where the same have been issued and registered or
at the Securities Servicing Department, Central Bank of the Philippines, and by the
registered owner thereof, in person or by his representative, duly authorized in writing.
For this purpose, the transferee may be designated as the representative of the registered
owner.
Petitioner, being a commercial bank, cannot feign ignorance of Central Bank Circular 769, and
its requirements. An entity which deals with corporate agents within circumstances showing
that the agents are acting in excess of corporate authority, may not hold the corporation
liable.
22
This is only fair, as everyone must, in the exercise of his rights and in the performance
of his duties, act with justice, give everyone his due, and observe honesty and good faith.
23

The transfer made by Filriters to Philfinance did not conform to the said. Central Bank Circular,
which for all intents, is considered part of the law. As found by the courts a quo, Alfredo O.
Banaria, who had signed the deed of assignment from Filriters to Philfinance, purportedly for
and in favor of Filriters, did not have the necessary written authorization from the Board of
Directors of Filriters to act for the latter. As it is, the sale from Filriters to Philfinance was
fictitious, and therefore void and inexistent, as there was no consideration for the same. This is
fatal to the petitioner's cause, for then, Philfinance had no title over the subject certificate to
convey the Traders Royal Bank. Nemo potest nisi quod de jure potest no man can do
anything except what he can do lawfully.
Concededly, the subject CBCI was acquired by Filriters to form part of its legal and capital
reserves, which are required by law
24
to be maintained at a mandated level. This was pointed
out by Elias Garcia, Manager-in-Charge of respondent Filriters, in his testimony given before
the court on May 30, 1986.
Q Do you know this Central Bank Certificate of Indebtedness, in short, CBCI No. D891 in
the face value of P5000,000.00 subject of this case?
A Yes, sir.
Q Why do you know this?
A Well, this was CBCI of the company sought to be examined by the Insurance Commission
sometime in early 1981 and this CBCI No. 891 was among the CBCI's that were found to be
missing.
Q Let me take you back further before 1981. Did you have the knowledge of this CBCI No.
891 before 1981?
A Yes, sir. This CBCI is an investment of Filriters required by the Insurance Commission as
legal reserve of the company.
Q Legal reserve for the purpose of what?
A Well, you see, the Insurance companies are required to put up legal reserves under
Section 213 of the Insurance Code equivalent to 40 percent of the premiums receipt and
further, the Insurance Commission requires this reserve to be invested preferably in
government securities or government binds. This is how this CBCI came to be purchased
by the company.
It cannot, therefore, be taken out of the said funds, without violating the requirements of the
law. Thus, the anauthorized use or distribution of the same by a corporate officer of Filriters
cannot bind the said corporation, not without the approval of its Board of Directors, and the
maintenance of the required reserve fund.
Consequently, the title of Filriters over the subject certificate of indebtedness must be upheld
over the claimed interest of Traders Royal Bank.
ACCORDINGLY, the petition is DISMISSED and the decision appealed from dated January 29,
1990 is hereby AFFIRMED.
SO ORDERED.

[G.R. No. 154127. December 8, 2003]
ROMEO C. GARCIA, petitioner, vs. DIONISIO V. LLAMAS, respondent.
D E C I S I O N
PANGANIBAN, J.:
Novation cannot be presumed. It must be clearly shown either by the express assent of the
parties or by the complete incompatibility between the old and the new agreements.
Petitioner herein fails to show either requirement convincingly; hence, the summary judgment
holding him liable as a joint and solidary debtor stands.
The Case
Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to nullify the
November 26, 2001 Decision and the June 26, 2002 Resolution of the Court of Appeals (CA) in
CA-GR CV No. 60521. The appellate court disposed as follows:
UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from, insofar as it
pertains to [Petitioner] Romeo Garcia, must be, as it hereby is, AFFIRMED, subject to the
modification that the award for attorneys fees and cost of suit is DELETED. The portion of the
judgment that pertains to x x x Eduardo de Jesus is SET ASIDE and VACATED. Accordingly, the
case against x x x Eduardo de Jesus is REMANDED to the court of origin for purposes of
receiving ex parte [Respondent] Dionisio Llamas evidence against x x x Eduardo de Jesus.
The challenged Resolution, on the other hand, denied petitioners Motion for Reconsideration.
The Antecedents
The antecedents of the case are narrated by the CA as follows:
This case started out as a complaint for sum of money and damages by x x x [Respondent]
Dionisio Llamas against x x x [Petitioner] Romeo Garcia and Eduardo de Jesus. Docketed as
Civil Case No. Q97-32-873, the complaint alleged that on 23 December 1996[,] [petitioner and
de Jesus] borrowed P400,000.00 from [respondent]; that, on the same day, [they] executed a
promissory note wherein they bound themselves jointly and severally to pay the loan on or
before 23 January 1997 with a 5% interest per month; that the loan has long been overdue
and, despite repeated demands, [petitioner and de Jesus] have failed and refused to pay it;
and that, by reason of the[ir] unjustified refusal, [respondent] was compelled to engage the
services of counsel to whom he agreed to pay 25% of the sum to be recovered from [petitioner
and de Jesus], plus P2,000.00 for every appearance in court. Annexed to the complaint were
the promissory note above-mentioned and a demand letter, dated 02 May 1997, by
[respondent] addressed to [petitioner and de Jesus].
Resisting the complaint, *Petitioner Garcia,+ in his *Answer,+ averred that he assumed no
liability under the promissory note because he signed it merely as an accommodation party for
x x x de Jesus; and, alternatively, that he is relieved from any liability arising from the note
inasmuch as the loan had been paid by x x x de Jesus by means of a check dated 17 April 1997;
and that, in any event, the issuance of the check and *respondents+ acceptance thereof
novated or superseded the note.
*Respondent+ tendered a reply to *Petitioner+ Garcias answer, thereunder asserting that the
loan remained unpaid for the reason that the check issued by x x x de Jesus bounced, and that
*Petitioner+ Garcias answer was not even accompanied by a certificate of non-forum
shopping. Annexed to the reply were the face of the check and the reverse side thereof.
For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim that out of the
supposed P400,000.00 loan, he received only P360,000.00, the P40,000.00 having been
advance interest thereon for two months, that is, for January and February 1997; that[,] in
fact[,] he paid the sum of P120,000.00 by way of interests; that this was made when
*respondents+ daughter, one Nits Llamas-Quijencio, received from the Central Police District
Command at Bicutan, Taguig, Metro Manila (where x x x de Jesus worked), the sum of
P40,000.00, representing the peso equivalent of his accumulated leave credits, another
P40,000.00 as advance interest, and still another P40,000.00 as interest for the months of
March and April 1997; that he had difficulty in paying the loan and had asked [respondent] for
an extension of time; that [respondent] acted in bad faith in instituting the case, [respondent]
having agreed to accept the benefits he (de Jesus) would receive for his retirement, but
[respondent] nonetheless filed the instant case while his retirement was being processed; and
that, in defense of his rights, he agreed to pay his counsel P20,000.00 *as+ attorneys fees, plus
P1,000.00 for every court appearance.
During the pre-trial conference, x x x de Jesus and his lawyer did not appear, nor did they file
any pre-trial brief. Neither did [Petitioner] Garcia file a pre-trial brief, and his counsel even
manifested that he would no [longer] present evidence. Given this development, the trial court
gave [respondent] permission to present his evidence ex parte against x x x de Jesus; and, as
regards [Petitioner] Garcia, the trial court directed [respondent] to file a motion for judgment
on the pleadings, and for [Petitioner] Garcia to file his comment or opposition thereto.
Instead, *respondent+ filed a *M+otion to declare [Petitioner] Garcia in default and to allow
him to present his evidence ex parte. Meanwhile, [Petitioner] Garcia filed a [M]anifestation
submitting his defense to a judgment on the pleadings. Subsequently, [respondent] filed a
[M]anifestation/[M]otion to submit the case for judgment on the pleadings, withdrawing in the
process his previous motion. Thereunder, he asserted that *petitioners and de Jesus+ solidary
liability under the promissory note cannot be any clearer, and that the check issued by de
Jesus did not discharge the loan since the check bounced.
On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222) disposed of the
case as follows:
WHEREFORE, premises considered, judgment on the pleadings is hereby rendered in favor of
[respondent] and against [petitioner and De Jesus], who are hereby ordered to pay, jointly and
severally, the [respondent] the following sums, to wit:
1) P400,000.00 representing the principal amount plus 5% interest thereon per month
from January 23, 1997 until the same shall have been fully paid, less the amount of
P120,000.00 representing interests already paid by x x x de Jesus;
2) P100,000.00 as attorneys fees plus appearance fee of P2,000.00 for each day of
[c]ourt appearance, and;
3) Cost of this suit.
Ruling of the Court of Appeals
The CA ruled that the trial court had erred when it rendered a judgment on the pleadings
against De Jesus. According to the appellate court, his Answer raised genuinely contentious
issues. Moreover, he was still required to present his evidence ex parte. Thus, respondent was
not ipso facto entitled to the RTC judgment, even though De Jesus had been declared in
default. The case against the latter was therefore remanded by the CA to the trial court for the
ex parte reception of the formers evidence.
As to petitioner, the CA treated his case as a summary judgment, because his Answer had
failed to raise even a single genuine issue regarding any material fact.
The appellate court ruled that no novation -- express or implied -- had taken place when
respondent accepted the check from De Jesus. According to the CA, the check was issued
precisely to pay for the loan that was covered by the promissory note jointly and severally
undertaken by petitioner and De Jesus. Respondents acceptance of the check did not serve to
make De Jesus the sole debtor because, first, the obligation incurred by him and petitioner was
joint and several; and, second, the check -- which had been intended to extinguish the
obligation -- bounced upon its presentment.
Hence, this Petition.
Issues
Petitioner submits the following issues for our consideration:
I
Whether or not the Honorable Court of Appeals gravely erred in not holding that novation
applies in the instant case as x x x Eduardo de Jesus had expressly assumed sole and exclusive
liability for the loan obligation he obtained from x x x Respondent Dionisio Llamas, as clearly
evidenced by:
a) Issuance by x x x de Jesus of a check in payment of the full amount of the loan of
P400,000.00 in favor of Respondent Llamas, although the check subsequently
bounced[;]
b) Acceptance of the check by the x x x respondent x x x which resulted in [the]
substitution by x x x de Jesus or [the superseding of] the promissory note;
c) x x x de Jesus having paid interests on the loan in the total amount of
P120,000.00;
d) The fact that Respondent Llamas agreed to the proposal of x x x de Jesus that due
to financial difficulties, he be given an extension of time to pay his loan obligation and
that his retirement benefits from the Philippine National Police will answer for said
obligation.
II
Whether or not the Honorable Court of Appeals seriously erred in not holding that the defense
of petitioner that he was merely an accommodation party, despite the fact that the promissory
note provided for a joint and solidary liability, should have been given weight and credence
considering that subsequent events showed that the principal obligor was in truth and in fact x
x x de Jesus, as evidenced by the foregoing circumstances showing his assumption of sole
liability over the loan obligation.
III
Whether or not judgment on the pleadings or summary judgment was properly availed of by
Respondent Llamas, despite the fact that there are genuine issues of fact, which the Honorable
Court of Appeals itself admitted in its Decision, which call for the presentation of evidence in a
full-blown trial.
Simply put, the issues are the following: 1) whether there was novation of the obligation; 2)
whether the defense that petitioner was only an accommodation party had any basis; and 3)
whether the judgment against him -- be it a judgment on the pleadings or a summary
judgment -- was proper.
The Courts Ruling
The Petition has no merit.
First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint and solidary debtor by insisting
that novation took place, either through the substitution of De Jesus as sole debtor or the
replacement of the promissory note by the check. Alternatively, the former argues that the
original obligation was extinguished when the latter, who was his co-obligor, paid the loan
with the check.
The fallacy of the second (alternative) argument is all too apparent. The check could not have
extinguished the obligation, because it bounced upon presentment. By law, the delivery of a
check produces the effect of payment only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its objects or principal
obligations, by substituting a new debtor in place of the old one, or by subrogating a third
person to the rights of the creditor. Article 1293 of the Civil Code defines novation as follows:
Art. 1293. Novation which consists in substituting a new debtor in the place of the original
one, may be made even without the knowledge or against the will of the latter, but not
without the consent of the creditor. Payment by the new debtor gives him rights mentioned in
articles 1236 and 1237.
In general, there are two modes of substituting the person of the debtor: (1) expromision and
(2) delegacion. In expromision, the initiative for the change does not come from -- and may
even be made without the knowledge of -- the debtor, since it consists of a third persons
assumption of the obligation. As such, it logically requires the consent of the third person and
the creditor. In delegacion, the debtor offers, and the creditor accepts, a third person who
consents to the substitution and assumes the obligation; thus, the consent of these three
persons are necessary. Both modes of substitution by the debtor require the consent of the
creditor.
Novation may also be extinctive or modificatory. It is extinctive when an old obligation is
terminated by the creation of a new one that takes the place of the former. It is merely
modificatory when the old obligation subsists to the extent that it remains compatible with the
amendatory agreement. Whether extinctive or modificatory, novation is made either by
changing the object or the principal conditions, referred to as objective or real novation; or by
substituting the person of the debtor or subrogating a third person to the rights of the
creditor, an act known as subjective or personal novation. For novation to take place, the
following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It is express when the new obligation declares in
unequivocal terms that the old obligation is extinguished. It is implied when the new
obligation is incompatible with the old one on every point. The test of incompatibility is
whether the two obligations can stand together, each one with its own independent existence.
Applying the foregoing to the instant case, we hold that no novation took place.
The parties did not unequivocally declare that the old obligation had been extinguished by the
issuance and the acceptance of the check, or that the check would take the place of the
note. There is no incompatibility between the promissory note and the check. As the CA
correctly observed, the check had been issued precisely to answer for the obligation. On the
one hand, the note evidences the loan obligation; and on the other, the check answers for
it. Verily, the two can stand together.
Neither could the payment of interests -- which, in petitioners view, also constitutes novation
-- change the terms and conditions of the obligation. Such payment was already provided for
in the promissory note and, like the check, was totally in accord with the terms thereof.
Also unmeritorious is petitioners argument that the obligation was novated by the
substitution of debtors. In order to change the person of the debtor, the old one must be
expressly released from the obligation, and the third person or new debtor must assume the
formers place in the relation. Well-settled is the rule that novation is never presumed.
Consequently, that which arises from a purported change in the person of the debtor must be
clear and express. It is thus incumbent on petitioner to show clearly and unequivocally that
novation has indeed taken place.
In the present case, petitioner has not shown that he was expressly released from the
obligation, that a third person was substituted in his place, or that the joint and solidary
obligation was cancelled and substituted by the solitary undertaking of De Jesus. The CA aptly
held:
x x x. Plaintiffs acceptance of the bum check did not result in substitution by de Jesus either,
the nature of the obligation being solidary due to the fact that the promissory note expressly
declared that the liability of appellants thereunder is joint and [solidary.] Reason: under the
law, a creditor may demand payment or performance from one of the solidary debtors or
some or all of them simultaneously, and payment made by one of them extinguishes the
obligation. It therefore follows that in case the creditor fails to collect from one of the solidary
debtors, he may still proceed against the other or others. x x x
Moreover, it must be noted that for novation to be valid and legal, the law requires that the
creditor expressly consent to the substitution of a new debtor. Since novation implies a waiver
of the right the creditor had before the novation, such waiver must be express. It cannot be
supposed, without clear proof, that the present respondent has done away with his right to
exact fulfillment from either of the solidary debtors.
More important, De Jesus was not a third person to the obligation. From the beginning, he
was a joint and solidary obligor of the P400,000 loan; thus, he can be released from it only
upon its extinguishment. Respondents acceptance of his check did not change the person of
the debtor, because a joint and solidary obligor is required to pay the entirety of the
obligation.
It must be noted that in a solidary obligation, the creditor is entitled to demand the
satisfaction of the whole obligation from any or all of the debtors. It is up to the former to
determine against whom to enforce collection. Having made himself jointly and severally liable
with De Jesus, petitioner is therefore liable for the entire obligation.
Second Issue:
Accommodation Party
Petitioner avers that he signed the promissory note merely as an accommodation party; and
that, as such, he was released as obligor when respondent agreed to extend the term of the
obligation.
This reasoning is misplaced, because the note herein is not a negotiable instrument. The note
reads:
PROMISSORY NOTE
P400,000.00
RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED THOUSAND PESOS,
Philippine Currency payable on or before January 23, 1997 at No. 144 K-10 St. Kamias, Quezon
City, with interest at the rate of 5% per month or fraction thereof.
It is understood that our liability under this loan is jointly and severally [sic].
Done at Quezon City, Metro Manila this 23
rd
day of December, 1996.
By its terms, the note was made payable to a specific person rather than to bearer or to order -
- a requisite for negotiability under Act 2031, the Negotiable Instruments Law (NIL). Hence,
petitioner cannot avail himself of the NILs provisions on the liabilities and defenses of an
accommodation party. Besides, a non-negotiable note is merely a simple contract in writing
and is evidence of such intangible rights as may have been created by the assent of the
parties. The promissory note is thus covered by the general provisions of the Civil Code, not by
the NIL.
Even granting arguendo that the NIL was applicable, still, petitioner would be liable for the
promissory note. Under Article 29 of Act 2031, an accommodation party is liable for the
instrument to a holder for value even if, at the time of its taking, the latter knew the former to
be only an accommodation party. The relation between an accommodation party and the
party accommodated is, in effect, one of principal and surety -- the accommodation party
being the surety. It is a settled rule that a surety is bound equally and absolutely with the
principal and is deemed an original promissor and debtor from the beginning. The liability is
immediate and direct.
Third Issue:
Propriety of Summary Judgment
or Judgment on the Pleadings
The next issue illustrates the usual confusion between a judgment on the pleadings and a
summary judgment. Under Section 3 of Rule 35 of the Rules of Court, a summary judgment
may be rendered after a summary hearing if the pleadings, supporting affidavits, depositions
and admissions on file show that (1) except as to the amount of damages, there is no genuine
issue regarding any material fact; and (2) the moving party is entitled to a judgment as a
matter of law.
A summary judgment is a procedural device designed for the prompt disposition of actions in
which the pleadings raise only a legal, not a genuine, issue regarding any material fact.
Consequently, facts are asserted in the complaint regarding which there is yet no admission,
disavowal or qualification; or specific denials or affirmative defenses are set forth in the
answer, but the issues are fictitious as shown by the pleadings, depositions or admissions. A
summary judgment may be applied for by either a claimant or a defending party.
On the other hand, under Section 1 of Rule 34 of the Rules of Court, a judgment on the
pleadings is proper when an answer fails to render an issue or otherwise admits the material
allegations of the adverse partys pleading. The essential question is whether there are issues
generated by the pleadings. A judgment on the pleadings may be sought only by a claimant,
who is the party seeking to recover upon a claim, counterclaim or cross-claim; or to obtain a
declaratory relief.
Apropos thereto, it must be stressed that the trial courts judgment against petitioner was
correctly treated by the appellate court as a summary judgment, rather than as a judgment on
the pleadings. His Answer apparently raised several issues -- that he signed the promissory
note allegedly as a mere accommodation party, and that the obligation was extinguished by
either payment or novation. However, these are not factual issues requiring trial. We quote
with approval the CAs observations:
Although Garcias *A+nswer tendered some issues, by way of affirmative defenses, the
documents submitted by [respondent] nevertheless clearly showed that the issues so tendered
were not valid issues. Firstly, Garcias claim that he was merely an accommodation party is
belied by the promissory note that he signed. Nothing in the note indicates that he was only an
accommodation party as he claimed to be. Quite the contrary, the promissory note bears the
statement: It is understood that our liability under this loan is jointly and severally
*sic+. Secondly, his claim that his co-defendant de Jesus already paid the loan by means of a
check collapses in view of the dishonor thereof as shown at the dorsal side of said check.
From the records, it also appears that petitioner himself moved to submit the case for
judgment on the basis of the pleadings and documents. In a written Manifestation, he stated
that judgment on the pleadings may now be rendered without further evidence, considering
the allegations and admissions of the parties.
In view of the foregoing, the CA correctly considered as a summary judgment that which the
trial court had issued against petitioner.
WHEREFORE, this Petition is hereby DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.






















G.R. No. 111190 June 27, 1995
LORETO D. DE LA VICTORIA, as City Fiscal of Mandaue City and in his personal capacity as
garnishee,petitioner,
vs.
HON. JOSE P. BURGOS, Presiding Judge, RTC, Br. XVII, Cebu City, and RAUL H.
SESBREO, respondents.

BELLOSILLO, J.:
RAUL H. SESBREO filed a complaint for damages against Assistant City Fiscals Bienvenido N.
Mabanto, Jr., and Dario D. Rama, Jr., before the Regional Trial Court of Cebu City. After trial
judgment was rendered ordering the defendants to pay P11,000.00 to the plaintiff, private
respondent herein. The decision having become final and executory, on motion of the latter,
the trial court ordered its execution. This order was questioned by the defendants before the
Court of Appeals. However, on 15 January 1992 a writ of execution was issued.
On 4 February 1992 a notice of garnishment was served on petitioner Loreto D. de la Victoria
as City Fiscal of Mandaue City where defendant Mabanto, Jr., was then detailed. The notice
directed petitioner not to disburse, transfer, release or convey to any other person except to
the deputy sheriff concerned the salary checks or other checks, monies, or cash due or
belonging to Mabanto, Jr., under penalty of law.
1
On 10 March 1992 private respondent filed a
motion before the trial court for examination of the garnishees.
On 25 May 1992 the petition pending before the Court of Appeals was dismissed. Thus the trial
court, finding no more legal obstacle to act on the motion for examination of the garnishees,
directed petitioner on 4 November 1992 to submit his report showing the amount of the
garnished salaries of Mabanto, Jr., within fifteen (15) days from receipt
2
taking into
consideration the provisions of Sec. 12, pars. (f) and (i), Rule 39 of the Rules of Court.
On 24 November 1992 private respondent filed a motion to require petitioner to explain why
he should not be cited in contempt of court for failing to comply with the order of 4 November
1992.
On the other hand, on 19 January 1993 petitioner moved to quash the notice of garnishment
claiming that he was not in possession of any money, funds, credit, property or anything of
value belonging to Mabanto, Jr., except his salary and RATA checks, but that said checks were
not yet properties of Mabanto, Jr., until delivered to him. He further claimed that, as such,
they were still public funds which could not be subject to garnishment.
On 9 March 1993 the trial court denied both motions and ordered petitioner to immediately
comply with its order of 4 November 1992.
3
It opined that the checks of Mabanto, Jr., had
already been released through petitioner by the Department of Justice duly signed by the
officer concerned. Upon service of the writ of garnishment, petitioner as custodian of the
checks was under obligation to hold them for the judgment creditor. Petitioner became a
virtual party to, or a forced intervenor in, the case and the trial court thereby acquired
jurisdiction to bind him to its orders and processes with a view to the complete satisfaction of
the judgment. Additionally, there was no sufficient reason for petitioner to hold the checks
because they were no longer government funds and presumably delivered to the payee,
conformably with the last sentence of Sec. 16 of the Negotiable Instruments Law.
With regard to the contempt charge, the trial court was not morally convinced of petitioner's
guilt. For, while his explanation suffered from procedural infirmities nevertheless he took pains
in enlightening the court by sending a written explanation dated 22 July 1992 requesting for
the lifting of the notice of garnishment on the ground that the notice should have been sent to
the Finance Officer of the Department of Justice. Petitioner insists that he had no authority to
segregate a portion of the salary of Mabanto, Jr. The explanation however was not submitted
to the trial court for action since the stenographic reporter failed to attach it to the record.
4

On 20 April 1993 the motion for reconsideration was denied. The trial court explained that it
was not the duty of the garnishee to inquire or judge for himself whether the issuance of the
order of execution, writ of execution and notice of garnishment was justified. His only duty
was to turn over the garnished checks to the trial court which issued the order of execution.
5

Petitioner raises the following relevant issues: (1) whether a check still in the hands of the
maker or its duly authorized representative is owned by the payee before physical delivery to
the latter: and, (2) whether the salary check of a government official or employee funded with
public funds can be subject to garnishment.
Petitioner reiterates his position that the salary checks were not owned by Mabanto, Jr.,
because they were not yet delivered to him, and that petitioner as garnishee has no legal
obligation to hold and deliver them to the trial court to be applied to Mabanto, Jr.'s judgment
debt. The thesis of petitioner is that the salary checks still formed part of public funds and
therefore beyond the reach of garnishment proceedings.
Petitioner has well argued his case.
Garnishment is considered as a species of attachment for reaching credits belonging to the
judgment debtor owing to him from a stranger to the litigation.
6
Emphasis is laid on the
phrase "belonging to the judgment debtor" since it is the focal point in resolving the issues
raised.
As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is public funds. He receives his
compensation in the form of checks from the Department of Justice through petitioner as City
Fiscal of Mandaue City and head of office. Under Sec. 16 of the Negotiable Instruments Law,
every contract on a negotiable instrument is incomplete and revocable until delivery of the
instrument for the purpose of giving effect thereto. As ordinarily understood, delivery means
the transfer of the possession of the instrument by the maker or drawer with intent to transfer
title to the payee and recognize him as the holder thereof.
7

According to the trial court, the checks of Mabanto, Jr., were already released by the
Department of Justice duly signed by the officer concerned through petitioner and upon
service of the writ of garnishment by the sheriff petitioner was under obligation to hold them
for the judgment creditor. It recognized the role of petitioner ascustodian of the checks. At the
same time however it considered the checks as no longer government funds and presumed
delivered to the payee based on the last sentence of Sec. 16 of the Negotiable Instruments Law
which states: "And where the instrument is no longer in the possession of a party whose
signature appears thereon, a valid and intentional delivery by him is presumed." Yet, the
presumption is not conclusive because the last portion of the provision says "until the contrary
is proved." However this phrase was deleted by the trial court for no apparent reason. Proof to
the contrary is its own finding that the checks were in the custody of petitioner. Inasmuch as
said checks had not yet been delivered to Mabanto, Jr., they did not belong to him and still had
the character of public funds. In Tiro v. Hontanosas
8
we ruled that
The salary check of a government officer or employee such as a teacher does not belong
to him before it is physically delivered to him. Until that time the check belongs to the
government. Accordingly, before there is actual delivery of the check, the payee has no
power over it; he cannot assign it without the consent of the Government.
As a necessary consequence of being public fund, the checks may not be garnished to satisfy
the judgment.
9
The rationale behind this doctrine is obvious consideration of public policy. The
Court succinctly stated inCommissioner of Public Highways v. San Diego
10
that
The functions and public services rendered by the State cannot be allowed to be paralyzed
or disrupted by the diversion of public funds from their legitimate and specific objects, as
appropriated by law.
In denying petitioner's motion for reconsideration, the trial court expressed the additional
ratiocination that it was not the duty of the garnishee to inquire or judge for himself whether
the issuance of the order of execution, the writ of execution, and the notice of garnishment
was justified, citing our ruling in Philippine Commercial Industrial Bank v. Court of
Appeals.
11
Our precise ruling in that case was that "[I]t is not incumbent upon the garnishee to
inquire or to judge for itself whether or not the order for the advance execution of a judgment
is valid." But that is invoking only the general rule. We have also established therein the
compelling reasons, as exceptions thereto, which were not taken into account by the trial
court, e.g., a defect on the face of the writ or actual knowledge by the garnishee of lack of
entitlement on the part of the garnisher. It is worth to note that the ruling referred to the
validity of advance execution of judgments, but a careful scrutiny of that case and similar cases
reveals that it was applicable to a notice of garnishment as well. In the case at bench, it was
incumbent upon petitioner to inquire into the validity of the notice of garnishment as he had
actual knowledge of the non-entitlement of private respondent to the checks in question.
Consequently, we find no difficulty concluding that the trial court exceeded its jurisdiction in
issuing the notice of garnishment concerning the salary checks of Mabanto, Jr., in the
possession of petitioner.
WHEREFORE, the petition is GRANTED. The orders of 9 March 1993 and 20 April 1993 of the
Regional Trial Court of Cebu City, Br. 17, subject of the petition are SET ASIDE. The notice of
garnishment served on petitioner dated 3 February 1992 is ordered DISCHARGED.
SO ORDERED.
Quiason and Kapunan, JJ., concur.
Separate Opinions
DAVIDE, JR., J., concurring and dissenting:
This Court may take judicial notice of the fact that checks for salaries of employees of various
Departments all over the country are prepared in Manila not at the end of the payroll period,
but days before it to ensure that they reach the employees concerned not later than the end of
the payroll period. As to the employees in the provinces or cities, the checks are sent through
the heads of the corresponding offices of the Departments. Thus, in the case of Prosecutors
and Assistant Prosecutors of the Department of Justice, the checks are sent through the
Provincial Prosecutors or City Prosecutors, as the case may be, who shall then deliver the
checks to the payees.
Involved in the instant case are the salary and RATA checks of then Assistant City Fiscal
Bienvenido Mabanto, Jr., who was detailed in the Office of the City Fiscal (now Prosecutor) of
Mandaue City. Conformably with the aforesaid practice, these checks were sent to Mabanto
thru the petitioner who was then the City Fiscal of Mandaue City.
The ponencia failed to indicate the payroll period covered by the salary check and the month
to which the RATA check corresponds.
I respectfully submit that if these salary and RATA checks corresponded, respectively, to a
payroll period and to a month which had already lapsed at the time the notice of garnishment
was served, the garnishment would be valid, as the checks would then cease to be property of
the Government and would become property of Mabanto. Upon the expiration of such period
and month, the sums indicated therein were deemed automatically segregated from the
budgetary allocations for the Department of Justice under the General Appropriations Act.
It must be recalled that the public policy against execution, attachment, or garnishment is
directed to public funds.
Thus, in the case of Director of the Bureau of Commerce and Industry vs. Concepcion
1
where
the core issue was whether or not the salary due from the Government to a public officer or
employee can, by garnishment, be seized before being paid to him and appropriated to the
payment of his judgment debts, this Court held:
A rule, which has never been seriously questioned, is that money in the hands of public
officers, although it may be due government employees, is not liable to the creditors of
these employees in the process of garnishment. One reason is, that the State, by virtue of
its sovereignty, may not be sued in its own courts except by express authorization by the
Legislature, and to subject its officers to garnishment would be to permit indirectly what is
prohibited directly. Another reason is that moneys sought to be garnished, as long as they
remain in the hands of the disbursing officer of the Government, belong to the latter,
although the defendant in garnishment may be entitled to a specific portion thereof. And
still another reason which covers both of the foregoing is that every consideration of public
policy forbids it.
The United States Supreme Court, in the leading case of Buchanan vs. Alexander ([1846], 4
How., 19), in speaking of the right of creditors of seamen, by process of attachment, to
divert the public money from its legitimate and appropriate object, said:
To state such a principle is to refute it. No government can sanction it. At all times it
would be found embarrassing, and under some circumstances it might be fatal to the
public service. . . . So long as money remains in the hands of a disbursing officer, it is
as much the money of the United States, as if it had not been drawn from the
treasury. Until paid over by the agent of the government to the person entitled to it,
the fund cannot, in any legal sense, be considered a part of his effects." (See, further,
12 R.C.L., p. 841; Keene vs. Smith [1904], 44 Ore., 525; Wild vs. Ferguson [1871], 23
La. Ann., 752; Bank of Tennessee vs. Dibrell [1855], 3 Sneed [Tenn.], 379). (emphasis
supplied)
The authorities cited in the ponencia are inapplicable. Garnished or levied on therein were
public funds, to wit: (a) the pump irrigation trust fund deposited with the Philippine National
Bank (PNB) in the account of the Irrigation Service Unit in Republic vs. Palacio;
2
(b) the
deposits of the National Media Production Center in Traders Royal Bank vs. Intermediate
Appellate Court;
3
and (c) the deposits of the Bureau of Public Highways with the PNB under a
current account, which may be expended only for their legitimate object as authorized by the
corresponding legislative appropriation in Commissioner of Public Highways vs. Diego.
4

Neither is Tiro vs. Hontanosas
5
squarely in point. The said case involved the validity of Circular
No. 21, series of 1969, issued by the Director of Public Schools which directed that "henceforth
no cashier or disbursing officer shall pay to attorneys-in-fact or other persons who may be
authorized under a power of attorney or other forms of authority to collect the salary of an
employee, except when the persons so designated and authorized is an immediate member of
the family of the employee concerned, and in all other cases except upon proper authorization
of the Assistant Executive Secretary for Legal and Administrative Matters, with the
recommendation of the Financial Assistant." Private respondent Zafra Financing Enterprise,
which had extended loans to public school teachers in Cebu City and obtained from the
latter promissory notes and special powers of attorney authorizing it to take and collect their
salary checks from the Division Office in Cebu City of the Bureau of Public Schools, sought, inter
alia, to nullify the Circular. It is clear that the teachers had in fact assigned to or waived in favor
of Zafra their future salaries which were still public funds. That assignment or waiver was
contrary to public policy.
I would therefore vote to grant the petition only if the salary and RATA checks garnished
corresponds to an unexpired payroll period and RATA month, respectively.
Padilla, J., concurs.
Separate Opinions
DAVIDE, JR., J., concurring and dissenting:
This Court may take judicial notice of the fact that checks for salaries of employees of various
Departments all over the country are prepared in Manila not at the end of the payroll period,
but days before it to ensure that they reach the employees concerned not later than the end of
the payroll period. As to the employees in the provinces or cities, the checks are sent through
the heads of the corresponding offices of the Departments. Thus, in the case of Prosecutors
and Assistant Prosecutors of the Department of Justice, the checks are sent through the
Provincial Prosecutors or City Prosecutors, as the case may be, who shall then deliver the
checks to the payees.
Involved in the instant case are the salary and RATA checks of then Assistant City Fiscal
Bienvenido Mabanto, Jr., who was detailed in the Office of the City Fiscal (now Prosecutor) of
Mandaue City. Conformably with the aforesaid practice, these checks were sent to Mabanto
thru the petitioner who was then the City Fiscal of Mandaue City.
The ponencia failed to indicate the payroll period covered by the salary check and the month
to which the RATA check corresponds.
I respectfully submit that if these salary and RATA checks corresponded, respectively, to a
payroll period and to a month which had already lapsed at the time the notice of garnishment
was served, the garnishment would be valid, as the checks would then cease to be property of
the Government and would become property of Mabanto. Upon the expiration of such period
and month, the sums indicated therein were deemed automatically segregated from the
budgetary allocations for the Department of Justice under the General Appropriations Act.
It must be recalled that the public policy against execution, attachment, or garnishment is
directed to public funds.
Thus, in the case of Director of the Bureau of Commerce and Industry vs. Concepcion
1
where
the core issue was whether or not the salary due from the Government to a public officer or
employee can, by garnishment, be seized before being paid to him and appropriated to the
payment of his judgment debts, this Court held:
A rule, which has never been seriously questioned, is that money in the hands of public
officers, although it may be due government employees, is not liable to the creditors of
these employees in the process of garnishment. One reason is, that the State, by virtue of
its sovereignty, may not be sued in its own courts except by express authorization by the
Legislature, and to subject its officers to garnishment would be to permit indirectly what is
prohibited directly. Another reason is that moneys sought to be garnished, as long as they
remain in the hands of the disbursing officer of the Government, belong to the latter,
although the defendant in garnishment may be entitled to a specific portion thereof. And
still another reason which covers both of the foregoing is that every consideration of public
policy forbids it.
The United States Supreme Court, in the leading case of Buchanan vs. Alexander ([1846], 4
How., 19), in speaking of the right of creditors of seamen, by process of attachment, to
divert the public money from its legitimate and appropriate object, said:
To state such a principle is to refute it. No government can sanction it. At all times it
would be found embarrassing, and under some circumstances it might be fatal to the
public service. . . . So long as money remains in the hands of a disbursing officer, it is
as much the money of the United States, as if it had not been drawn from the
treasury. Until paid over by the agent of the government to the person entitled to it,
the fund cannot, in any legal sense, be considered a part of his effects." (See, further,
12 R.C.L., p. 841; Keene vs. Smith [1904], 44 Ore., 525; Wild vs. Ferguson [1871], 23
La. Ann., 752; Bank of Tennessee vs. Dibrell [1855], 3 Sneed [Tenn.], 379). (emphasis
supplied)
The authorities cited in the ponencia are inapplicable. Garnished or levied on therein were
public funds, to wit: (a) the pump irrigation trust fund deposited with the Philippine National
Bank (PNB) in the account of the Irrigation Service Unit in Republic vs. Palacio;
2
(b) the
deposits of the National Media Production Center in Traders Royal Bank vs. Intermediate
Appellate Court;
3
and (c) the deposits of the Bureau of Public Highways with the PNB under a
current account, which may be expended only for their legitimate object as authorized by the
corresponding legislative appropriation in Commissioner of Public Highways vs. Diego.
4

Neither is Tiro vs. Hontanosas
5
squarely in point. The said case involved the validity of Circular
No. 21, series of 1969, issued by the Director of Public Schools which directed that "henceforth
no cashier or disbursing officer shall pay to attorneys-in-fact or other persons who may be
authorized under a power of attorney or other forms of authority to collect the salary of an
employee, except when the persons so designated and authorized is an immediate member of
the family of the employee concerned, and in all other cases except upon proper authorization
of the Assistant Executive Secretary for Legal and Administrative Matters, with the
recommendation of the Financial Assistant." Private respondent Zafra Financing Enterprise,
which had extended loans to public school teachers in Cebu City and obtained from the
latter promissory notes and special powers of attorney authorizing it to take and collect their
salary checks from the Division Office in Cebu City of the Bureau of Public Schools, sought, inter
alia, to nullify the Circular. It is clear that the teachers had in fact assigned to or waived in favor
of Zafra their future salaries which were still public funds. That assignment or waiver was
contrary to public policy.
I would therefore vote to grant the petition only if the salary and RATA checks garnished
corresponds to an unexpired payroll period and RATA month, respectively.
Padilla, J., concurs.









G.R. No. 116320 November 29, 1999
ADALIA FRANCISCO, petitioner,
vs.
COURT OF APPEALS, HERBY COMMERCIAL & CONSTRUCTION CORPORATION AND JAIME C.
ONG,respondents.
GONZAGA-REYES, J.:
Assailed in this petition for review on certiorari is the decision
1
of the Court of Appeals
affirming the decision
2
rendered by Branch 168 of the Regional Trial Court of Pasig in Civil Case
No. 35231 in favor of private respondents.
The controversy before this Court finds its origins in a Land Development and Construction
Contract which was entered into on June 23, 1977 by A. Francisco Realty & Development
Corporation (AFRDC), of which petitioner Adalia Francisco (Francisco) is the president, and
private respondent Herby Commercial & Construction Corporation (HCCC), represented by its
President and General Manager private respondent Jaime C. Ong (Ong), pursuant to a housing
project of AFRDC at San Jose del Monte, Bulacan, financed by the Government Service
Insurance System (GSIS). Under the contract, HCCC agreed to undertake the construction of 35
housing units and the development of 35 hectares of land. The payment of HCCC for its
services was on a turn-key basis, that is, HCCC was to be paid on the basis of the completed
houses and developed lands delivered to and accepted by AFRDC and the GSIS. To facilitate
payment, AFRDC executed a Deed of Assignment in favor of HCCC to enable the latter to
collect payments directly from the GSIS. Furthermore, the GSIS and AFRDC put up an Executive
Committee Account with the Insular Bank of Asia & America (IBAA) in the amount of
P4,000,000.00 from which checks would be issued and co-signed by petitioner Francisco and
the GSIS Vice-President Armando Diaz (Diaz).
On February 10, 1978, HCCC filed a complaint
3
with the Regional Trial Court of Quezon City
against Francisco, AFRDC and the GSIS for the collection of the unpaid balance under the Land
Development and Construction Contract in the amount of P515,493.89 for completed and
delivered housing units and land development. However, the parties eventually arrived at an
amicable settlement of their differences, which was embodied in a Memorandum Agreement
executed by HCCC and AFRDC on July 21, 1978. Under the agreement, the parties stipulated
that HCCC had turned over 83 housing units which have been accepted and paid for by the
GSIS. The GSIS acknowledged that it still owed HCCC P520,177.50 representing incomplete
construction of housing units, incomplete land development and 5% retention, which amount
will be discharged when the defects and deficiencies are finally completed by HCCC. It was also
provided that HCCC was indebted to AFRDC in the amount of P180,234.91 which the former
agreed would be paid out of the proceeds from the 40 housing units still to be turned over by
HCCC or from any amount due to HCCC from the GSIS. Consequently, the trial court dismissed
the case upon the filing by the parties of a joint motion to dismiss.
Sometime in 1979, after an examination of the records of the GSIS, Ong discovered that Diaz
and Francisco had executed and signed seven checks
4
, of various dates and amounts, drawn
against the IBAA and payable to HCCC for completed and delivered work under the contract.
Ong, however, claims that these checks were never delivered to HCCC. Upon inquiry with Diaz,
Ong learned that the GSIS gave Francisco custody of the checks since she promised that she
would deliver the same to HCCC. Instead, Francisco forged the signature of Ong, without his
knowledge or consent, at the dorsal portion of the said checks to make it appear that HCCC
had indorsed the checks; Francisco then indorsed the checks for a second time by signing her
name at the back of the checks and deposited the checks in her IBAA savings account. IBAA
credited Francisco's account with the amount of the checks and the latter withdrew the
amount so credited.
On June 7, 1979, Ong filed complaints with the office of the city fiscal of Quezon City, charging
Francisco with estafa thru falsification of commercial documents. Francisco denied having
forged Ong's signature on the checks, claiming that Ong himself indorsed the seven checks in
behalf of HCCC and delivered the same to Francisco in payment of the loans extended by
Francisco to HCCC. According to Francisco, she agreed to grant HCCC the loans in the total
amount of P585,000.00 and covered by eighteen promissory notes in order to obviate the risk
of the non-completion of the project. As a means of repayment, Ong allegedly issued a
Certification authorizing Francisco to collect HCCC's receivables from the GSIS. Assistant City
Fiscal Ramon M. Gerona gave credence to Francisco's claims and accordingly, dismissed the
complaints, which dismissal was affirmed by the Minister of Justice in a resolution issued on
June 5, 1981.
The present case was brought by private respondents on November 19, 1979 against Francisco
and IBAA for the recovery of P370,475.00, representing the total value of the seven checks,
and for damages, attorney's fees, expenses of litigation and costs. After trial on the merits, the
trial court rendered its decision in favor of private respondents, the dispositive portion of
which provides
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs
and against the defendants INSULAR BANK OF ASIA & AMERICA and ATTY. ADALIA
FRANCISCO, to jointly and severally pay the plaintiffs the amount of P370.475.00 plus
interest thereon at the rate of 12% per annum from the date of the filing of the complaint
until the full amount is paid; moral damages to plaintiff Jaime Ong in the sum of
P50,000.00; exemplary damages of P50,000.00; litigation expenses of P5,000.00; and
attorney's fees of P50,000.00.
With respect to the cross-claim of the defendant IBAA against its co-defendant Atty. Adalia
Francisco, the latter is ordered to reimburse the former for the sums that the Bank shall
pay to the plaintiff on the forged checks including the interests paid thereon.
Further, the defendants are ordered to pay the costs.
Based upon the findings of handwriting experts from the National Bureau of Investigation
(NBI), the trial court held that Francisco had indeed forged the signature of Ong to make it
appear that he had indorsed the checks. Also, the court ruled that there were no loans
extended, reasoning that it was unbelievable that HCCC was experiencing financial difficulties
so as to compel it to obtain the loans from AFRDC in view of the fact that the GSIS had issued
checks in favor of HCCC at about the same time that the alleged advances were made. The trial
court stated that it was plausible that Francisco concealed the fact of issuance of the checks
from private respondents in order to make it appear as if she were accommodating private
respondents, when in truth she was lending HCCC its own money.
With regards to the Memorandum Agreement entered into between AFRDC and HCCC in Civil
Case No. Q-24628, the trial court held that the same did not make any mention of the forged
checks since private respondents were as of yet unaware of their existence, that fact having
been effectively concealed by Francisco, until private respondents acquired knowledge of
Francisco's misdeeds in 1979.
IBAA was held liable to private respondents for having honored the checks despite such
obvious irregularities as the lack of initials to validate the alterations made on the check, the
absence of the signature of a co-signatory in the corporate checks of HCCC and the deposit of
the checks on a second indorsement in the savings account of Francisco. However, the trial
court allowed IBAA recourse against Francisco, who was ordered to reimburse the IBAA for any
sums it shall have to pay to private respondents.
5

Both Francisco and IBAA appealed the trial court's decision, but the Court of Appeals dismissed
IBAA's appeal for its failure to file its brief within the 45-day extension granted by the appellate
court. IBAA's motion for reconsideration and petition for review on certiorari filed with this
Court were also similarly denied. On November 21, 1989, IBAA and HCCC entered into a
Compromise Agreement which was approved by the trial court, wherein HCCC acknowledged
receipt of the amount of P370,475.00 in full satisfaction of its claims against IBAA, without
prejudice to the right of the latter to pursue its claims against Francisco.
On June 29, 1992, the Court of Appeals affirmed the trial court's ruling, hence this petition for
review on certiorarifiled by petitioner, assigning the following errors to the appealed decision

1. The respondent Court of Appeals erred in concluding that private respondents did not
owe Petitioner the sum covered by the Promissory Notes Exh. 2-2-A-2-P (FRANCISCO).
Such conclusion was based mainly on conjectures, surmises and speculation contrary to
the unrebutted pleadings and evidence presented by petitioner.
2. The respondent Court of Appeals erred in holding that Petitioner falsified the signature
of private respondent ONG on the checks in question without any authority therefor
which is patently contradictory to the unrebutted pleading and evidence that petitioner
was expressly authorized by respondent HERBY thru ONG to collect all receivables of
HERBY from GSIS to pay the loans extended to them. (Exhibit 3).
3. That respondent Court of Appeals erred in holding that the seven checks in question
were not taken up in the liquidation and reconciliation of all outstanding account between
AFRDC and HERBY as acknowledged by the parties in Memorandum Agreement (Exh. 5) is
a pure conjecture, surmise and speculation contrary to the unrebutted evidence
presented by petitioners. It is an inference made which is manifestly mistaken.
4. The respondent Court of Appeals erred in affirming the decision of the lower court and
dismissing the appeal.
6

The pivotal issue in this case is whether or not Francisco forged the signature of Ong on the
seven checks. In this connection, we uphold the lower courts' finding that the subject matter of
the present case, specifically the seven checks, drawn by GSIS and AFRDC, dated between
October to November 1977, in the total amount of P370,475.00 and payable to HCCC, was not
included in the Memorandum Agreement executed by HCCC and AFRDC in Civil Case No. Q-
24628. As observed by the trial court, aside from there being absolutely no mention of the
checks in the said agreement, the amounts represented by said checks could not have been
included in the Memorandum Agreement executed in 1978 because private respondents only
discovered Francisco's acts of forgery in 1979. The lower courts found that Francisco was able
to easily conceal from private respondents even the fact of the issuance of the checks since
she was a co-signatory thereof.
7
We also note that Francisco had custody of the checks, as
proven by the check vouchers bearing her uncontested signature,
8
by which she, in effect,
acknowledged having received the checks intended for HCCC. This contradicts Francisco's
claims that the checks were issued to Ong who delivered them to Francisco already indorsed.
9

As regards the forgery, we concur with the lower courts', finding that Francisco forged the
signature of Ong on the checks to make it appear as if Ong had indorsed said checks and that,
after indorsing the checks for a second time by signing her name at the back of the checks,
Francisco deposited said checks in her savings account with IBAA. The forgery was satisfactorily
established in the trial court upon the strength of the findings of the NBI handwriting
expert.
10
Other than petitioner's self-serving denials, there is nothing in the records to rebut
the NBI's findings. Well-entrenched is the rule that findings of trial courts which are factual in
nature, especially when affirmed by the Court of Appeals, deserve to be respected and
affirmed by the Supreme Court, provided it is supported by substantial evidence on
record,
11
as it is in the case at bench.
Petitioner claims that she was, in any event, authorized to sign Ong's name on the checks by
virtue of the Certification executed by Ong in her favor giving her the authority to collect all
the receivables of HCCC from the GSIS, including the questioned checks.
12
Petitioner's
alternative defense must similarly fail. The Negotiable Instruments Law provides that where
any person is under obligation to indorse in a representative capacity, he may indorse in such
terms as to negative personal liability.
13
An agent, when so signing, should indicate that he is
merely signing in behalf of the principal and must disclose the name of his principal; otherwise
he shall be held personally liable.
14
Even assuming that Francisco was authorized by HCCC to
sign Ong's name, still, Francisco did not indorse the instrument in accordance with law. Instead
of signing Ong's name, Francisco should have signed her own name and expressly indicated
that she was signing as an agent of HCCC. Thus, the Certification cannot be used by Francisco
to validate her act of forgery.
Every person who, contrary to law, wilfully or negligently causes damage to another, shall
indemnify the latter for the same.
15
Due to her forgery of Ong's signature which enabled her
to deposit the checks in her own account, Francisco deprived HCCC of the money due it from
the GSIS pursuant to the Land Development and Construction Contract. Thus, we affirm
respondent court's award of compensatory damages in the amount of P370,475.00, but with a
modification as to the interest rate which shall be six percent (6%) per annum, to be computed
from the date of the filing of the complaint since the amount of damages was alleged in the
complaint;
16
however, the rate of interest shall be twelve percent (12%) per annum from the
time the judgment in this case becomes final and executory until its satisfaction and the basis
for the computation of this twelve percent (12%) rate of interest shall be the amount of
P370,475.00. This is in accordance with the doctrine enunciated in Eastern Shipping
Lines, Inc.vs. Court of Appeals, et al.,
17
which was reiterated in Philippine National Bank
vs. Court of Appeals,
18
Philippine Airlines, Inc. vs. Court of Appeals
19
and in Keng Hua Paper
Products Co., Inc. vs. Court of Appeals,
20
which provides that
1. When an 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 12% 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 six percent (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
twelve percent (12%) per annum from such finality until its satisfaction, this interim period
being deemed to be by then an equivalent to a forbearance of credit.
We also sustain the award of exemplary damages in the amount of P50,000.00. Under Article
2229 of the Civil Code, exemplary damages are imposed by way of example or correction for
the public good, in addition to the moral, temperate, liquidated or compensatory damages.
Considering petitioner's fraudulent act, we hold that an award of P50,000.00 would be
adequate, fair and reasonable. The grant of exemplary damages justifies the award of
attorney's fees in the amount of P50,000.00, and the award of P5,000.00 for litigation
expenses.
21

The appellate court's award of P50,000.00 in moral damages is warranted. Under Article 2217
of the Civil Code, moral damages may be granted upon proof of physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation and similar injury.
22
Ong testitified that he suffered sleepless nights,
embarrassment, humiliation and anxiety upon discovering that the checks due his company
were forged by petitioner and that petitioner had filed baseless criminal complaints against
him before the fiscal's office of Quezon City which disrupted HCCC's business operations.
23

WHEREFORE, we AFFIRM the respondent court's decision promulgated on June 29, 1992,
upholding the February 16, 1988 decision of the trial court in favor of private respondents,
with the modification that the interest upon the actual damages awarded shall be at six
percent (6%) per annum, which interest rate shall be computed from the time of the filing of
the complaint on November 19, 1979. However, the interest rate shall be twelve percent
(12%) per annum from the time the judgment in this case becomes final and executory and
until such amount is fully paid. The basis for computation of the six percent and twelve percent
rates of interest shall be the amount of P370,475.00. No pronouncement as to costs.
SO ORDERED.






[G.R. No. 149454. May 28, 2004]
BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. CASA MONTESSORI INTERNATIONALE and
LEONARDO T. YABUT, respondents.
[G.R. No. 149507. May 28, 2004]
CASA MONTESSORI INTERNATIONALE, petitioner, vs. BANK OF THE PHILIPPINE
ISLANDS, respondent.
D E C I S I O N
PANGANIBAN, J.:
By the nature of its functions, a bank is required to take meticulous care of the deposits of its
clients, who have the right to expect high standards of integrity and performance from
it. Among its obligations in furtherance thereof is knowing the signatures of its
clients. Depositors are not estopped from questioning wrongful withdrawals, even if they have
failed to question those errors in the statements sent by the bank to them for verification.
The Case
Before us are two Petitions for Review
[1]
under Rule 45 of the Rules of Court, assailing
the March 23, 2001 Decision
[2]
and the August 17, 2001 Resolution
[3]
of the Court of Appeals
(CA) in CA-GR CV No. 63561. The decretal portion of the assailed Decision reads as follows:
WHEREFORE, upon the premises, the decision appealed from is AFFIRMED with the
modification that defendant bank [Bank of the Philippine Islands (BPI)] is held liable only for
one-half of the value of the forged checks in the amount of P547,115.00 after deductions
subject to REIMBURSEMENT from third party defendant Yabut who is likewise ORDERED to pay
the other half to plaintiff corporation *Casa Montessori Internationale (CASA)+.
[4]

The assailed Resolution denied all the parties Motions for Reconsideration.
The Facts
The facts of the case are narrated by the CA as follows:
On November 8, 1982, plaintiff CASA Montessori International
[5]
opened Current Account No.
0291-0081-01 with defendant BPI*,+ with CASAs President Ms. Ma. Carina C. Lebron as one of
its authorized signatories.
In 1991, after conducting an investigation, plaintiff discovered that nine (9) of its checks had
been encashed by a certain Sonny D. Santos since 1990 in the total amount of P782,000.00, on
the following dates and amounts:
Check No. Date Amount
1. 839700 April 24, 1990 P 43,400.00
2. 839459 Nov. 2, 1990 110,500.00
3. 839609 Oct. 17, 1990 47,723.00
4. 839549 April 7, 1990 90,700.00
5. 839569 Sept. 23, 1990 52,277.00
6. 729149 Mar. 22, 1990 148,000.00
7. 729129 Mar. 16, 1990 51,015.00
8. 839684 Dec. 1, 1990 140,000.00
9. 729034 Mar. 2, 1990 98,985.00
Total -- P 782,600.00
[6]

It turned out that Sonny D. Santos with account at BPIs Greenbelt Branch *was+ a fictitious
name used by third party defendant Leonardo T. Yabut who worked as external auditor of
CASA. Third party defendant voluntarily admitted that he forged the signature of Ms. Lebron
and encashed the checks.
The PNP Crime Laboratory conducted an examination of the nine (9) checks and concluded
that the handwritings thereon compared to the standard signature of Ms. Lebron were not
written by the latter.
On March 4, 1991, plaintiff filed the herein Complaint for Collection with Damages against
defendant bank praying that the latter be ordered to reinstate the amount of P782,500.00
[7]
in
the current and savings accounts of the plaintiff with interest at 6% per annum.
On February 16, 1999, the RTC rendered the appealed decision in favor of the plaintiff.
[8]

Ruling of the Court of Appeals
Modifying the Decision of the Regional Trial Court (RTC), the CA apportioned the loss between
BPI and CASA. The appellate court took into account CASAs contributory negligence that
resulted in the undetected forgery. It then ordered Leonardo T. Yabut to reimburse BPI half
the total amount claimed; and CASA, the other half. It also disallowed attorneys fees and
moral and exemplary damages.
Hence, these Petitions.
[9]

Issues
In GR No. 149454, Petitioner BPI submits the following issues for our consideration:
I. The Honorable Court of Appeals erred in deciding this case NOT in accord with the
applicable decisions of this Honorable Court to the effect that forgery cannot be presumed;
that it must be proved by clear, positive and convincing evidence; and that the burden of proof
lies on the party alleging the forgery.
II. The Honorable Court of Appeals erred in deciding this case not in accord with applicable
laws, in particular the Negotiable Instruments Law (NIL) which precludes CASA, on account of
its own negligence, from asserting its forgery claim against BPI, specially taking into account
the absence of any negligence on the part of BPI.
[10]

In GR No. 149507, Petitioner CASA submits the following issues:
1. The Honorable Court of Appeals erred when it ruled that there is no showing that *BPI+,
although negligent, acted in bad faith x x x thus denying the prayer for the award of attorneys
fees, moral damages and exemplary damages to [CASA]. The Honorable Court also erred when
it did not order [BPI] to pay interest on the amounts due to [CASA].
2. The Honorable Court of Appeals erred when it declared that *CASA+ was likewise negligent
in the case at bar, thus warranting its conclusion that the loss in the amount of P547,115.00 be
apportioned between *CASA+ and *BPI+ x x x.
[11]

These issues can be narrowed down to three. First, was there forgery under the Negotiable
Instruments Law (NIL)? Second, were any of the parties negligent and therefore precluded
from setting up forgery as a defense? Third, should moral and exemplary damages, attorneys
fees, and interest be awarded?
The Courts Ruling
The Petition in GR No. 149454 has no merit, while that in GR No. 149507 is partly meritorious.
First Issue:
Forged Signature Wholly Inoperative
Section 23 of the NIL provides:
Section 23. Forged signature; effect of. -- 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
x x x 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.
[12]

Under this provision, a forged signature is a real
[13]
or absolute defense,
[14]
and a person whose
signature on a negotiable instrument is forged is deemed to have never become a party
thereto and to have never consented to the contract that allegedly gave rise to it.
[15]

The counterfeiting of any writing, consisting in the signing of anothers name with intent to
defraud, is forgery.
[16]

In the present case, we hold that there was forgery of the drawers signature on the check.
First, both the CA
[17]
and the RTC
[18]
found that Respondent Yabut himself had voluntarily
admitted, through an Affidavit, that he had forged the drawers signature and encashed the
checks.
[19]
He never refuted these findings.
[20]
That he had been coerced into admission was
not corroborated by any evidence on record.
[21]

Second, the appellate and the trial courts also ruled that the PNP Crime Laboratory, after its
examination of the said checks,
[22]
had concluded that the handwritings thereon -- compared
to the standard signature of the drawer -- were not hers.
[23]
This conclusion was the same as
that in the Report
[24]
that the PNP Crime Laboratory had earlier issued to BPI -- the drawee
bank -- upon the latters request.
Indeed, we respect and affirm the RTCs factual findings, especially when affirmed by the CA,
since these are supported by substantial evidence on record.
[25]

Voluntary Admission Not
Violative of Constitutional Rights
The voluntary admission of Yabut did not violate his constitutional rights (1) on custodial
investigation, and (2) against self-incrimination.
In the first place, he was not under custodial investigation.
[26]
His Affidavit was executed in
private and before private individuals.
[27]
The mantle of protection under Section 12 of Article
III of the 1987 Constitution
[28]
covers only the period from the time a person is taken into
custody for investigation of his possible participation in the commission of a crime or from the
time he is singled out as a suspect in the commission of a crime although not yet in
custody.
[29]

Therefore, to fall within the ambit of Section 12, quoted above, there must be an arrest or a
deprivation of freedom, with questions propounded on him by the police authorities for the
purpose of eliciting admissions, confessions, or any information.
[30]
The said constitutional
provision does not apply to spontaneous statements made in a voluntary
manner
[31]
whereby an individual orally admits to authorship of a crime.
[32]
What the
Constitution proscribes is the compulsory or coercive disclosure of incriminating facts.
[33]

Moreover, the right against self-incrimination
[34]
under Section 17 of Article III
[35]
of the
Constitution, which is ordinarily available only in criminal prosecutions, extends to all other
government proceedings -- including civil actions, legislative investigations,
[36]
and
administrative proceedings that possess a criminal or penal aspect
[37]
-- but not to private
investigations done by private individuals. Even in such government proceedings, this right
may be waived,
[38]
provided the waiver is certain; unequivocal; and intelligently,
understandingly and willingly made.
[39]

If in these government proceedings waiver is allowed, all the more is it so in private
investigations. It is of no moment that no criminal case has yet been filed against Yabut. The
filing thereof is entirely up to the appropriate authorities or to the private individuals upon
whom damage has been caused. As we shall also explain later, it is not mandatory for CASA --
the plaintiff below -- to implead Yabut in the civil case before the lower court.
Under these two constitutional provisions, *t+he Bill of Rights
[40]
does not concern itself with
the relation between a private individual and another individual. It governs the relationship
between the individual and the State.
[41]
Moreover, the Bill of Rights is a charter of liberties
for the individual and a limitation upon the power of the *S+tate.
[42]
These rights
[43]
are
guaranteed to preclude the slightest coercion by the State that may lead the accused to admit
something false, not prevent him from freely and voluntarily telling the truth.
[44]

Yabut is not an accused here. Besides, his mere invocation of the aforesaid rights does not
automatically entitle him to the constitutional protection.
[45]
When he freely and voluntarily
executed
[46]
his Affidavit, the State was not even involved. Such Affidavit may therefore be
admitted without violating his constitutional rights while under custodial investigation and
against self-incrimination.
Clear, Positive and Convincing
Examination and Evidence
The examination by the PNP, though inconclusive, was nevertheless clear, positive and
convincing.
Forgery cannot be presumed.
[47]
It must be established by clear, positive and convincing
evidence.
[48]
Under the best evidence rule as applied to documentary evidence like the checks
in question, no secondary or substitutionary evidence may inceptively be introduced, as the
original writing itself must be produced in court.
[49]
But when, without bad faith on the part of
the offeror, the original checks have already been destroyed or cannot be produced in court,
secondary evidence may be produced.
[50]
Without bad faith on its part, CASA proved the loss or
destruction of the original checks through the Affidavit of the one person who knew of that
fact
[51]
-- Yabut. He clearly admitted to discarding the paid checks to cover up his
misdeed.
[52]
In such a situation, secondary evidence like microfilm copies may be introduced in
court.
The drawers signatures on the microfilm copies were compared with the standard
signature. PNP Document Examiner II Josefina de la Cruz testified on cross-examination that
two different persons had written them.
[53]
Although no conclusive report could be issued in
the absence of the original checks,
[54]
she affirmed that her findings were 90 percent
conclusive.
[55]
According to her, even if the microfilm copies were the only basis of comparison,
the differences were evident.
[56]
Besides, the RTC explained that although the Report was
inconclusive, no conclusive report could have been given by the PNP, anyway, in the absence
of the original checks.
[57]
This explanation is valid; otherwise, no such report can ever be relied
upon in court.
Even with respect to documentary evidence, the best evidence rule applies only when the
contents of a document -- such as the drawers signature on a check -- is the subject of
inquiry.
[58]
As to whether the document has been actually executed, this rule does not apply;
and testimonial as well as any other secondary evidence is admissible.
[59]
Carina Lebron herself,
the drawers authorized signatory, testified many times that she had never signed those
checks. Her testimonial evidence is admissible; the checks have not been actually
executed. The genuineness of her handwriting is proved, not only through the courts
comparison of the questioned handwritings and admittedly genuine specimens thereof,
[60]
but
above all by her.
The failure of CASA to produce the original checks neither gives rise to the presumption of
suppression of evidence
[61]
nor creates an unfavorable inference against it.
[62]
Such failure
merely authorizes the introduction of secondary evidence
[63]
in the form of microfilm
copies. Of no consequence is the fact that CASA did not present the signature card containing
the signatures with which those on the checks were compared.
[64]
Specimens of standard
signatures are not limited to such a card. Considering that it was not produced in evidence,
other documents that bear the drawers authentic signature may be resorted to.
[65]
Besides,
that card was in the possession of BPI -- the adverse party.
We have held that without the original document containing the allegedly forged signature,
one cannot make a definitive comparison that would establish forgery;
[66]
and that a
comparison based on a mere reproduction of the document under controversy cannot
produce reliable results.
[67]
We have also said, however, that a judge cannot merely rely on a
handwriting experts testimony,
[68]
but should also exercise independent judgment in
evaluating the authenticity of a signature under scrutiny.
[69]
In the present case, both the RTC
and the CA conducted independent examinations of the evidence presented and arrived at
reasonable and similar conclusions. Not only did they admit secondary evidence; they also
appositely considered testimonial and other documentary evidence in the form of the
Affidavit.
The best evidence rule admits of exceptions and, as we have discussed earlier, the first of
these has been met.
[70]
The result of examining a questioned handwriting, even with the aid of
experts and scientific instruments, may be inconclusive;
[71]
but it is a non sequitur to say that
such result is not clear, positive and convincing. The preponderance of evidence required in
this case has been satisfied.
[72]

Second Issue:
Negligence Attributable to BPI Alone
Having established the forgery of the drawers signature, BPI -- the drawee -- erred in making
payments by virtue thereof. The forged signatures are wholly inoperative, and CASA -- the
drawer whose authorized signatures do not appear on the negotiable instruments -- cannot be
held liable thereon. Neither is the latter precluded from setting up forgery as a real defense.
Clear Negligence
in Allowing Payment
Under a Forged Signature
We have repeatedly emphasized that, since the banking business is impressed with public
interest, of paramount importance thereto is the trust and confidence of the public in
general. Consequently, the highest degree of diligence
[73]
is expected,
[74]
and high standards of
integrity and performance are even required, of it.
[75]
By the nature of its functions, a bank is
under obligation to treat the accounts of its depositors with meticulous care,
[76]
always having
in mind the fiduciary nature of their relationship.
[77]

BPI contends that it has a signature verification procedure, in which checks are honored only
when the signatures therein are verified to be the same with or similar to the specimen
signatures on the signature cards. Nonetheless, it still failed to detect the eight instances of
forgery. Its negligence consisted in the omission of that degree of diligence required
[78]
of a
bank. It cannot now feign ignorance, for very early on we have already ruled that a bank is
bound to know the signatures of its customers; and if it pays a forged check, it must be
considered as making the payment out of its own funds, and cannot ordinarily charge the
amount so paid to the account of the depositor whose name was forged.
[79]
In fact, BPI was
the same bank involved when we issued this ruling seventy years ago.
Neither Waiver nor Estoppel
Results from Failure to
Report Error in Bank Statement
The monthly statements issued by BPI to its clients contain a notice worded as follows: If no
error is reported in ten (10) days, account will be correct.
[80]
Such notice cannot be considered
a waiver, even if CASA failed to report the error. Neither is it estopped from questioning the
mistake after the lapse of the ten-day period.
This notice is a simple confirmation
[81]
or circularization -- in accounting parlance -- that
requests client-depositors to affirm the accuracy of items recorded by the banks.
[82]
Its purpose
is to obtain from the depositors a direct corroboration of the correctness of their account
balances with their respective banks.
[83]
Internal or external auditors of a bank use it as a basic
audit procedure
[84]
-- the results of which its client-depositors are neither interested in nor
privy to -- to test the details of transactions and balances in the banks records.
[85]
Evidential
matter obtained from independent sources outside a bank only serves to provide greater
assurance of reliability
[86]
than that obtained solely within it for purposes of an audit of its own
financial statements, not those of its client-depositors.
Furthermore, there is always the audit risk that errors would not be detected
[87]
for various
reasons. One, materiality is a consideration in audit planning;
[88]
and two, the information
obtained from such a substantive test is merely presumptive and cannot be the basis of a valid
waiver.
[89]
BPI has no right to impose a condition unilaterally and thereafter consider failure to
meet such condition a waiver. Neither may CASA renounce a right
[90]
it has never possessed.
[91]

Every right has subjects -- active and passive. While the active subject is entitled to demand its
enforcement, the passive one is duty-bound to suffer such enforcement.
[92]

On the one hand, BPI could not have been an active subject, because it could not have
demanded from CASA a response to its notice. Besides, the notice was a measly request
worded as follows: Please examine x x x and report x x x.
[93]
CASA, on the other hand, could
not have been a passive subject, either, because it had no obligation to respond. It could -- as
it did -- choose not to respond.
Estoppel precludes individuals from denying or asserting, by their own deed or representation,
anything contrary to that established as the truth, in legal contemplation.
[94]
Our rules on
evidence even make a juris et de jure presumption
[95]
that whenever one has, by ones own act
or omission, intentionally and deliberately led another to believe a particular thing to be true
and to act upon that belief, one cannot -- in any litigation arising from such act or omission --
be permitted to falsify that supposed truth.
[96]

In the instant case, CASA never made any deed or representation that misled BPI. The
formers omission, if any, may only be deemed an innocent mistake oblivious to the
procedures and consequences of periodic audits. Since its conduct was due to such ignorance
founded upon an innocent mistake, estoppel will not arise.
[97]
A person who has no knowledge
of or consent to a transaction may not be estopped by it.
[98]
Estoppel cannot be sustained by
mere argument or doubtful inference x x x.
[99]
CASA is not barred from questioning BPIs error
even after the lapse of the period given in the notice.
Loss Borne by
Proximate Source
of Negligence
For allowing payment
[100]
on the checks to a wrongful and fictitious payee, BPI -- the drawee
bank -- becomes liable to its depositor-drawer. Since the encashing bank is one of its
branches,
[101]
BPI can easily go after it and hold it liable for reimbursement.
[102]
It may not
debit the drawers account
[103]
and is not entitled to indemnification from the drawer.
[104]
In
both law and equity, when one of two innocent persons must suffer by the wrongful act of a
third person, the loss must be borne by the one whose negligence was the proximate cause of
the loss or who put it into the power of the third person to perpetrate the wrong.
[105]

Proximate cause is determined by the facts of the case.
[106]
It 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.
[107]

Pursuant to its prime duty to ascertain well the genuineness of the signatures of its client-
depositors on checks being encashed, BPI is expected to use reasonable business
prudence.
[108]
In the performance of that obligation, it is bound by its internal banking rules
and regulations that form part of the contract it enters into with its depositors.
[109]

Unfortunately, it failed in that regard. First, Yabut was able to open a bank account in one of
its branches without privity;
[110]
that is, without the proper verification of his corresponding
identification papers. Second, BPI was unable to discover early on not only this irregularity, but
also the marked differences in the signatures on the checks and those on the signature
card. Third, despite the examination procedures it conducted, the Central Verification
Unit
[111]
of the bank even passed off these evidently different signatures as genuine. Without
exercising the required prudence on its part, BPI accepted and encashed the eight checks
presented to it. As a result, it proximately contributed to the fraud and should be held
primarily liable
[112]
for the negligence of its officers or agents when acting within the course
and scope of their employment.
[113]
It must bear the loss.
CASA Not Negligent
in Its Financial Affairs
In this jurisdiction, the negligence of the party invoking forgery is recognized as an
exception
[114]
to the general rule that a forged signature is wholly inoperative.
[115]
Contrary to
BPIs claim, however, we do not find CASA negligent in handling its financial affairs. CASA, we
stress, is not precluded from setting up forgery as a real defense.
Role of Independent Auditor
The major purpose of an independent audit is to investigate and determine objectively if the
financial statements submitted for audit by a corporation have been prepared in accordance
with the appropriate financial reporting practices
[116]
of private entities. The relationship that
arises therefrom is both legal and moral.
[117]
It begins with the execution of the engagement
letter
[118]
that embodies the terms and conditions of the audit and ends with the fulfilled
expectation of the auditors ethical
[119]
and competent performance in all aspects of the
audit.
[120]

The financial statements are representations of the client; but it is the auditor who has the
responsibility for the accuracy in the recording of data that underlies their preparation, their
form of presentation, and the opinion
[121]
expressed therein.
[122]
The auditor does not assume
the role of employee or of management in the clients conduct of operations
[123]
and is never
under the control or supervision
[124]
of the client.
Yabut was an independent auditor
[125]
hired by CASA. He handled its monthly bank
reconciliations and had access to all relevant documents and checkbooks.
[126]
In him was
reposed the clients
[127]
trust and confidence
[128]
that he would perform precisely those
functions and apply the appropriate procedures in accordance with generally accepted
auditing standards.
[129]
Yet he did not meet these expectations. Nothing could be more
horrible to a client than to discover later on that the person tasked to detect fraud was the
same one who perpetrated it.
Cash Balances
Open to Manipulation
It is a non sequitur to say that the person who receives the monthly bank statements, together
with the cancelled checks and other debit/credit memoranda, shall examine the contents and
give notice of any discrepancies within a reasonable time. Awareness is not equipollent with
discernment.
Besides, in the internal accounting control system prudently installed by CASA,
[130]
it was Yabut
who should examine those documents in order to prepare the bank reconciliations.
[131]
He
owned his working papers,
[132]
and his output consisted of his opinion as well as the clients
financial statements and accompanying notes thereto. CASA had every right to rely solely
upon his output -- based on the terms of the audit engagement -- and could thus be
unwittingly duped into believing that everything was in order. Besides, *g+ood faith is always
presumed and it is the burden of the party claiming otherwise to adduce clear and convincing
evidence to the contrary.
[133]

Moreover, there was a time gap between the period covered by the bank statement and the
date of its actual receipt. Lebron personally received the December 1990 bank statement only
in January 1991
[134]
-- when she was also informed of the forgery for the first time, after which
she immediately requested a stop payment order. She cannot be faulted for the late
detection of the forged December check. After all, the bank account with BPI was not personal
but corporate, and she could not be expected to monitor closely all its finances. A preschool
teacher charged with molding the minds of the youth cannot be burdened with the intricacies
or complexities of corporate existence.
There is also a cutoff period such that checks issued during a given month, but not presented
for payment within that period, will not be reflected therein.
[135]
An experienced auditor with
intent to defraud can easily conceal any devious scheme from a client unwary of the
accounting processes involved by manipulating the cash balances on record -- especially when
bank transactions are numerous, large and frequent. CASA could only be blamed, if at all, for
its unintelligent choice in the selection and appointment of an auditor -- a fault that is not
tantamount to negligence.
Negligence is not presumed, but proven by whoever alleges it.
[136]
Its mere existence is not
sufficient without proof that it, and no other cause,
[137]
has given rise to damages.
[138]
In
addition, this fault is common to, if not prevalent among, small and medium-sized business
entities, thus leading the Professional Regulation Commission (PRC), through the Board of
Accountancy (BOA), to require today not only accreditation for the practice of public
accountancy,
[139]
but also the registration of firms in the practice thereof. In fact, among the
attachments now required upon registration are the code of good governance
[140]
and a sworn
statement on adequate and effective training.
[141]

The missing checks were certainly reported by the bookkeeper
[142]
to the accountant
[143]
-- her
immediate supervisor -- and by the latter to the auditor. However, both the accountant and
the auditor, for reasons known only to them, assured the bookkeeper that there were no
irregularities.
The bookkeeper
[144]
who had exclusive custody of the checkbooks
[145]
did not have to go
directly to CASAs president or to BPI. Although she rightfully reported the matter, neither an
investigation was conducted nor a resolution of it was arrived at, precisely because the person
at the top of the helm was the culprit. The vouchers, invoices and check stubs in support of all
check disbursements could be concealed or fabricated -- even in collusion -- and management
would still have no way to verify its cash accountabilities.
Clearly then, Yabut was able to perpetrate the wrongful act through no fault of CASA. If
auditors may be held liable for breach of contract and negligence,
[146]
with all the more reason
may they be charged with the perpetration of fraud upon an unsuspecting client. CASA had
the discretion to pursue BPI alone under the NIL, by reason of expediency or munificence or
both. Money paid under a mistake may rightfully be recovered,
[147]
and under such terms as
the injured party may choose.
Third Issue:
Award of Monetary Claims
Moral Damages Denied
We deny CASAs claim for moral damages.
In the absence of a wrongful act or omission,
[148]
or of fraud or bad faith,
[149]
moral damages
cannot be awarded.
[150]
The adverse result of an action does not per se make the action
wrongful, or the party liable for it. One may err, but error alone is not a ground for granting
such damages.
[151]
While no proof of pecuniary loss is necessary therefor -- with the amount to
be awarded left to the courts discretion
[152]
-- the claimant must nonetheless satisfactorily
prove the existence of its factual basis
[153]
and causal relation
[154]
to the claimants act or
omission.
[155]

Regrettably, in this case CASA was unable to identify the particular instance -- enumerated in
the Civil Code -- upon which its claim for moral damages is predicated.
[156]
Neither bad faith
nor negligence so gross that it amounts to malice
[157]
can be imputed to BPI. Bad faith, under
the law, does not simply connote bad judgment or negligence;
[158]
it imports a dishonest
purpose or some moral obliquity and conscious doing of a wrong, a breach of a known duty
through some motive or interest or ill will that partakes of the nature of fraud.
[159]

As a general rule, a corporation -- being an artificial person without feelings, emotions and
senses, and having existence only in legal contemplation -- is not entitled to moral
damages,
[160]
because it cannot experience physical suffering and mental anguish.
[161]
However,
for breach of the fiduciary duty required of a bank, a corporate client may claim such damages
when its good reputation is besmirched by such breach, and social humiliation results
therefrom.
[162]
CASA was unable to prove that BPI had debased the good reputation of,
[163]
and
consequently caused incalculable embarrassment to, the former. CASAs mere allegation or
supposition thereof, without any sufficient evidence on record,
[164]
is not enough.
Exemplary Damages Also Denied
We also deny CASAs claim for exemplary damages.
Imposed by way of correction
[165]
for the public good,
[166]
exemplary damages cannot be
recovered as a matter of right.
[167]
As we have said earlier, there is no bad faith on the part of
BPI for paying the checks of CASA upon forged signatures. Therefore, the former cannot be
said to have acted in a wanton, fraudulent, reckless, oppressive or malevolent manner.
[168]
The
latter, having no right to moral damages, cannot demand exemplary damages.
[169]

Attorneys Fees Granted
Although it is a sound policy not to set a premium on the right to litigate,
[170]
we find that CASA
is entitled to reasonable attorneys fees based on factual, legal, and equitable
justification.
[171]

When the act or omission of the defendant has compelled the plaintiff to incur expenses to
protect the latters interest,
[172]
or where the court deems it just and equitable,
[173]
attorneys
fees may be recovered. In the present case, BPI persistently denied the claim of CASA under
the NIL to recredit the latters account for the value of the forged checks. This denial
constrained CASA to incur expenses and exert effort for more than ten years in order to
protect its corporate interest in its bank account. Besides, we have already cautioned BPI on a
similar act of negligence it had committed seventy years ago, but it has remained
unrelenting. Therefore, the Court deems it just and equitable to grant ten percent (10%)
[174]
of
the total value adjudged to CASA as attorneys fees.
Interest Allowed
For the failure of BPI to pay CASA upon demand and for compelling the latter to resort to the
courts to obtain payment, legal interest may be adjudicated at the discretion of the Court, the
same to run from the filing
[175]
of the Complaint.
[176]
Since a court judgment is not a loan or a
forbearance of recovery, the legal interest shall be at six percent (6%) per annum.
[177]
If the
obligation consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of x x
x legal interest, which is six percent per annum.
[178]
The actual base for its computation shall
be on the amount finally adjudged,
[179]
compounded
[180]
annually to make up for the cost of
money
[181]
already lost to CASA.
Moreover, the failure of the CA to award interest does not prevent us from granting it upon
damages awarded for breach of contract.
[182]
Because BPI evidently breached its contract of
deposit with CASA, we award interest in addition to the total amount adjudged. Under Section
196 of the NIL, any case not provided for shall be governed by the provisions of existing
legislation or, in default thereof, by the rules of the law merchant.
[183]
Damages are not
provided for in the NIL. Thus, we resort to the Code of Commerce and the Civil Code. Under
Article 2 of the Code of Commerce, acts of commerce shall be governed by its provisions and,
in their absence, by the usages of commerce generally observed in each place; and in the
absence of both rules, by those of the civil law.
[184]
This law being silent, we look at Article 18
of the Civil Code, which states: In matters which are governed by the Code of Commerce and
special laws, their deficiency shall be supplied by its provisions. A perusal of these three
statutes unmistakably shows that the award of interest under our civil law is justified.
WHEREFORE, the Petition in GR No. 149454 is hereby DENIED, and that in GR No.
149507 PARTLY GRANTED. The assailed Decision of the Court of Appeals is AFFIRMED with
modification: BPI is held liable for P547,115, the total value of the forged checks less the
amount already recovered by CASA from Leonardo T. Yabut, plus interest at the legal rate of six
percent (6%) per annum -- compounded annually, from the filing of the complaint until paid in
full; and attorneys fees of ten percent (10%) thereof, subject to reimbursement from
Respondent Yabut for the entire amount, excepting attorneys fees. Let a copy of this
Decision be furnished the Board of Accountancy of the Professional Regulation Commission for
such action as it may deem appropriate against Respondent Yabut. No costs.
SO ORDERED.
Ynares-Santiago, Carpio, and Azcuna, JJ., concur.
Davide, Jr., C.J., (Chairman), on official leave.




































[G.R. No. 135219. January 17, 2002]
PHILIPPINE NATIONAL BANK, petitioner, vs. THE COURT OF APPEALS and ERNESTO AUSTRIA
and LORETO Q. QUINTANA, respondents.
D E C I S I O N
YNARES-SANTIAGO, J.:
Before us is a petition for review under Rule 45 of the Rules of Court, seeking a reversal of the
Court of Appeals resolution in CA-G.R. SP No. 48660 dated August 25, 1998, which affirmed
the order of the Regional Trial Court of Makati, Branch 60 in LRC Case No. M-2635.
Sometime during the late 70s, the spouses Godofredo and Wilma Monsod obtained a loan in
the amount of P120,000.00 from petitioner Philippine National Bank (PNB). To secure their
loan, the Monsods mortgaged to PNB a parcel of land covered by TCT No. S-84843, located
within the Monte Villa de Monsod Subdivision in Paraaque, Rizal.
Due to Monsods failure to pay their loan obligation, PNB extrajudicially foreclosed the
mortgage. At the auction sale of the subject real property, PNB was declared the highest
bidder. OnDecember 21, 1981, a certificate of sale was issued in favor of PNB, and was
registered on July 11, 1984.
[1]

Upon expiration of the redemption period on July 12, 1985, ownership of the property was
consolidated in PNB. Thereafter, TCT No. S-84843 was cancelled and TCT No. 99480 was
issued in PNBs name.
[2]

On June 23, 1992, PNB filed an Ex-Parte Petition for the Issuance of Writ of Possession with
Branch 60 of the Regional Trial Court of Makati City, docketed as LRC Case No. M-
2635. Pursuant to the provisions of Act No. 3135, as amended, the trial court conducted an ex
parte hearing. PNBs representative testified that the foreclosed property is occupied by one
Ernesto Austria. According to PNB, Mr. Austria was invited by the bank to a conference to
discuss the ownership of the foreclosed lot, however, he did not honor the banks invitation.
[3]

On August 28, 1992, the trial court granted PNBs petition and a writ of possession was issued
on October 26, 1992.
[4]

On December 11, 1992, respondents Ernesto and Loreto Quintana Austria filed a Motion for
Intervention and to Recall and/or Stop the Enforcement of the Writ of
Possession. The Austriasalleged that they are the actual occupants of the subject lot, which
they purportedly bought from the Monsods as early as 1974. They claimed that the foreclosed
property was enclosed within a concrete fence and formed part of their family compound. PNB
allegedly knew of this fact even before it granted the loan to the Monsods, because the banks
credit investigators were advised of the same when they inspected the property in the summer
of 1976. Consequently, the Austrias maintained that the issuance of the possessory writ ex
parte was improper, since it will deprive them of their property without due process.
[5]

Due to the Austrias refusal to vacate the premises, the sheriff failed to enforce the challenged
writ.
On July 27, 1993, on motion of PNB, the trial court issued an alias writ of possession. Again,
the writ was not implemented.
[6]

On September 17, 1993, the sheriff sought to enforce the first alias writ of possession for the
second time. The Austrias filed a Second Motion for Intervention seeking to restrain the
enforcement of the writ of possession issued on October 26, 1992.
[7]
PNB then filed an Urgent
Ex-Parte Motion for Issuance of Break Open Order
[8]
and, subsequently, an Opposition to
theAustrias Second Motion for Intervention.
[9]

On January 31, 1994, the trial court denied the Austrias second motion and granted PNBs
Motion for Issuance of Break Open Order. The trial court ruled that the Austrias can no
longer be permitted to intervene in the case during said stage of the proceedings and that the
remedy of the Austrias was to file an ordinary civil action to assert their claim of ownership
over the property.
[10]

In the meantime, the first alias writ of possession lapsed. PNB thus filed an Ex-Parte Motion
for Issuance of Second Alias Writ of Possession,
[11]
and on November 29, 1994, a second alias
writ was issued.
[12]

Unfazed, the Austrias filed an Omnibus Motion on January 25, 1995, seeking a recall of the
second alias writ and a reconsideration of the trial courts order denying their motion to
intervene.
[13]
Meanwhile, the second alias writ had likewise expired.
PNB filed a Manifestation and Motion for Issuance of Third Alias Writ of Possession, which
the trial court granted anew in an order dated October 10, 1995.
[14]

However, on December 12, 1995, the Austrias again filed a motion to set aside the trial courts
order dated October 10, 1995 and to recall the third alias writ.
[15]

Consequent to the filing of this fourth motion, the sheriff again failed to implement the third
alias writ, which also lapsed. Thus, on February 15, 1996, PNB filed another Motion for
Issuance of a Fourth Alias Writ,
[16]
which was granted on March 26, 1996.
The trial court, after hearing the Austrias fourth motion, issued an order on October 4, 1996,
denying the same, on the ground that the issuance of a possessory writ for a property sold at
public auction pursuant to an extra-judicial foreclosure proceeding was a ministerial duty on its
part. The Austrias failed to establish any legal ground for recalling the writs, even as they
claimed a superior right to the subject property.
[17]

On February 19, 1997, the fourth alias writ was issued by the trial court. The writ was partially
implemented with the posting of PNB security guards within the premises of the foreclosed
lot.
[18]

On April 17, 1997, the Austrias, for the fifth time, filed a motion to stop the enforcement of the
fourth alias writ and to set aside all prior writs issued by the trial court.
[19]

In the meantime, the Austrias filed before the Regional Trial Court of Paraaque, an action for
cancellation of PNBs title to the property, docketed as Civil Case No. 97-0184.
[20]

On October 28, 1997, the trial court denied the Austrias fifth motion but ruled that: any writ
of possession that may be issued in this case, is declared unenforceable against the MOVANTS
ERNESTO AUSTRIA and the HEIRS OF LORETO AUSTRIA, until the Court declares otherwise.
[21]

PNB filed a motion for reconsideration, which was denied on May 20, 1998.
[22]
A petition
for certiorari under Rule 65 of the Rules of Court was filed by PNB before the Court of
Appeals. However, the Court of Appeals dismissed the petition, stating:
There is no prima facie showing of grave abuse of discretion on the part of respondent Judge in
issuing his assailed Order which the Court finds to be in accord with law, the pertinent rules
and jurisprudence cited therein.
Hence, PNB filed the instant petition, contending that:
I
THE COURT OF APPEALS COMMITTED A SERIOUS ERROR BY SIMPLY ADOPTING THE FINDINGS
OF THE TRIAL COURT THAT WRIT OF POSSESSION CANNOT BE ENFORCED AGAINST
RESPONDENT AUSTRIA. SAID FINDINGS ARE UNPROVEN AND UNSUPPORTED BY EVIDENCE.
II
THE COURT OF APPEALS COMMITTED SERIOUS MISAPPREHENSION OF FACTS IN:
A) SUPPORTING THE JURISPRUDENCE CITED BY THE TRIAL COURT IN THE OCTOBER 28,
1997 ORDER. THE RULINGS DO NOT JUSTIFY THE NON-ENFORCEMENT OF THE WRIT OF
POSSESSION AGAINST RESPONDENTS. RESPONDENTS WERE GIVEN THE OPPORTUNITY TO BE
HEARD BUT NO EVIDENCE WAS PRESENTED TO SUPPORT THEIR CLAIM;
B) NOT GIVING DUE CONSIDERATION TO THE FACT THAT PNB HAS THE LEGAL RIGHT TO
POSSESS THE PROPERTY AS ITS REGISTERED OWNER;
C) LOSING SIGHT OF THE FACT THAT THE TRIAL COURT BELATEDLY ISSUED THE OCTOBER
28, 1997 ORDER DIRECTING THAT THE WRIT OF POSSESSION CANNOT BE ENFORCED AGAINST
THE RESPONDENTS. THE TRIAL COURT HAD EARLIER ISSUED FOUR (4) POSSESSORY WRITS ALL
OF WHICH WERE DIRECTED AGAINST RESPONDENTS AUSTRIA & QUINTANA.
[23]

The basic issue to be resolved in this case is whether or not an ex-parte writ of possession
issued pursuant to Act No. 3135, as amended, can be enforced against a third person who is in
actual possession of the foreclosed property and who is not in privity with the debtor/
mortgagor.
[24]

Petitioner PNB maintains that the trial courts order was based on the unproven allegation that
respondents had purchased the property from the Monsods before the latter mortgaged it to
PNB. According to petitioner PNB, respondents did not adduce any proof to support their claim
of ownership, even as they were repeatedly given the opportunity to do so during the hearings
on the numerous motions filed by respondents themselves.
Petitioner PNB also submits that since it is the registered owner of the property, it is entitled to
a writ of possession as a matter of right. The bank insists that it could rely on the title of the
registered land which does not have any annotation of respondents supposed rights.
Petitioner PNB likewise avers that the trial court could not now belatedly refuse to enforce the
writ of possession against respondents. The trial court had already issued a total of four
possessory writs directing the ouster of all occupants of the lot, including respondents herein.
On the other hand, respondents assert that the trial court correctly held that the writ of
possession can only be implemented against the debtor/mortgagor and his successors-in-
interest. Since respondents acquired their rights as owners of the property by virtue of a sale
made to them by the Monsods prior to the banks mortgage lien, respondents can not be
dispossessed therefrom without due notice and hearing, through the simple expedient of
an ex-parte possessory writ.
We agree with respondents. Under applicable laws and jurisprudence, they can not be ejected
from the property by means of an ex-parte writ of possession.
The operative provision under Act No. 3135, as amended,
[25]
is Section 6, which states:
Sec. 6. Redemption. In all cases in which an extrajudicial sale is made under the special power
hereinbefore referred to, the debtor, his successors in interest or any person having a lien on
the property subsequent to the mortgage or deed of trust under which the property is sold,
may redeem the same at any time within the term of one year from and after the date of the
sale; and such redemption shall be governed by the provisions of section four hundred and
sixty-four to four hundred and sixty-six, inclusive, of the Code of Civil Procedure, in so far as
these are not inconsistent with the provisions of this Act. (Italics ours)
Despite the evolutionary development of our procedural laws throughout the years, the
pertinent rule in the Code of Civil Procedure
[26]
remains practically unchanged. Particularly,
Rule 39, Section 33, second paragraph, which relates to the right of possession of a purchaser
of property in an extrajudicial foreclosure sale:
Sec. 33. x x x
Upon the expiration of the right of redemption, the purchaser or redemptioner shall be
substituted to and acquire all the rights, title, interest and claim of the judgment obligor to the
property at the time of levy. The possession of the property shall be given to the purchaser or
last redemptioner by the same officer unless a third party is actually holding the property
adversely to the judgment obligor. (Italics ours)
Thus, in Barican v. Intermediate Appellate Court,
[27]
we held that the obligation of a court to
issue an ex-parte writ of possession in favor of the purchaser in an extrajudicial foreclosure
sale ceases to be ministerial once it appears that there is a third party in possession of the
property who is claiming a right adverse to that of the debtor/mortgagor. The same principle
was inversely applied in a more recent case,
[28]
where we ruled that a writ of possession may
be issued in an extrajudicial foreclosure of real estate mortgage, only if the debtor is in
possession and no third party had intervened. Although the factual nuances of this case may
slightly differ from the aforecited cases, the availing circumstances are undeniably similar a
party in possession of the foreclosed property is asserting a right adverse to the
debtor/mortgagor and is a stranger to the foreclosure proceedings in which the ex-parte writ
of possession was applied for.
It should be stressed that the foregoing doctrinal pronouncements are not without support in
substantive law. Notably, the Civil Code protects the actual possessor of a property, to wit:
Art. 433. Actual possession under claim of ownership raises a disputable presumption of
ownership. The true owner must resort to judicial process for the recovery of the property.
Under the aforequoted provision, one who claims to be the owner of a property possessed by
another must bring the appropriate judicial action for its physical recovery. The term judicial
process could mean no less than an ejectment suit or reinvindicatory action, in which the
ownership claims of the contending parties may be properly heard and adjudicated.
An ex-parte petition for issuance of a possessory writ under Section 7 of Act No. 3135 is not,
strictly speaking, a judicial process as contemplated above. Even if the same may be
considered a judicial proceeding for the enforcement of ones right of possession as purchaser
in a foreclosure sale, it is not an ordinary suit filed in court, by which one party sues another
for the enforcement or protection of a right, or the prevention or redress of a wrong.
[29]

It should be emphasized that an ex-parte petition for issuance of a writ of possession is a non-
litigious proceeding authorized in an extrajudicial foreclosure of mortgage pursuant to Act
3135, as amended. Unlike a judicial foreclosure of real estate mortgage under Rule 68 of the
Rules of Court, any property brought within the ambit of the act is foreclosed by the filing of a
petition, not with any court of justice, but with the office of the sheriff of the province where
the sale is to be made.
[30]

As such, a third person in possession of an extrajudicially foreclosed realty, who claims a right
superior to that of the original mortgagor, will have no opportunity to be heard on his claim in
a proceeding of this nature. It stands to reason, therefore, that such third person may not be
dispossessed on the strength of a mere ex-parte possessory writ, since to do so would be
tantamount to his summary ejectment, in violation of the basic tenets of due process.
Besides, as earlier stressed, Article 433 of the Civil Code, cited above, requires nothing less
than an action for ejectment to be brought even by the true owner. After all, the actual
possessor of a property enjoys a legal presumption of just title in his favor,
[31]
which must be
overcome by the party claiming otherwise.
In the case at bar, petitioner PNB admitted that as early as 1990, it was aware that the subject
lot was occupied by the Austrias. Yet, instead of bringing an action in court for the ejectment
of respondents, it chose to simply file an ex-parte petition for a writ of possession pursuant to
its alleged right as purchaser in the extra-judicial foreclosure sale. We cannot sanction this
procedural shortcut. To enforce the writ against an unwitting third party possessor, who took
no part in the foreclosure proceedings, would be tantamount to the taking of real property
without the benefit of proper judicial intervention.
Consequently, it was not a ministerial duty of the trial court under Act No. 3135 to issue a writ
of possession for the ouster of respondents from the lot subject of this instant case. The trial
court was without authority to grant the ex-parte writ, since petitioner PNBs right of
possession under said Act could be rightfully recognized only against the Monsods and the
latters successors-in-interest, but not against respondents who assert a right adverse to the
Monsods. Hence, the trial court cannot be precluded from correcting itself by refusing to
enforce the writs it had previously issued. Its lack of authority to direct issuance of the writs
against respondents assured that its earlier orders would never attain finality in the first place.
In the same vein, respondents are not obliged to prove their ownership of the foreclosed lot in
the ex-parte proceedings conducted below. The trial court has no jurisdiction to determine
who between the parties is entitled to ownership and possession of the foreclosed lot.
Likewise, registration of the lot in petitioner PNBs name does not automatically entitle the
latter to possession thereof. As discussed earlier, petitioner PNB must resort to the
appropriate judicial process for recovery of the property and cannot simply invoke its title in
an ex-parte proceeding to justify the ouster of respondents.
WHEREFORE, the instant petition is DENIED and the resolution of the Court of Appeals in CA
G.R. SP No. 48660 is AFFIRMED.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Pardo, JJ., concur.





















































G.R. No. 92244 February 9, 1993

NATIVIDAD GEMPESAW, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS,
respondents.

L.B. Camins for petitioner.

Angara, Abello, Concepcion, Regals & Cruz for private respondent


CAMPOS, JR., J.:

From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447), petitioner,
Natividad Gempesaw, appealed to this Court in a Petition for Review, on the issue of the right
of the drawer to recover from the drawee bank who pays a check with a forged indorsement
of the payee, debiting the same against the drawer's account.

The records show that on January 23, 1985, petitioner filed a Complaint against the private
respondent Philippine Bank of Communications (respondent drawee Bank) for recovery of the
money value of eighty-two (82) checks charged against the petitioner's account with the
respondent drawee Bank on the ground that the payees' indorsements were forgeries. The
Regional Trial Court, Branch CXXVIII of Caloocan City, which tried the case, rendered a decision
on November 17, 1987 dismissing the complaint as well as the respondent drawee Bank's
counterclaim. On appeal, the Court of Appeals in a decision rendered on February 22, 1990,
affirmed the decision of the RTC on two grounds, namely (1) that the plaintiff's (petitioner
herein) gross negligence in issuing the checks was the proximate cause of the loss and (2)
assuming that the bank was also negligent, the loss must nevertheless be borne by the party
whose negligence was the proximate cause of the loss. On March 5, 1990, the petitioner filed
this petition under Rule 45 of the Rules of Court setting forth the following as the alleged
errors of the respondent Court: 1

I

THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE NEGLIGENCE OF THE
DRAWER IS THE PROXIMATE CAUSE OF THE RESULTING INJURY TO THE DRAWEE BANK, AND
THE DRAWER IS PRECLUDED FROM SETTING UP THE FORGERY OR WANT OF AUTHORITY.

II

THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT FINDING AND RULING THAT IT IS
THE GROSS AND INEXCUSABLE NEGLIGENCE AND FRAUDULENT ACTS OF THE OFFICIALS AND
EMPLOYEES OF THE RESPONDENT BANK IN FORGING THE SIGNATURE OF THE PAYEES AND THE
WRONG AND/OR ILLEGAL PAYMENTS MADE TO PERSONS, OTHER THAN TO THE INTENDED
PAYEES SPECIFIED IN THE CHECKS, IS THE DIRECT AND PROXIMATE CAUSE OF THE DAMAGE TO
PETITIONER WHOSE SAVING (SIC) ACCOUNT WAS DEBITED.

III

THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT ORDERING THE RESPONDENT
BANK TO RESTORE OR RE-CREDIT THE CHECKING ACCOUNT OF THE PETITIONER IN THE
CALOOCAN CITY BRANCH BY THE VALUE OF THE EIGHTY-TWO (82) CHECKS WHICH IS IN THE
AMOUNT OF P1,208,606.89 WITH LEGAL INTEREST.

From the records, the relevant facts are as follows:

Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery stores located
at Rizal Avenue Extension and at Second Avenue, Caloocan City. Among these groceries are
D.G. Shopper's Mart and D.G. Whole Sale Mart. Petitioner maintains a checking account
numbered 13-00038-1 with the Caloocan City Branch of the respondent drawee Bank. To
facilitate payment of debts to her suppliers, petitioner draws checks against her checking
account with the respondent bank as drawee. Her customary practice of issuing checks in
payment of her suppliers was as follows: the checks were prepared and filled up as to all
material particulars by her trusted bookkeeper, Alicia Galang, an employee for more than eight
(8) years. After the bookkeeper prepared the checks, the completed checks were submitted to
the petitioner for her signature, together with the corresponding invoice receipts which
indicate the correct obligations due and payable to her suppliers. Petitioner signed each and
every check without bothering to verify the accuracy of the checks against the corresponding
invoices because she reposed full and implicit trust and confidence on her bookkeeper. The
issuance and delivery of the checks to the payees named therein were left to the bookkeeper.
Petitioner admitted that she did not make any verification as to whether or not the checks
were delivered to their respective payees. Although the respondent drawee Bank notified her
of all checks presented to and paid by the bank, petitioner did not verify he correctness of the
returned checks, much less check if the payees actually received the checks in payment for the
supplies she received. In the course of her business operations covering a period of two years,
petitioner issued, following her usual practice stated above, a total of eighty-two (82) checks in
favor of several suppliers. These checks were all presented by the indorsees as holders thereof
to, and honored by, the respondent drawee Bank. Respondent drawee Bank correspondingly
debited the amounts thereof against petitioner's checking account numbered 30-00038-1.
Most of the aforementioned checks were for amounts in excess of her actual obligations to the
various payees as shown in their corresponding invoices. To mention a few:

. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of P11,895.23 in favor of
Kawsek Inc. (Exh. A-60), appellant's actual obligation to said payee was only P895.33 (Exh. A-
83); (2) in Check No. 652282 issued on September 18, 1984 in favor of Senson Enterprises in
the amount of P11,041.20 (Exh. A-67) appellant's actual obligation to said payee was only
P1,041.20 (Exh. 7); (3) in Check No. 589092 dated April 7, 1984 for the amount of P11,672.47 in
favor of Marchem (Exh. A-61) appellant's obligation was only P1,672.47 (Exh. B); (4) in Check
No. 620450 dated May 10, 1984 in favor of Knotberry for P11,677.10 (Exh. A-31) her actual
obligation was only P677.10 (Exhs. C and C-1); (5) in Check No. 651862 dated August 9, 1984 in
favor of Malinta Exchange Mart for P11,107.16 (Exh. A-62), her obligation was only P1,107.16
(Exh. D-2); (6) in Check No. 651863 dated August 11, 1984 in favor of Grocer's International
Food Corp. in the amount of P11,335.60 (Exh. A-66), her obligation was only P1,335.60 (Exh. E
and E-1); (7) in Check No. 589019 dated March 17, 1984 in favor of Sophy Products in the
amount of P11,648.00 (Exh. A-78), her obligation was only P648.00 (Exh. G); (8) in Check No.
589028 dated March 10, 1984 for the amount of P11,520.00 in favor of the Yakult Philippines
(Exh. A-73), the latter's invoice was only P520.00 (Exh. H-2); (9) in Check No. 62033 dated May
23, 1984 in the amount of P11,504.00 in favor of Monde Denmark Biscuit (Exh. A-34), her
obligation was only P504.00 (Exhs. I-1 and I-2). 2

Practically, all the checks issued and honored by the respondent drawee bank were crossed
checks. 3 Aside from the daily notice given to the petitioner by the respondent drawee Bank,
the latter also furnished her with a monthly statement of her transactions, attaching thereto
all the cancelled checks she had issued and which were debited against her current account. It
was only after the lapse of more two (2) years that petitioner found out about the fraudulent
manipulations of her bookkeeper.

All the eighty-two (82) checks with forged signatures of the payees were brought to Ernest L.
Boon, Chief Accountant of respondent drawee Bank at the Buendia branch, who, without
authority therefor, accepted them all for deposit at the Buendia branch to the credit and/or in
the accounts of Alfredo Y. Romero and Benito Lam. Ernest L. Boon was a very close friend of
Alfredo Y. Romero. Sixty-three (63) out of the eighty-two (82) checks were deposited in Savings
Account No. 00844-5 of Alfredo Y. Romero at the respondent drawee Bank's Buendia branch,
and four (4) checks in his Savings Account No. 32-81-9 at its Ongpin branch. The rest of the
checks were deposited in Account No. 0443-4, under the name of Benito Lam at the Elcao
branch of the respondent drawee Bank.

About thirty (30) of the payees whose names were specifically written on the checks testified
that they did not receive nor even see the subject checks and that the indorsements appearing
at the back of the checks were not theirs.

The team of auditors from the main office of the respondent drawee Bank which conducted
periodic inspection of the branches' operations failed to discover, check or stop the
unauthorized acts of Ernest L. Boon. Under the rules of the respondent drawee Bank, only a
Branch Manager and no other official of the respondent drawee bank, may accept a second
indorsement on a check for deposit. In the case at bar, all the deposit slips of the eighty-two
(82) checks in question were initialed and/or approved for deposit by Ernest L. Boon. The
Branch Managers of the Ongpin and Elcao branches accepted the deposits made in the
Buendia branch and credited the accounts of Alfredo Y. Romero and Benito Lam in their
respective branches.

On November 7, 1984, petitioner made a written demand on respondent drawee Bank to
credit her account with the money value of the eighty-two (82) checks totalling P1,208.606.89
for having been wrongfully charged against her account. Respondent drawee Bank refused to
grant petitioner's demand. On January 23, 1985, petitioner filed the complaint with the
Regional Trial Court.

This is not a suit by the party whose signature was forged on a check drawn against the drawee
bank. The payees are not parties to the case. Rather, it is the drawer, whose signature is
genuine, who instituted this action to recover from the drawee bank the money value of
eighty-two (82) checks paid out by the drawee bank to holders of those checks where the
indorsements of the payees were forged. How and by whom the forgeries were committed are
not established on the record, but the respective payees admitted that they did not receive
those checks and therefore never indorsed the same. The applicable law is the Negotiable
Instruments Law 4 (heretofore referred to as the NIL). Section 23 of the NIL provides:

When a signature is forged or made without the authority of the person whose signature it
purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against any party thereto, can be acquired
through or under such signature, unless the party against whom it is sought to enforce such
right is precluded from setting up the forgery or want of authority.

Under the aforecited provision, forgery is a real or absolute defense by the party whose
signature is forged. A party whose signature to an instrument was forged was never a party
and never gave his consent to the contract which gave rise to the instrument. Since his
signature does not appear in the instrument, he cannot be held liable thereon by anyone, not
even by a holder in due course. Thus, if a person's signature is forged as a maker of a
promissory note, he cannot be made to pay because he never made the promise to pay. Or
where a person's signature as a drawer of a check is forged, the drawee bank cannot charge
the amount thereof against the drawer's account because he never gave the bank the order to
pay. And said section does not refer only to the forged signature of the maker of a promissory
note and of the drawer of a check. It covers also a forged indorsement, i.e., the forged
signature of the payee or indorsee of a note or check. Since under said provision a forged
signature is "wholly inoperative", no one can gain title to the instrument through such forged
indorsement. Such an indorsement prevents any subsequent party from acquiring any right as
against any party whose name appears prior to the forgery. Although rights may exist between
and among parties subsequent to the forged indorsement, not one of them can acquire rights
against parties prior to the forgery. Such forged indorsement cuts off the rights of all
subsequent parties as against parties prior to the forgery. However, the law makes an
exception to these rules where a party is precluded from setting up forgery as a defense.

As a matter of practical significance, problems arising from forged indorsements of checks may
generally be broken into two types of cases: (1) where forgery was accomplished by a person
not associated with the drawer for example a mail robbery; and (2) where the indorsement
was forged by an agent of the drawer. This difference in situations would determine the effect
of the drawer's negligence with respect to forged indorsements. While there is no duty resting
on the depositor to look for forged indorsements on his cancelled checks in contrast to a duty
imposed upon him to look for forgeries of his own name, a depositor is under a duty to set up
an accounting system and a business procedure as are reasonably calculated to prevent or
render difficult the forgery of indorsements, particularly by the depositor's own employees.
And if the drawer (depositor) learns that a check drawn by him has been paid under a forged
indorsement, the drawer is under duty promptly to report such fact to the drawee bank. 5 For
his negligence or failure either to discover or to report promptly the fact of such forgery to the
drawee, the drawer loses his right against the drawee who has debited his account under a
forged indorsement. 6 In other words, he is precluded from using forgery as a basis for his
claim for re-crediting of his account.

In the case at bar, petitioner admitted that the checks were filled up and completed by her
trusted employee, Alicia Galang, and were given to her for her signature. Her signing the
checks made the negotiable instrument complete. Prior to signing the checks, there was no
valid contract yet.

Every contract on a negotiable instrument is incomplete and revocable until delivery of the
instrument to the payee for the purpose of giving effect thereto. 7 The first delivery of the
instrument, complete in form, to the payee who takes it as a holder, is called issuance of the
instrument. 8 Without the initial delivery of the instrument from the drawer of the check to
the payee, there can be no valid and binding contract and no liability on the instrument.

Petitioner completed the checks by signing them as drawer and thereafter authorized her
employee Alicia Galang to deliver the eighty-two (82) checks to their respective payees.
Instead of issuing the checks to the payees as named in the checks, Alicia Galang delivered
them to the Chief Accountant of the Buendia branch of the respondent drawee Bank, a certain
Ernest L. Boon. It was established that the signatures of the payees as first indorsers were
forged. The record fails to show the identity of the party who made the forged signatures. The
checks were then indorsed for the second time with the names of Alfredo Y. Romero and
Benito Lam, and were deposited in the latter's accounts as earlier noted. The second
indorsements were all genuine signatures of the alleged holders. All the eighty-two (82) checks
bearing the forged indorsements of the payees and the genuine second indorsements of
Alfredo Y. Romero and Benito Lam were accepted for deposit at the Buendia branch of
respondent drawee Bank to the credit of their respective savings accounts in the Buendia,
Ongpin and Elcao branches of the same bank. The total amount of P1,208,606.89,
represented by eighty-two (82) checks, were credited and paid out by respondent drawee
Bank to Alfredo Y. Romero and Benito Lam, and debited against petitioner's checking account
No. 13-00038-1, Caloocan branch.

As a rule, a drawee bank who has paid a check on which an indorsement has been forged
cannot charge the drawer's account for the amount of said check. An exception to this rule is
where the drawer is guilty of such negligence which causes the bank to honor such a check or
checks. If a check is stolen from the payee, it is quite obvious that the drawer cannot possibly
discover the forged indorsement by mere examination of his cancelled check. This accounts for
the rule that although a depositor owes a duty to his drawee bank to examine his cancelled
checks for forgery of his own signature, he has no similar duty as to forged indorsements. A
different situation arises where the indorsement was forged by an employee or agent of the
drawer, or done with the active participation of the latter. Most of the cases involving forgery
by an agent or employee deal with the payee's indorsement. The drawer and the payee often
time shave business relations of long standing. The continued occurrence of business
transactions of the same nature provides the opportunity for the agent/employee to commit
the fraud after having developed familiarity with the signatures of the parties. However,
sooner or later, some leak will show on the drawer's books. It will then be just a question of
time until the fraud is discovered. This is specially true when the agent perpetrates a series of
forgeries as in the case at bar.

The negligence of a depositor which will prevent recovery of an unauthorized payment is
based on failure of the depositor to act as a prudent businessman would under the
circumstances. In the case at bar, the petitioner relied implicitly upon the honesty and loyalty
of her bookkeeper, and did not even verify the accuracy of amounts of the checks she signed
against the invoices attached thereto. Furthermore, although she regularly received her bank
statements, she apparently did not carefully examine the same nor the check stubs and the
returned checks, and did not compare them with the same invoices. Otherwise, she could have
easily discovered the discrepancies between the checks and the documents serving as bases
for the checks. With such discovery, the subsequent forgeries would not have been
accomplished. It was not until two years after the bookkeeper commenced her fraudulent
scheme that petitioner discovered that eighty-two (82) checks were wrongfully charged to her
account, at which she notified the respondent drawee bank.

It is highly improbable that in a period of two years, not one of Petitioner's suppliers
complained of non-payment. Assuming that even one single complaint had been made,
petitioner would have been duty-bound, as far as the respondent drawee Bank was concerned,
to make an adequate investigation on the matter. Had this been done, the discrepancies would
have been discovered, sooner or later. Petitioner's failure to make such adequate inquiry
constituted negligence which resulted in the bank's honoring of the subsequent checks with
forged indorsements. On the other hand, since the record mentions nothing about such a
complaint, the possibility exists that the checks in question covered inexistent sales. But even
in such a case, considering the length of a period of two (2) years, it is hard to believe that
petitioner did not know or realize that she was paying more than she should for the supplies
she was actually getting. A depositor may not sit idly by, after knowledge has come to her that
her funds seem to be disappearing or that there may be a leak in her business, and refrain
from taking the steps that a careful and prudent businessman would take in such
circumstances and if taken, would result in stopping the continuance of the fraudulent
scheme. If she fails to take steps, the facts may establish her negligence, and in that event, she
would be estopped from recovering from the bank. 9

One thing is clear from the records that the petitioner failed to examine her records with
reasonable diligence whether before she signed the checks or after receiving her bank
statements. Had the petitioner examined her records more carefully, particularly the invoice
receipts, cancelled checks, check book stubs, and had she compared the sums written as
amounts payable in the eighty-two (82) checks with the pertinent sales invoices, she would
have easily discovered that in some checks, the amounts did not tally with those appearing in
the sales invoices. Had she noticed these discrepancies, she should not have signed those
checks, and should have conducted an inquiry as to the reason for the irregular entries.
Likewise had petitioner been more vigilant in going over her current account by taking careful
note of the daily reports made by respondent drawee Bank in her issued checks, or at least
made random scrutiny of cancelled checks returned by respondent drawee Bank at the close of
each month, she could have easily discovered the fraud being perpetrated by Alicia Galang,
and could have reported the matter to the respondent drawee Bank. The respondent drawee
Bank then could have taken immediate steps to prevent further commission of such fraud.
Thus, petitioner's negligence was the proximate cause of her loss. And since it was her
negligence which caused the respondent drawee Bank to honor the forged checks or
prevented it from recovering the amount it had already paid on the checks, petitioner cannot
now complain should the bank refuse to recredit her account with the amount of such checks.
10 Under Section 23 of the NIL, she is now precluded from using the forgery to prevent the
bank's debiting of her account.

The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Bank 11
is not applicable to the case at bar because in said case, the check was fraudulently taken and
the signature of the payee was forged not by an agent or employee of the drawer. The drawer
was not found to be negligent in the handling of its business affairs and the theft of the check
by a total stranger was not attributable to negligence of the drawer; neither was the forging of
the payee's indorsement due to the drawer's negligence. Since the drawer was not negligent,
the drawee was duty-bound to restore to the drawer's account the amount theretofore paid
under the check with a forged payee's indorsement because the drawee did not pay as
ordered by the drawer.

Petitioner argues that respondent drawee Bank should not have honored the checks because
they were crossed checks. Issuing a crossed check imposes no legal obligation on the drawee
not to honor such a check. It is more of a warning to the holder that the check cannot be
presented to the drawee bank for payment in cash. Instead, the check can only be deposited
with the payee's bank which in turn must present it for payment against the drawee bank in
the course of normal banking transactions between banks. The crossed check cannot be
presented for payment but it can only be deposited and the drawee bank may only pay to
another bank in the payee's or indorser's account.

Petitioner likewise contends that banking rules prohibit the drawee bank from having checks
with more than one indorsement. The banking rule banning acceptance of checks for deposit
or cash payment with more than one indorsement unless cleared by some bank officials does
not invalidate the instrument; neither does it invalidate the negotiation or transfer of the said
check. In effect, this rule destroys the negotiability of bills/checks by limiting their negotiation
by indorsement of only the payee. Under the NIL, the only kind of indorsement which stops the
further negotiation of an instrument is a restrictive indorsement which prohibits the further
negotiation thereof.

Sec. 36. When indorsement restrictive. An indorsement is restrictive which either

(a) Prohibits further negotiation of the instrument; or

xxx xxx xxx

In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written
in express words at the back of the instrument, so that any subsequent party may be
forewarned that ceases to be negotiable. However, the restrictive indorsee acquires the right
to receive payment and bring any action thereon as any indorser, but he can no longer transfer
his rights as such indorsee where the form of the indorsement does not authorize him to do
so. 12

Although the holder of a check cannot compel a drawee bank to honor it because there is no
privity between them, as far as the drawer-depositor is concerned, such bank may not legally
refuse to honor a negotiable bill of exchange or a check drawn against it with more than one
indorsement if there is nothing irregular with the bill or check and the drawer has sufficient
funds. The drawee cannot be compelled to accept or pay the check by the drawer or any
holder because as a drawee, he incurs no liability on the check unless he accepts it. But the
drawee will make itself liable to a suit for damages at the instance of the drawer for wrongful
dishonor of the bill or check.

Thus, it is clear that under the NIL, petitioner is precluded from raising the defense of forgery
by reason of her gross negligence. But under Section 196 of the NIL, any case not provided for
in the Act shall be governed by the provisions of existing legislation. Under the laws of quasi-
delict, she cannot point to the negligence of the respondent drawee Bank in the selection and
supervision of its employees as being the cause of the loss because negligence is the proximate
cause thereof and under Article 2179 of the Civil Code, she may not be awarded damages.
However, under Article 1170 of the same Code the respondent drawee Bank may be held liable
for damages. The article provides

Those who in the performance of their obligations are guilty of fraud, negligence or delay, and
those who in any manner contravene the tenor thereof, are liable for damages.

There is no question that there is a contractual relation between petitioner as depositor
(obligee) and the respondent drawee bank as the obligor. In the performance of its obligation,
the drawee bank is bound by its internal banking rules and regulations which form part of any
contract it enters into with any of its depositors. When it violated its internal rules that second
endorsements are not to be accepted without the approval of its branch managers and it did
accept the same upon the mere approval of Boon, a chief accountant, it contravened the tenor
of its obligation at the very least, if it were not actually guilty of fraud or negligence.

Furthermore, the fact that the respondent drawee Bank did not discover the irregularity with
respect to the acceptance of checks with second indorsement for deposit even without the
approval of the branch manager despite periodic inspection conducted by a team of auditors
from the main office constitutes negligence on the part of the bank in carrying out its
obligations to its depositors. Article 1173 provides

The fault or negligence of the obligor consists in the omission of that diligence which is
required by the nature of the obligation and corresponds with the circumstance of the
persons, of the time and of the place. . . .

We hold that banking business is so impressed with public interest where the trust and
confidence of the public in general is of paramount importance such that the appropriate
standard of diligence must be a high degree of diligence, if not the utmost diligence. Surely,
respondent drawee Bank cannot claim it exercised such a degree of diligence that is required
of it. There is no way We can allow it now to escape liability for such negligence. Its liability as
obligor is not merely vicarious but primary wherein the defense of exercise of due diligence in
the selection and supervision of its employees is of no moment.

Premises considered, respondent drawee Bank is adjudged liable to share the loss with the
petitioner on a fifty-fifty ratio in accordance with Article 172 which provides:

Responsibility arising from negligence in the performance of every kind of obligation is also
demandable, but such liability may be regulated by the courts according to the circumstances.

With the foregoing provisions of the Civil Code being relied upon, it is being made clear that
the decision to hold the drawee bank liable is based on law and substantial justice and not on
mere equity. And although the case was brought before the court not on breach of contractual
obligations, the courts are not precluded from applying to the circumstances of the case the
laws pertinent thereto. Thus, the fact that petitioner's negligence was found to be the
proximate cause of her loss does not preclude her from recovering damages. The reason why
the decision dealt on a discussion on proximate cause is due to the error pointed out by
petitioner as allegedly committed by the respondent court. And in breaches of contract under
Article 1173, due diligence on the part of the defendant is not a defense.

PREMISES CONSIDERED, the case is hereby ordered REMANDED to the trial court for the
reception of evidence to determine the exact amount of loss suffered by the petitioner,
considering that she partly benefited from the issuance of the questioned checks since the
obligation for which she issued them were apparently extinguished, such that only the excess
amount over and above the total of these actual obligations must be considered as loss of
which one half must be paid by respondent drawee bank to herein petitioner.

SO ORDERED.

Narvasa, C.J., Feliciano, Regalado and Nocon, JJ., concur.
























































METROPOLITAN BANK V. CA
194 SCRA 169
FACTS: Gomez opened an account with Golden Savings bank and deposited 38 treasury
warrants. All these warrants were indorsed by the cashier of Golden Savings, and deposited it
to the savings account in a Metrobank branch. They were sent later on for clearing by the
branch office to the principal office of Metrobank, which forwarded them to the Bureau of
Treasury for special clearing. On persistent inquiries on whether the warrants have been
cleared, the branch manager allowed withdrawal of the warrants, only to find out later on that
the treasury warrants have been dishonored.
HELD: The treasury warrants were not negotiable instruments. Clearly, it is indicated that it
was non-negotiable and of equal significance is the indication that they are payable from a
particular fund, Fund 501. This indication as the source of payment to be made on the treasury
warrant makes the promise to pay conditional and the warrants themselves non-negotiable.
Metrobank then cannot contend that by indorsing the warrants in general, GS assumed that
they were genuine and in all respects what they purport it to be, in accordance to Section 66 of
the NIL. The simple reason is that the law isnt applicable to the non-negotiable treasury
warrants. The indorsement was made for the purpose of merely depositing them with
Metrobank for clearing. It was in fact Metrobank which stamped on the back of the warrants:
All prior indorsements and/or lack of endorsements guaranteed
G.R. No. 88866 February 18, 1991
METROPOLITAN BANK & TRUST COMPANY, petitioner, vs. COURT OF APPEALS, GOLDEN
SAVINGS & LOAN ASSOCIATION, INC., LUCIA CASTILLO, MAGNO CASTILLO and GLORIA
CASTILLO, respondents.
Angara, Abello, Concepcion, Regala & Cruz for petitioner.
Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and Lucia Castillo.
Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings & Loan Association, Inc.
CRUZ, J.:p
This case, for all its seeming complexity, turns on a simple question of negligence. The facts,
pruned of all non-essentials, are easily told.
The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the
Philippines and even abroad. Golden Savings and Loan Association was, at the time these
events happened, operating in Calapan, Mindoro, with the other private respondents as its
principal officers.
In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and
deposited over a period of two months 38 treasury warrants with a total value of
P1,755,228.37. They were all drawn by the Philippine Fish Marketing Authority and
purportedly signed by its General Manager and countersigned by its Auditor. Six of these were
directly payable to Gomez while the others appeared to have been indorsed by their
respective payees, followed by Gomez as second indorser. 1
On various dates between June 25 and July 16, 1979, all these warrants were subsequently
indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Savings Account
No. 2498 in the Metrobank branch in Calapan, Mindoro. They were then sent for clearing by
the branch office to the principal office of Metrobank, which forwarded them to the Bureau of
Treasury for special clearing. 2
More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several
times to ask whether the warrants had been cleared. She was told to wait. Accordingly, Gomez
was meanwhile not allowed to withdraw from his account. Later, however, "exasperated" over
Gloria's repeated inquiries and also as an accommodation for a "valued client," the petitioner
says it finally decided to allow Golden Savings to withdraw from the proceeds of the warrants.
3 The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the second on
July 13, 1979, in the amount of P310,000.00, and the third on July 16, 1979, in the amount of
P150,000.00. The total withdrawal was P968.000.00. 4
In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own
account, eventually collecting the total amount of P1,167,500.00 from the proceeds of the
apparently cleared warrants. The last withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been
dishonored by the Bureau of Treasury on July 19, 1979, and demanded the refund by Golden
Savings of the amount it had previously withdrawn, to make up the deficit in its account.
The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court of
Mindoro. 5 After trial, judgment was rendered in favor of Golden Savings, which, however,
filed a motion for reconsideration even as Metrobank filed its notice of appeal. On November
4, 1986, the lower court modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:
1. Dismissing the complaint with costs against the plaintiff;
2. Dissolving and lifting the writ of attachment of the properties of defendant Golden Savings
and Loan Association, Inc. and defendant Spouses Magno Castillo and Lucia Castillo;
3. Directing the plaintiff to reverse its action of debiting Savings Account No. 2498 of the sum
of P1,754,089.00 and to reinstate and credit to such account such amount existing before the
debit was made including the amount of P812,033.37 in favor of defendant Golden Savings and
Loan Association, Inc. and thereafter, to allow defendant Golden Savings and Loan Association,
Inc. to withdraw the amount outstanding thereon before the debit;
4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association, Inc.
attorney's fees and expenses of litigation in the amount of P200,000.00.
5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and Lucia Castillo
attorney's fees and expenses of litigation in the amount of P100,000.00.
SO ORDERED.
On appeal to the respondent court, 6 the decision was affirmed, prompting Metrobank to file
this petition for review on the following grounds:
1. Respondent Court of Appeals erred in disregarding and failing to apply the clear contractual
terms and conditions on the deposit slips allowing Metrobank to charge back any amount
erroneously credited.
(a) Metrobank's right to charge back is not limited to instances where the checks or treasury
warrants are forged or unauthorized.
(b) Until such time as Metrobank is actually paid, its obligation is that of a mere collecting
agent which cannot be held liable for its failure to collect on the warrants.
2. Under the lower court's decision, affirmed by respondent Court of Appeals, Metrobank is
made to pay for warrants already dishonored, thereby perpetuating the fraud committed by
Eduardo Gomez.
3. Respondent Court of Appeals erred in not finding that as between Metrobank and Golden
Savings, the latter should bear the loss.
4. Respondent Court of Appeals erred in holding that the treasury warrants involved in this
case are not negotiable instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the Court that Metrobank was indeed
negligent in giving Golden Savings the impression that the treasury warrants had been cleared
and that, consequently, it was safe to allow Gomez to withdraw the proceeds thereof from his
account with it.
Without such assurance, Golden Savings would not have allowed the withdrawals; with such
assurance, there was no reason not to allow the withdrawal. Indeed, Golden Savings might
even have incurred liability for its refusal to return the money that to all appearances belonged
to the depositor, who could therefore withdraw it any time and for any reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited
them to its account with Metrobank. Golden Savings had no clearing facilities of its own. It
relied on Metrobank to determine the validity of the warrants through its own services. The
proceeds of the warrants were withheld from Gomez until Metrobank allowed Golden Savings
itself to withdraw them from its own deposit. 7 It was only when Metrobank gave the go-signal
that Gomez was finally allowed by Golden Savings to withdraw them from his own account.
The argument of Metrobank that Golden Savings should have exercised more care in checking
the personal circumstances of Gomez before accepting his deposit does not hold water. It was
Gomez who was entrusting the warrants, not Golden Savings that was extending him a loan;
and moreover, the treasury warrants were subject to clearing, pending which the depositor
could not withdraw its proceeds. There was no question of Gomez's identity or of the
genuineness of his signature as checked by Golden Savings. In fact, the treasury warrants were
dishonored allegedly because of the forgery of the signatures of the drawers, not of Gomez as
payee or indorser. Under the circumstances, it is clear that Golden Savings acted with due care
and diligence and cannot be faulted for the withdrawals it allowed Gomez to make.
By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not
trifling more than one and a half million pesos (and this was 1979). There was no reason
why it should not have waited until the treasury warrants had been cleared; it would not have
lost a single centavo by waiting. Yet, despite the lack of such clearance and notwithstanding
that it had not received a single centavo from the proceeds of the treasury warrants, as it now
repeatedly stresses it allowed Golden Savings to withdraw not once, not twice, but thrice
from the uncleared treasury warrants in the total amount of P968,000.00
Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the
clearance and it also wanted to "accommodate" a valued client. It "presumed" that the
warrants had been cleared simply because of "the lapse of one week." 8 For a bank with its
long experience, this explanation is unbelievably naive.
And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on the
dorsal side of the deposit slips through which the treasury warrants were deposited by Golden
Savings with its Calapan branch. The conditions read as follows:
Kindly note that in receiving items on deposit, the bank obligates itself only as the depositor's
collecting agent, assuming no responsibility beyond care in selecting correspondents, and until
such time as actual payment shall have come into possession of this bank, the right is reserved
to charge back to the depositor's account any amount previously credited, whether or not such
item is returned. This also applies to checks drawn on local banks and bankers and their
branches as well as on this bank, which are unpaid due to insufficiency of funds, forgery,
unauthorized overdraft or any other reason. (Emphasis supplied.)
According to Metrobank, the said conditions clearly show that it was acting only as a collecting
agent for Golden Savings and give it the right to "charge back to the depositor's account any
amount previously credited, whether or not such item is returned. This also applies to checks ".
. . which are unpaid due to insufficiency of funds, forgery, unauthorized overdraft of any other
reason." It is claimed that the said conditions are in the nature of contractual stipulations and
became binding on Golden Savings when Gloria Castillo, as its Cashier, signed the deposit slips.
Doubt may be expressed about the binding force of the conditions, considering that they have
apparently been imposed by the bank unilaterally, without the consent of the depositor.
Indeed, it could be argued that the depositor, in signing the deposit slip, does so only to
identify himself and not to agree to the conditions set forth in the given permit at the back of
the deposit slip. We do not have to rule on this matter at this time. At any rate, the Court feels
that even if the deposit slip were considered a contract, the petitioner could still not validly
disclaim responsibility thereunder in the light of the circumstances of this case.
In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems
to be suggesting that as a mere agent it cannot be liable to the principal. This is not exactly
true. On the contrary, Article 1909 of the Civil Code clearly provides that
Art. 1909. The agent is responsible not only for fraud, but also for negligence, which shall be
judged 'with more or less rigor by the courts, according to whether the agency was or was not
for a compensation.
The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was
the clearance given by it that assured Golden Savings it was already safe to allow Gomez to
withdraw the proceeds of the treasury warrants he had deposited Metrobank misled Golden
Savings. There may have been no express clearance, as Metrobank insists (although this is
refuted by Golden Savings) but in any case that clearance could be implied from its allowing
Golden Savings to withdraw from its account not only once or even twice but three times. The
total withdrawal was in excess of its original balance before the treasury warrants were
deposited, which only added to its belief that the treasury warrants had indeed been cleared.
Metrobank's argument that it may recover the disputed amount if the warrants are not paid
for any reason is not acceptable. Any reason does not mean no reason at all. Otherwise, there
would have been no need at all for Golden Savings to deposit the treasury warrants with it for
clearance. There would have been no need for it to wait until the warrants had been cleared
before paying the proceeds thereof to Gomez. Such a condition, if interpreted in the way the
petitioner suggests, is not binding for being arbitrary and unconscionable. And it becomes
more so in the case at bar when it is considered that the supposed dishonor of the warrants
was not communicated to Golden Savings before it made its own payment to Gomez.
The belated notification aggravated the petitioner's earlier negligence in giving express or at
least implied clearance to the treasury warrants and allowing payments therefrom to Golden
Savings. But that is not all. On top of this, the supposed reason for the dishonor, to wit, the
forgery of the signatures of the general manager and the auditor of the drawer corporation,
has not been established. 9 This was the finding of the lower courts which we see no reason to
disturb. And as we said in MWSS v. Court of Appeals: 10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be established
by clear, positive and convincing evidence. This was not done in the present case.
A no less important consideration is the circumstance that the treasury warrants in question
are not negotiable instruments. Clearly stamped on their face is the word "non-negotiable."
Moreover, and this is of equal significance, it is indicated that they are payable from a
particular fund, to wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially the underscored parts,
are pertinent:
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.
xxx xxx xxx
Sec. 3. When promise is unconditional. An unqualified order or promise to pay is
unconditional within the meaning of this Act though coupled with
(a) An indication of a particular fund out of which reimbursement is to be made or a particular
account to be debited with the amount; or
(b) A statement of the transaction which gives rise to the instrument judgment.
But an order or promise to pay out of a particular fund is not unconditional.
The indication of Fund 501 as the source of the payment to be made on the treasury warrants
makes the order or promise to pay "not unconditional" and the warrants themselves non-
negotiable. There should be no question that the exception on Section 3 of the Negotiable
Instruments Law is applicable in the case at bar. This conclusion conforms to Abubakar vs.
Auditor General 11 where the Court held:
The petitioner argues that he is a holder in good faith and for value of a negotiable instrument
and is entitled to the rights and privileges of a holder in due course, free from defenses. But
this treasury warrant is not within the scope of the negotiable instrument law. For one thing,
the document bearing on its face the words "payable from the appropriation for food
administration, is actually an Order for payment out of
"a particular fund," and is not unconditional and does not fulfill one of the essential
requirements of a negotiable instrument (Sec. 3 last sentence and section [1(b)] of the
Negotiable Instruments Law).
Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed
that they were "genuine and in all respects what they purport to be," in accordance with
Section 66 of the Negotiable Instruments Law. The simple reason is that this law is not
applicable to the non-negotiable treasury warrants. The indorsement was made by Gloria
Castillo not for the purpose of guaranteeing the genuineness of the warrants but merely to
deposit them with Metrobank for clearing. It was in fact Metrobank that made the guarantee
when it stamped on the back of the warrants: "All prior indorsement and/or lack of
endorsements guaranteed, Metropolitan Bank & Trust Co., Calapan Branch."
The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine Islands, 12 but
we feel this case is inapplicable to the present controversy. That case involved checks whereas
this case involves treasury warrants. Golden Savings never represented that the warrants were
negotiable but signed them only for the purpose of depositing them for clearance. Also, the
fact of forgery was proved in that case but not in the case before us. Finally, the Court found
the Jai Alai Corporation negligent in accepting the checks without question from one Antonio
Ramirez notwithstanding that the payee was the Inter-Island Gas Services, Inc. and it did not
appear that he was authorized to indorse it. No similar negligence can be imputed to Golden
Savings.
We find the challenged decision to be basically correct. However, we will have to amend it
insofar as it directs the petitioner to credit Golden Savings with the full amount of the treasury
checks deposited to its account.
The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which Gomez
was allowed to withdraw P1,167,500.00 before Golden Savings was notified of the dishonor.
The amount he has withdrawn must be charged not to Golden Savings but to Metrobank,
which must bear the consequences of its own negligence. But the balance of P586,589.00
should be debited to Golden Savings, as obviously Gomez can no longer be permitted to
withdraw this amount from his deposit because of the dishonor of the warrants. Gomez has in
fact disappeared. To also credit the balance to Golden Savings would unduly enrich it at the
expense of Metrobank, let alone the fact that it has already been informed of the dishonor of
the treasury warrants.
WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3 of
the dispositive portion of the judgment of the lower court shall be reworded as follows:
3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and thereafter allowing
defendant Golden Savings & Loan Association, Inc. to withdraw the amount outstanding
thereon, if any, after the debit.
SO ORDERED.
Narvasa, Gancayco, Grio-Aquino and Medialdea, JJ., concur.