CHAPTER 3

JOHN DY, Petitioner,

- versus PEOPLE OF THE PHILIPPINES and The HONORABLE COURT OF APPEALS, Respondents.
G.R. No. 158312 November 14, 2008
DECISION
QUISUMBING, Acting C.J.:
This appeal prays for the reversal of the Decision [1] dated January 23, 2003 and the Resolution[2] dated
May 14, 2003 of the Court of Appeals in CA-G.R. CR No. 23802. The appellate court affirmed with
modification the Decision[3] dated November 17, 1999 of the Regional Trial Court (RTC), Branch 82 of
Quezon City, which had convicted petitioner John Dy of two counts of estafa in Criminal Cases Nos. Q93-46711 and Q-93-46713, and two counts of violation of Batas Pambansa Bilang 22[4] (B.P. Blg. 22) in
Criminal Cases Nos. Q-93-46712 and Q-93-46714.
The facts are undisputed:
Since 1990, John Dy has been the distributor of W.L. Food Products (W.L. Foods) in Naga City, Bicol,
under the business name Dyna Marketing. Dy would pay W.L. Foods in either cash or check upon pick
up of stocks of snack foods at the latters branch or main office in Quezon City. At times, he would
entrust the payment to one of his drivers.
On June 24, 1992, Dys driver went to the branch office of W.L. Foods to pick up stocks of snack
foods. He introduced himself to the checker, Mary Jane D. Maraca, who upon confirming Dys credit
with the main office, gave him merchandise worth P106,579.60. In return, the driver handed her a blank
Far East Bank and Trust Company (FEBTC) Check with Check No. 553602 postdated July 22, 1992. The
check was signed by Dy though it did not indicate a specific amount.
Yet again, on July 1, 1992, the same driver obtained snack foods from Maraca in the amount
of P226,794.36 in exchange for a blank FEBTC Check with Check No. 553615 postdated July 31, 1992.
In both instances, the driver was issued an unsigned delivery receipt. The amounts for the purchases were
filled in later by Evelyn Ong, accountant of W.L. Foods, based on the value of the goods delivered.
When presented for payment, FEBTC dishonored the checks for insufficiency of funds. Raul D.
Gonzales, manager of FEBTC-Naga Branch, notified Atty. Rita Linda Jimeno, counsel of W.L. Foods, of
the dishonor. Apparently, Dy only had an available balance of P2,000 as of July 22, 1992 and July 31,
1992.
Later, Gonzales sent Atty. Jimeno another letter [5] advising her that FEBTC Check No. 553602
for P106,579.60 was returned to the drawee bank for the reasons stop payment order and drawn against
uncollected deposit (DAUD), and not because it was drawn against insufficient funds as stated in the first
letter. Dys savings deposit account ledger reflected a balance of P160,659.39 as of July 22, 1992. This,
however, included a regional clearing check for P55,000 which he deposited on July 20, 1992, and which
took five (5) banking days to clear. Hence, the inward check was drawn against the yet uncollected
deposit.
When William Lim, owner of W.L. Foods, phoned Dy about the matter, the latter explained that he could
not pay since he had no funds yet. This prompted the former to send petitioner a demand letter, which the
latter ignored.
On July 16, 1993, Lim charged Dy with two counts of estafa under Article 315, paragraph 2(d)[6] of the
Revised Penal Code in two Informations, which except for the dates and amounts involved, similarly read
as follows:
That on or about the 24 th day of June, 1992, in Quezon City, Philippines, the said accused, did then and
there [willfully] and feloniously defraud W.L. PRODUCTS, a corporation duly organized and existing
under the laws of the Republic of the Philippines with business address at No. 531 Gen. Luis St.,
Novaliches, this City, in the following manner, to wit: the said accused, by means of false manifestations

and fraudulent representation which he made to complainant to the effect that Far East Bank and Trust
Co. check No. 553602 dated July 22, 1992 in the amount of P106,579.60, payable to W.L. Products is a
good check and will be honored by the bank on its maturity date, and by means of other deceit of similar
import, induced and succeeded in inducing the said complainant to receive and accept the aforesaid check
in payment of snack foods, the said accused knowing fully well that all his manifestations and
representations were false and untrue and were made solely for the purpose of obtaining, as in fact he did
obtain the aforesaid snack foods valued at P106,579.60 from said complainant as upon presentation of
said check to the bank for payment, the same was dishonored and payment thereof refused for the reason
stop payment and the said accused, once in possession of the aforesaid snack foods, with intent to
defraud, [willfully], unlawfully and feloniously misapplied, misappropriated and converted the same or
the value thereof to his own personal use and benefit, to the damage and prejudice of said W.L. Products,
herein represented by RODOLFO BORJAL, in the aforementioned amount of P106,579.60, Philippine
Currency.
Contrary to law.[7]
On even date, Lim also charged Dy with two counts of violation of B.P. Blg. 22 in two Informations
which likewise save for the dates and amounts involved similarly read as follows:
That on or about the 24th day of June, 1992, the said accused, did then and there [willfully], unlawfully
and feloniously make or draw and issue to W.L. FOOD PRODUCTS to apply on account or for value a
Far East Bank and Trust Co. Check no. 553602 dated July 22, 1992 payable to W.L. FOOD PRODUCTS
in the amount of P106,579.60 Philippine Currency, said accused knowing fully well that at the time of
issue he/she/they did not have sufficient funds in or credit with the drawee bank for payment of such
check in full upon its presentment, which check when presented 90 days from the date thereof was
subsequently dishonored by the drawee bank for the reason Payment stopped but the same would have
been dishonored for insufficient funds had not the accused without any valid reason, ordered the bank to
stop payment, the said accused despite receipt of notice of such dishonor, failed to pay said W.L. Food
Products the amount of said check or to make arrangement for payment in full of the same within five (5)
banking days after receiving said notice.
CONTRARY TO LAW.[8]
On November 23, 1994, Dy was arrested in Naga City. On arraignment, he pleaded not guilty to all
charges. Thereafter, the cases against him were tried jointly.
On November 17, 1999 the RTC convicted Dy on two counts each of estafa and violation of B.P. Blg.
22. The trial court disposed of the case as follows:
WHEREFORE, accused JOHN JERRY DY ALDEN (JOHN DY) is hereby found GUILTY beyond
reasonable doubt of swindling (ESTAFA) as charged in the Informations in Criminal Case No. 93-46711
and in Criminal Case No. Q-93-46713, respectively. Accordingly, after applying the provisions of the
Indeterminate Sentence Law and P.D. No. 818, said accused is hereby sentenced to suffer the
indeterminate penalty of ten (10) years and one (1) day to twelve (12) years of prision mayor, as
minimum, to twenty (20) years of reclusion temporal, as maximum, in Criminal Case No. Q-93-46711
and of ten (10) years and one (1) day to twelve (12) years of prision mayor, as minimum, to thirty (30)
years of reclusion perpetua, as maximum, in Criminal Case No. Q-93-46713.
Likewise, said accused is hereby found GUILTY beyond reasonable doubt of Violation of B.P. 22 as
charged in the Informations in Criminal Case No. Q-93-46712 and in Criminal Case No. Q-93-46714 and
is accordingly sentenced to imprisonment of one (1) year for each of the said offense and to pay a fine in
the total amount of P333,373.96, with subsidiary imprisonment in case of insolvency.
FINALLY, judgment is hereby rendered in favor of private complainant, W. L. Food Products, herein
represented by Rodolfo Borjal, and against herein accused JOHN JERRY DY ALDEN (JOHN DY),
ordering the latter to pay to the former the total sum of P333,373.96 plus interest thereon at the rate of
12% per annum from September 28, 1992 until fully paid; and, (2) the costs of this suit.
SO ORDERED.[9]

Dy brought the case to the Court of Appeals. In the assailed Decision of January 23, 2003, the appellate
court affirmed the RTC. It, however, modified the sentence and deleted the payment of interests in this
wise:
WHEREFORE, in view of the foregoing, the decision appealed from is hereby AFFIRMED with
MODIFICATION. In Criminal Case No. Q-93-46711 (for estafa), the accused-appellant JOHN
JERRY DY ALDEN (JOHN DY) is hereby sentenced to suffer an indeterminate penalty of imprisonment
ranging from six (6) years and one (1) day of prision mayor as minimum to twenty (20) years ofreclusion
temporal as maximum plus eight (8) years in excess of [P]22,000.00. In Criminal Case No. Q-93-46712
(for violation of BP 22), accused-appellant is sentenced to suffer an imprisonment of one (1) year and to
indemnify W.L. Food Products, represented by Rodolfo Borjal, the amount of ONE HUNDRED SIX
THOUSAND FIVE HUNDRED SEVENTY NINE PESOS and 60/100 ([P]106,579.60). In Criminal
Case No. Q-93-46713 (for estafa), accused-appellant is hereby sentenced to suffer an indeterminate
penalty of imprisonment ranging from eight (8) years and one (1) day ofprision mayor as minimum to
thirty (30) years as maximum. Finally, in Criminal Case No. Q-93-46714 (for violation of BP 22),
accused-appellant is sentenced to suffer an imprisonment of one (1) year and to indemnify W.L. Food
Products, represented by Rodolfo Borjal, the amount of TWO HUNDRED TWENTY SIX THOUSAND
SEVEN HUNDRED NINETY FOUR PESOS AND 36/100 ([P]226,794.36).
SO ORDERED.[10]
Dy moved for reconsideration, but his motion was denied in the Resolution dated May 14, 2003.
Hence, this petition which raises the following issues:
I.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN FINDING
THAT THE PROSECUTION HAS PROVEN THE GUILT OF ACCUSED BEYOND REASONABLE
DOUBT OF ESTAFA ON TWO (2) COUNTS?
II.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN FINDING
THAT THE PROSECUTION HAS PROVEN THE GUILT OF ACCUSED BEYOND REASONABLE
DOUBT OF VIOLATION OF BP 22 ON TWO (2) COUNTS?
III.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN AWARDING
DAMAGES TO PRIVATE COMPLAINANT, W.L. FOOD PRODUCTS, THE TOTAL SUM OF
[P]333,373.96?[11]
Essentially, the issue is whether John Dy is liable for estafa and for violation of B.P. Blg. 22.
First, is petitioner guilty of estafa?
Mainly, petitioner contends that the checks were ineffectively issued. He stresses that not only were the
checks blank, but also that W.L. Foods accountant had no authority to fill the amounts. Dy also claims
failure of consideration to negate any obligation to W.L. Foods. Ultimately, petitioner denies having
deceived Lim inasmuch as only the two checks bounced since he began dealing with him. He maintains
that it was his long established business relationship with Lim that enabled him to obtain the goods, and
not the checks issued in payment for them. Petitioner renounces personal liability on the checks since he
was absent when the goods were delivered.
The Office of the Solicitor General (OSG), for the State, avers that the delivery of the checks by Dys
driver to Maraca, constituted valid issuance. The OSG sustains Ongs prima facie authority to fill the
checks based on the value of goods taken. It observes that nothing in the records showed that W.L.
Foods accountant filled up the checks in violation of Dys instructions or their previous
agreement. Finally, the OSG challenges the present petition as an inappropriate remedy to review the
factual findings of the trial court.
We find that the petition is partly meritorious.
Before an accused can be held liable for estafa under Article 315, paragraph 2(d) of the Revised Penal
Code, as amended by Republic Act No. 4885, [12] the following elements must concur: (1) postdating or
issuance of a check in payment of an obligation contracted at the time the check was issued; (2)

insufficiency of funds to cover the check; and (3) damage to the payee thereof. [13] These elements are
present in the instant case.
Section 191 of the Negotiable Instruments Law [14] defines issue as the first delivery of an instrument,
complete in form, to a person who takes it as a holder. Significantly, delivery is the final act essential to
the negotiability of an instrument. Delivery denotes physical transfer of the instrument by the maker or
drawer coupled with an intention to convey title to the payee and recognize him as a holder. [15] It means
more than handing over to another; it imports such transfer of the instrument to another as to enable the
latter to hold it for himself.[16]
In this case, even if the checks were given to W.L. Foods in blank, this alone did not make its issuance
invalid. When the checks were delivered to Lim, through his employee, he became a holder with prima
facie authority to fill the blanks. This was, in fact, accomplished by Lims accountant.
The pertinent provisions of Section 14 of the Negotiable Instruments Law are instructive:
SEC. 14. Blanks; when may be filled.Where the instrument is wanting in any material particular, the
person in possession thereof has a prima facie authority to complete it by filling up the
blanks therein. And a signature on a blank paper delivered by the person making the signature in order
that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it
up as such for any amount. . (Emphasis supplied.)
Hence, the law merely requires that the instrument be in the possession of a person other than the drawer
or maker. From such possession, together with the fact that the instrument is wanting in a material
particular, the law presumes agency to fill up the blanks. [17] Because of this, the burden of proving want
of authority or that the authority granted was exceeded, is placed on the person questioning such
authority.[18] Petitioner failed to fulfill this requirement.
Next, petitioner claims failure of consideration. Nevertheless, in a letter [19] dated November 10, 1992, he
expressed willingness to pay W.L. Foods, or to replace the dishonored checks. This was a clear
acknowledgment of receipt of the goods, which gave rise to his duty to maintain or deposit sufficient
funds to cover the amount of the checks.
More significantly, we are not swayed by petitioners arguments that the single incident of dishonor and
his absence when the checks were delivered belie fraud. Indeed damage and deceit are essential elements
of the offense and must be established with satisfactory proof to warrant conviction. [20] Deceit as an
element of estafa is a specie of fraud. It is actual fraud which consists in any misrepresentation or
contrivance where a person deludes another, to his hurt. There is deceit when one is misled -- by guile,
trickery or by other means -- to believe as true what is really false. [21]
Prima facie evidence of deceit was established against petitioner with regard to FEBTC Check No.
553615 which was dishonored for insufficiency of funds. The letter[22]of petitioners counsel dated
November 10, 1992 shows beyond reasonable doubt that petitioner received notice of the dishonor of the
said check for insufficiency of funds. Petitioner, however, failed to deposit the amounts necessary to
cover his check within three banking days from receipt of the notice of dishonor. Hence, as provided for
by law,[23] the presence of deceit was sufficiently proven.
Petitioner failed to overcome the said proof of deceit. The trial court found no pre-existing obligation
between the parties. The existence of prior transactions between Lim and Dy alone did not rule out deceit
because each transaction was separate, and had a different consideration from the others. Even as
petitioner was absent when the goods were delivered, by the principle of agency, delivery of the checks
by his driver was deemed as his act as the employer. The evidence shows that as a matter of course, Dy,
or his employee, would pay W.L. Foods in either cash or check upon pick up of the stocks of snack foods
at the latters branch or main office. Despite their two-year standing business relations prior to the
issuance of the subject check, W.L Foods employees would not have parted with the stocks were it not for
the simultaneous delivery of the check issued by petitioner. [24] Aside from the existing business relations
between petitioner and W.L. Foods, the primary inducement for the latter to part with its stocks of snack
foods was the issuance of the check in payment of the value of the said stocks.

In a number of cases,[25] the Court has considered good faith as a defense to a charge of estafa by
postdating a check. This good faith may be manifested by making arrangements for payment with the
creditor and exerting best efforts to make good the value of the checks. In the instant case petitioner
presented no proof of good faith. Noticeably absent from the records is sufficient proof of sincere and best
efforts on the part of petitioner for the payment of the value of the check that would constitute good faith
and negate deceit.
With the foregoing circumstances established, we find petitioner guilty of estafa with regard to FEBTC
Check No. 553615 for P226,794.36.
The same, however, does not hold true with respect to FEBTC Check No. 553602 for P106,579.60. This
check was dishonored for the reason that it was drawn against uncollected deposit. Petitioner
had P160,659.39 in his savings deposit account ledger as of July 22, 1992. We disagree with the
conclusion of the RTC that since the balance included a regional clearing check worth P55,000 deposited
on July 20, 1992, which cleared only five (5) days later, then petitioner had inadequate funds in this
instance. Since petitioner technically and retroactively had sufficient funds at the time Check No. 553602
was presented for payment then the second element (insufficiency of funds to cover the check) of the
crime is absent. Also there is no prima facie evidence of deceit in this instance because the check was not
dishonored for lack or insufficiency of funds. Uncollected deposits are not the same as insufficient funds.
The prima facie presumption of deceit arises only when a check has been dishonored for lack or
insufficiency of funds. Notably, the law speaks of insufficiency of funds but not of uncollected
deposits. Jurisprudence teaches that criminal laws are strictly construed against the Government and
liberally in favor of the accused. [26] Hence, in the instant case, the law cannot be interpreted or applied in
such a way as to expand its provision to encompass the situation of uncollected deposits because it would
make the law more onerous on the part of the accused.
Clearly, the estafa punished under Article 315, paragraph 2(d) of the Revised Penal Code is committed
when a check is dishonored for being drawn against insufficient funds or closed account, and not against
uncollected deposit.[27] Corollarily, the issuer of the check is not liable for estafa if the remaining balance
and the uncollected deposit, which was duly collected, could satisfy the amount of the check when
presented for payment.
Second, did petitioner violate B.P. Blg. 22?
Petitioner argues that the blank checks were not valid orders for the bank to pay the holder of such
checks. He reiterates lack of knowledge of the insufficiency of funds and reasons that the checks could
not have been issued to apply on account or for value as he did not obtain delivery of the goods.
The OSG maintains that the guilt of petitioner has been proven beyond reasonable doubt. It cites pieces
of evidence that point to Dys culpability: Maracas acknowledgment that the checks were issued to W.L.
Foods as consideration for the snacks; Lims testimony proving that Dy received a copy of the demand
letter; the bank managers confirmation that petitioner had insufficient balance to cover the checks; and
Dys failure to settle his obligation within five (5) days from dishonor of the checks.
Once again, we find the petition to be meritorious in part.
The elements of the offense penalized under B.P. Blg. 22 are as follows: (1) the making, drawing and
issuance of any check to apply to account or for value; (2) the knowledge of the maker, drawer or issuer
that at the time of issue he does not have sufficient funds in or credit with the drawee bank for the
payment of such check in full upon its presentment; and (3) subsequent dishonor of the check by the
drawee bank for insufficiency of funds or credit or dishonor for the same reason had not the drawer,
without any valid cause, ordered the bank to stop payment. [28] The case at bar satisfies all these elements.
During the joint pre-trial conference of this case, Dy admitted that he issued the checks, and that the
signatures appearing on them were his. [29] The facts reveal that the checks were issued in blank because
of the uncertainty of the volume of products to be retrieved, the discount that can be availed of, and the
deduction for bad orders. Nevertheless, we must stress that what the law punishes is simply the issuance
of a bouncing check and not the purpose for which it was issued nor the terms and conditions relating
thereto.[30] If inquiry into the reason for which the checks are issued, or the terms and conditions of their

issuance is required, the publics faith in the stability and commercial value of checks as currency
substitutes will certainly erode.[31]
Moreover, the gravamen of the offense under B.P. Blg. 22 is the act of making or issuing a worthless
check or a check that is dishonored upon presentment for payment. The act effectively declares the
offense to be one of malum prohibitum. The only valid query, then, is whether the law has been
breached, i.e., by the mere act of issuing a bad check, without so much regard as to the criminal intent of
the issuer.[32] Indeed, non-fulfillment of the obligation is immaterial. Thus, petitioners defense of failure
of consideration must likewise fall. This is especially so since as stated above, Dy has acknowledged
receipt of the goods.
On the second element, petitioner disputes notice of insufficiency of funds on the basis of the check being
issued in blank. He relies on Dingle v. Intermediate Appellate Court[33] and Lao v. Court of Appeals[34] as
his authorities. In both actions, however, the accused were co-signatories, who were neither apprised of
the particular transactions on which the blank checks were issued, nor given notice of their dishonor. In
the latter case, Lao signed the checks without knowledge of the insufficiency of funds, knowledge she
was not expected or obliged to possess under the organizational structure of the corporation. [35] Lao was
only a minor employee who had nothing to do with the issuance, funding and delivery of checks. [36] In
contrast, petitioner was the proprietor of Dyna Marketing and the sole signatory of the checks who
received notice of their dishonor.
Significantly, under Section 2[37] of B.P. Blg. 22, petitioner was prima facie presumed to know of the
inadequacy of his funds with the bank when he did not pay the value of the goods or make arrangements
for their payment in full within five (5) banking days upon notice. His letter dated November 10, 1992 to
Lim fortified such presumption.
Undoubtedly, Dy violated B.P. Blg. 22 for issuing FEBTC Check No. 553615. When said check was
dishonored for insufficient funds and stop payment order, petitioner did not pay or make arrangements
with the bank for its payment in full within five (5) banking days.
Petitioner should be exonerated, however, for issuing FEBTC Check No. 553602, which was dishonored
for the reason DAUD or drawn against uncollected deposit. When the check was presented for payment,
it was dishonored by the bank because the check deposit made by petitioner, which would make
petitioners bank account balance more than enough to cover the face value of the subject check, had not
been collected by the bank.
In Tan v. People,[38] this Court acquitted the petitioner therein who was indicted under B.P. Blg. 22, upon a
check which was dishonored for the reason DAUD, among others. We observed that:
In the second place, even without relying on the credit line, petitioners bank account covered the check
she issued because even though there were some deposits that were still uncollected the deposits became
good and the bank certified that the check was funded. [39]
To be liable under Section 1[40] of B.P. Blg. 22, the check must be dishonored by the drawee bank for
insufficiency of funds or credit or dishonored for the same reason had not the drawer, without any valid
cause, ordered the bank to stop payment.
In the instant case, even though the check which petitioner deposited on July 20, 1992 became good only
five (5) days later, he was considered by the bank to retroactively have had P160,659.39 in his account on
July 22, 1992. This was more than enough to cover the check he issued to respondent in the amount
of P106,579.60. Under the circumstance obtaining in this case, we find the petitioner had issued the
check, with full ability to abide by his commitment [41] to pay his purchases.
Significantly, like Article 315 of the Revised Penal Code, B.P. Blg. 22 also speaks only of insufficiency of
funds and does not treat of uncollected deposits. To repeat, we cannot interpret the law in such a way as
to expand its provision to encompass the situation of uncollected deposits because it would make the law
more onerous on the part of the accused. Again, criminal statutes are strictly construed against the
Government and liberally in favor of the accused. [42]
As regards petitioners civil liability, this Court has previously ruled that an accused may be held civilly
liable where the facts established by the evidence so warrant. [43] The rationale for this is simple. The
criminal and civil liabilities of an accused are separate and distinct from each other. One is meant to

punish the offender while the other is intended to repair the damage suffered by the aggrieved party. So,
for the purpose of indemnifying the latter, the offense need not be proved beyond reasonable doubt but
only by preponderance of evidence.[44]
We therefore sustain the appellate courts award of damages to W.L. Foods in the total amount
of P333,373.96, representing the sum of the checks petitioner issued for goods admittedly delivered to his
company.
As to the appropriate penalty, petitioner was charged with estafa under Article 315, paragraph 2(d) of the
Revised Penal Code, as amended by Presidential Decree No. 818 [45] (P.D. No. 818).
Under Section 1[46] of P.D. No. 818, if the amount of the fraud exceeds P22,000, the penalty
of reclusin temporal is imposed in its maximum period, adding one year for each additional P10,000 but
the total penalty shall not exceed thirty (30) years, which shall be termed reclusin perpetua.
[47]
Reclusin perpetua is not the prescribed penalty for the offense, but merely describes the penalty
actually imposed on account of the amount of the fraud involved.
WHEREFORE, the petition is PARTLY GRANTED. John Dy is hereby ACQUITTED in Criminal
Case No. Q-93-46711 for estafa, and Criminal Case No. Q-93-46712 for violation of B.P. Blg. 22, but he
is ORDERED to pay W.L. Foods the amount of P106,579.60 for goods delivered to his company.
In Criminal Case No. Q-93-46713 for estafa, the Decision of the Court of Appeals is AFFIRMED with
MODIFICATION. Petitioner is sentenced to suffer an indeterminate penalty of twelve (12) years
of prisin mayor, as minimum, to thirty (30) years of reclusin perpetua, as maximum.
In Criminal Case No. Q-93-46714 for violation of B.P. Blg. 22, the Decision of the Court of Appeals
is AFFIRMED, and John Dy is hereby sentenced to one (1) year imprisonment and ordered to indemnify
W.L. Foods in the amount of P226,794.36.
SO ORDERED.

DIGEST
FACTS:
Since 1990, John Dy under the business name Dyna MarketinG has been the distributor of W.L. Food
Products (W.L. Foods)
Dy would pay W.L. Foods in either cash or check upon pick up of stocks of snack foods
At times, he would entrust the payment to one of his drivers.
June 24, 1992: Dy's driver went to the branch office of W.L. Foods to pick up stocks of snack foods.
He introduced himself to the checker, Mary Jane D. Maraca, who upon confirming Dy's credit with the
main office, gave him merchandise worth P106,579.60
In return, the driver handed her a blank Far East Bank and Trust Company (FEBTC) Check postdated
July 22, 1992 signed by Dy
July 1, 1992: the driver obtained snack foods worth P226,794.36 in exchange for a blank FEBTC Check
postdated July 31, 1992
In both instances, the driver was issued an unsigned delivery receipt.
When presented for payment, FEBTC dishonored the checks for insufficiency of funds.
Later, Gonzales sent Atty. Jimeno another letter advising her that FEBTC Check for P106,579.60 was
returned to the drawee bank for the reasons stop payment order and drawn against uncollected deposit
(DAUD), and not because it was drawn against insufficient funds as stated in the first letter.
Dy's savings deposit account ledger reflected a balance of P160,659.39 as of July 22, 1992. This,
however, included a regional clearing check for P55,000 which he deposited on July 20, 1992, and which
took 5 banking days to clear.
When William Lim, owner of W.L. Foods, phoned Dy about the matter, the latter explained that he could
not pay since he had no funds yet.
This prompted the former to send petitioner a demand letter, which the latter ignored.
July 16, 1993: Lim charged Dy with 2 counts of estafa under Article 315, paragraph 2(d) of RPC and 2
counts of violation of B.P. Blg. 22
RTC convicted Dy on two counts each of estafa and violation of B.P. Blg. 22.
CA: affirmed
Dy contends that the checks were ineffectively issued
W.L. Foods' accountant had no authority to fill the amounts
ISSUE:
W/N Dy is liable for estafa and in violation of BP 22. Acquitted for the criminal cases in relation to the
first check.
HELD:
YES but only for the 2nd check.
Estafa under Article 315, paragraph 2(d) of the Revised Penal Code, as amended by Republic Act No.
4885 elements postdating or issuance of a check in payment of an obligation contracted at the time the
check was issued insufficiency of funds to cover the check - including the uncollected deposit he had
more than enough funds to cover the first check damage to the payee
Section 191 of the Negotiable Instruments Law
"issue" - first delivery of an instrument, complete in form, to a person who takes it as a holder
Significantly, delivery is the final act essential to the negotiability of an instrument. Delivery denotes
physical transfer of the instrument by the maker or drawer coupled with an intention to convey title to the
payee and recognize him as a holder. It means more than handing over to another; it imports such transfer
of the instrument to another as to enable the latter to hold it for himself
Even if the checks were given to W.L. Foods in blank, this alone did not make its issuance invalid.
When the checks were delivered to Lim, through his employee, he became a holder with prima facie
authority to fill the blanks

SEC. 14. Blanks; when may be filled.-Where the instrument is wanting in any material particular,the
person in possession thereof has a prima facie authority to complete it by filling up the blanks therein.
And a signature on a blank paper delivered by the person making the signature in order that the paper may
be converted into a negotiable instrument operates as aprima facie authority to fill it up as such for any
amount.
The law merely requires that the instrument be in the possession of a person other than the drawer or
maker
From such possession, together with the fact that the instrument is wanting in a material particular, the
law presumes agency to fill up the blanks burden of proving want of authority or that the authority
granted was exceeded, is placed on the person questioning such authority - Dy didn't fulfill this estafa
punished under Article 315, paragraph 2(d) of the Revised Penal Code is committed when a check is
dishonored for being drawn against insufficient funds or closed account, and not against uncollected
deposit. Corollarily, the issuer of the check is not liable for estafa if the remaining balance and the
uncollected deposit, which was duly collected, could satisfy the amount of the check when presented for
payment.
B.P. Blg. 22 elements = malum prohibitum
the making, drawing and issuance of any check to apply to account or for value the knowledge of the
maker, drawer or issuer that at the time of issue he does not have sufficient funds in or credit with the
drawee bank for the payment of such check in full upon its presentment subsequent dishonor of the check
by the drawee bank for insufficiency of funds or credit or dishonor for the same reason had not the
drawer, without any valid cause, ordered the bank to stop payment - considered by the bank to
retroactively have had P160,659.39 in his account on July 22, 1992 which was more than enough to cover
the first check. Dy admitted that he issued the checks, and that the signatures appearing on them were his
Section 2 of B.P. Blg. 22, petitioner was prima facie presumed to know of the inadequacy of his funds
with the bank when he did not pay the value of the goods or make arrangements for their payment in full
within 5 banking days upon notice

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 deliveryof 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 as custodian 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 himand 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 in Commissioner 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 inRepublic 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.

DIGEST
FACTS:
Assistant City Fiscal Bienvenido N. Mabanto was ordered to pay herein private respondent Raul Sesbreo
P11,000.00 as damages. A notice of garnishment was served on herein petitioner Loreto D. de la Victoria
as City Fiscal of Mandaue City where Mabanto was detailed. V was directed 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. Later, V was directed to
submit his report showing the amount of the garnished salaries. V 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.
ISSUE:
W/N 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.
RULING:
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 DOJ through V 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.
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. The salary check of a government officer or employee 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. Being public fund, the checks may not be garnished to satisfy
the judgment in consideration of public policy.

BANK OF THE PHILIPPINE ISLANDS, Petitioner,

-versusGREGORIO C. ROXAS, Respondent.
G.R. No. 157833October 15, 2007
DECISION
SANDOVAL-GUTIERREZ, J.:
For our resolution is the instant Petition for Review on Certiorari assailing the Decision[1] of the Court of
Appeals (Fourth Division) dated February 13, 2003 in CA-G.R. CV No. 67980.
The facts of the case, as found by the trial court and affirmed by the Court of Appeals, are:
Gregorio C. Roxas, respondent, is a trader. Sometime in March 1993, he delivered stocks of vegetable oil
to spouses Rodrigo and Marissa Cawili. As payment therefor, spouses Cawili issued a personal check in
the amount of P348,805.50. However, when respondent tried to encash the check, it was dishonored by
the drawee bank. Spouses Cawili then assured him that they would replace the bounced check with a
cashiers check from the Bank of the Philippine Islands (BPI), petitioner.
On March 31, 1993, respondent and Rodrigo Cawili went to petitioners branch at Shaw
Boulevard, Mandaluyong City where Elma Capistrano, the branch manager, personally attended to
them. Upon Elmas instructions, Lita Sagun, the bank teller, prepared BPI Cashiers Check No. 14428 in
the amount of P348,805.50, drawn against the account of Marissa Cawili, payable to respondent. Rodrigo
then handed the check to respondent in the presence of Elma.
The following day, April 1, 1993, respondent returned to petitioners branch at Shaw Boulevard to encash
the cashiers check but it was dishonored. Elma informed him that Marissas account was closed on that
date.
Despite respondents insistence, the bank officers refused to encash the check and tried to retrieve it from
respondent. He then called his lawyer who advised him to deposit the check in his (respondents)
account at Citytrust, Ortigas Avenue. However, the check was dishonored on the ground Account
Closed.
On September 23, 1993, respondent filed with the Regional Trial Court, Branch 263, Pasig City a
complaint for sum of money against petitioner, docketed as Civil Case No. 63663. Respondent prayed
that petitioner be ordered to pay the amount of the check, damages and cost of the suit.
In its answer, petitioner specifically denied the allegations in the complaint, claiming that it issued the
check by mistake in good faith; that its dishonor was due to lack of consideration; and that respondents
remedy was to sue Rodrigo Cawili who purchased the check. As a counterclaim, petitioner prayed that
respondent be ordered to pay attorneys fees and expenses of litigation.
Petitioner filed a third-party complaint against spouses Cawili. They were later declared in default for
their failure to file their answer.
After trial, the RTC rendered a Decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing premises, this Court hereby renders judgment in favor of
herein plaintiff and orders the defendant, Bank of the Philippine Islands, to pay Gerardo C. Roxas:
1)
The sum of P348,805.50, the face value of the cashiers check, with legal interest thereon computed
from April 1, 1993 until the amount is fully paid;
2)
The sum of P50,000.00 for moral damages;
3)
The sum of P50,000.00 as exemplary damages to serve as an example for the public good;
4)
The sum of P25,000.00 for and as attorneys fees; and the
5)
Costs of suit.
As to the third-party complaint, third-party defendants Spouses Rodrigo and Marissa Cawili are hereby
ordered to indemnify defendant Bank of the Philippine Islands such amount(s) adjudged and actually paid
by it to herein plaintiff Gregorio C. Roxas, including the costs of suit.
SO ORDERED.

On appeal, the Court of Appeals, in its Decision, affirmed the trial courts judgment.
Hence, this petition.
Petitioner ascribes to the Court of Appeals the following errors: (1) in finding that respondent is a holder
in due course; and (2) in holding that it (petitioner) is liable to respondent for the amount of the cashiers
check.
Section 52 of the Negotiable Instruments Law provides:
SEC. 52. What constitutes a holder in due course. A holder in due course is a holder who has taken the
instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue and without notice that it had been previously
dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or
defect in the title of person negotiating it.
As a general rule, under the above provision, every holder is presumed prima facie to be a holder in
due course. One who claims otherwise has the onus probandi to prove that one or more of the conditions
required to constitute a holder in due course are lacking. In this case, petitioner contends that the element
of value is not present, therefore, respondent could not be a holder in due course.
Petitioners contention lacks merit. Section 25 of the same law states:
SEC. 25. Value, what constitutes. Value is any consideration sufficient to support a simple
contract. An antecedent or pre-existing debt constitutes value; and is deemed as such whether the
instrument is payable on demand or at a future time.
In Walker Rubber Corp. v. Nederlandsch Indische & Handelsbank, N.V. and South Sea Surety &
Insurance Co., Inc.,[2] this Court ruled that value in general terms may be some right, interest, profit or
benefit to the party who makes the contract or some forbearance, detriment, loan, responsibility, etc. on
the other side. Here, there is no dispute that respondent received Rodrigo Cawilis cashiers check as
payment for the formers vegetable oil. The fact that it was Rodrigo who purchased the cashiers check
frompetitioner will not affect respondents status as a holder for value since the check was delivered to
him as payment for the vegetable oil he sold to spouses Cawili. Verily, the Court of Appeals did not err in
concluding that respondent is a holder in due course of the cashiers check.
Furthermore, it bears emphasis that the disputed check is a cashiers check. In International
Corporate Bank v. Spouses Gueco,[3] this Court held that a cashiers check is really the banks own check
and may be treated as a promissory note with the bank as the maker. The check becomes the primary
obligation of the bank which issues it and constitutes a written promise to pay upon
demand. In New Pacific Timber & Supply Co. Inc. v. Seeris,[4] this Court took judicial notice of the
well-known and accepted practice in the business sector that a cashiers check is deemed as cash. This
is because the mere issuance of a cashiers check is considered acceptance thereof.
In view of the above pronouncements, petitioner bank became liable to respondent from the moment it
issued the cashiers check. Having been accepted by respondent, subject to no condition
whatsoever, petitioner should have paid the same upon presentment by the former.
WHEREFORE, the petition is DENIED. The assailed Decision of the Court of Appeals (Fourth
Division) in CA-G.R. CV No. 67980 is AFFIRMED. Costs against petitioner.
SO ORDERED.

DIGEST
FACTS:
Gregorio Roxas, as trader, delivered stocks of vegetable oil to Spouses Rodrigo and MarissaCawili. As
payment, they issued a personal check amounting to PHP348,805.50 which wasdishonored by the drawee
bank when respondent tried to encash.The Spouses Cawili replaced the check with a cashier's check from
Bank of the Philippine Island(Petitioner). The cashier's check was drawn against the account of Marissa
Cawili. The Cashier Checkwas wanded to respondent by Rodrigo Cawili.When respondent tried to encash
the Cashier Check, it was dishonored on the ground that theaccount of Marissa was closed on the same
date that respondent tried to encash. Respondentthereafter filed a complaint with the Regional Trial Court
for a sum of money praying that petitioner payhim the amount of the chack, damages and cost of the
suit.The RTC in its decision held that Petitioner is liable to pay the face value of the cashier's
checkamounting to PHP 384, 805.50. On appeal, the CA affirmed the decision of the RTC. Hence, the
filingof the Petition for Certiorari by the petitioner.
LAW INVOLVED: Sec 50 and Sec. 25 of NIL
ISSUE:
(1) Whether or not the respondent is a holder in due course?
(2) Whether or not petitioner is liable to respondent for the amount of the cashiers check?
HELD
:The petition is DENIED. The assailed Decision of the Court of Appeals (Fourth Division) is
AFFIRMED. Held [1]:
Petitioner contends that the element of "value" is not present, therefore, respondent could notbe a holder
in due course.There is no dispute that respondent received Rodrigo Cawilis cashiers check as payment
for the formers vegetable oil. The fact that it was Rodrigo who purchased the cashiers check
frompetitioner will not affect respondents status as a holder for value since the check was delivered to
himas payment for the vegetable oil he sold to spouses Cawili. Verily, the Court of Appeals did not err in

G.R. No. 93073 December 21, 1992

REPUBLIC PLANTERS BANK, petitioner,
vs.
COURT OF APPEALS and FERMIN CANLAS, respondents.
CAMPOS, JR., J.:
This is an appeal by way of a Petition for Review on Certiorari from the decision * of the Court of
Appeals in CA G.R. CV No. 07302, entitled "Republic Planters Bank.Plaintiff-Appellee vs. Pinch
Manufacturing Corporation, et al., Defendants, and Fermin Canlas, Defendant-Appellant", which
affirmed the decision ** in Civil Case No. 82-5448 except that it completely absolved Fermin Canlas
from liability under the promissory notes and reduced the award for damages and attorney's fees. The
RTC decision, rendered on June 20, 1985, is quoted hereunder:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff Republic
Planters Bank, ordering defendant Pinch Manufacturing Corporation (formerly Worldwide Garment
Manufacturing, Inc.) and defendants Shozo Yamaguchi and Fermin Canlas to pay, jointly and severally,
the plaintiff bank the following sums with interest thereon at 16% per annum from the dates indicated, to
wit:
Under the promissory note (Exhibit "A"), the sum of P300,000.00 with interest from January 29, 1981
until fully paid; under promissory note (Exhibit "B"), the sum of P40,000.00 with interest from November
27, 1980; under the promissory note (Exhibit "C"), the sum of P166,466.00 which interest from January
29, 1981; under the promissory note (Exhibit "E"), the sum of P86,130.31 with interest from January 29,
1981; under the promissory note (Exhibit "G"), the sum of P12,703.70 with interest from November 27,
1980; under the promissory note (Exhibit "H"), the sum of P281,875.91 with interest from January 29,
1981; and under the promissory note (Exhibit "I"), the sum of P200,000.00 with interest from January 29,
1981.
Under the promissory note (Exhibit "D") defendants Pinch Manufacturing Corporation (formerly named
Worldwide Garment Manufacturing, Inc.), and Shozo Yamaguchi are ordered to pay jointly and severally,
the plaintiff bank the sum of P367,000.00 with interest of 16% per annum from January 29, 1980 until
fully paid
Under the promissory note (Exhibit "F") defendant corporation Pinch (formerly Worldwide) is ordered to
pay the plaintiff bank the sum of P140,000.00 with interest at 16% per annum from November 27, 1980
until fully paid.
Defendant Pinch (formely Worldwide) is hereby ordered to pay the plaintiff the sum of P231,120.81 with
interest at 12% per annum from July 1, 1981, until fully paid and the sum of P331,870.97 with interest
from March 28, 1981, until fully paid.
All the defendants are also ordered to pay, jointly and severally, the plaintiff the sum of P100,000.00 as
and for reasonable attorney's fee and the further sum equivalent to 3% per annum of the respective
principal sums from the dates above stated as penalty charge until fully paid, plus one percent (1%) of the
principal sums as service charge.
With costs against the defendants.
SO ORDERED. 1
From the above decision only defendant Fermin Canlas appealed to the then Intermediate Court (now the
Court Appeals). His contention was that inasmuch as he signed the promissory notes in his capacity as
officer of the defunct Worldwide Garment Manufacturing, Inc, he should not be held personally liable for
such authorized corporate acts that he performed. It is now the contention of the petitioner Republic
Planters Bank that having unconditionally signed the nine (9) promissory notes with Shozo Yamaguchi,
jointly and severally, defendant Fermin Canlas is solidarity liable with Shozo Yamaguchi on each of the
nine notes.
We find merit in this appeal.

From the records, these facts are established: Defendant Shozo Yamaguchi and private respondent Fermin
Canlas were President/Chief Operating Officer and Treasurer respectively, of Worldwide Garment
Manufacturing, Inc.. By virtue of Board Resolution No.1 dated August 1, 1979, defendant Shozo
Yamaguchi and private respondent Fermin Canlas were authorized to apply for credit facilities with the
petitioner Republic Planters Bank in the forms of export advances and letters of credit/trust receipts
accommodations. Petitioner bank issued nine promissory notes, marked as Exhibits A to I inclusive, each
of which were uniformly worded in the following manner:
___________, after date, for value received, I/we, jointly and severaIly promise to pay to the ORDER of
the REPUBLIC PLANTERS BANK, at its office in Manila, Philippines, the sum of ___________
PESOS(....) Philippine Currency...
On the right bottom margin of the promissory notes appeared the signatures of Shozo Yamaguchi and
Fermin Canlas above their printed names with the phrase "and (in) his personal capacity" typewritten
below. At the bottom of the promissory notes appeared: "Please credit proceeds of this note to:
________ Savings Account ______XX Current Account
No. 1372-00257-6
of WORLDWIDE GARMENT MFG. CORP.
These entries were separated from the text of the notes with a bold line which ran horizontally across the
pages.
In the promissory notes marked as Exhibits C, D and F, the name Worldwide Garment Manufacturing,
Inc. was apparently rubber stamped above the signatures of defendant and private respondent.
On December 20, 1982, Worldwide Garment Manufacturing, Inc. noted to change its corporate name to
Pinch Manufacturing Corporation.
On February 5, 1982, petitioner bank filed a complaint for the recovery of sums of money covered among
others, by the nine promissory notes with interest thereon, plus attorney's fees and penalty charges. The
complainant was originally brought against Worldwide Garment Manufacturing, Inc. inter alia, but it was
later amended to drop Worldwide Manufacturing, Inc. as defendant and substitute Pinch Manufacturing
Corporation it its place. Defendants Pinch Manufacturing Corporation and Shozo Yamaguchi did not file
an Amended Answer and failed to appear at the scheduled pre-trial conference despite due notice. Only
private respondent Fermin Canlas filed an Amended Answer wherein he, denied having issued the
promissory notes in question since according to him, he was not an officer of Pinch Manufacturing
Corporation, but instead of Worldwide Garment Manufacturing, Inc., and that when he issued said
promissory notes in behalf of Worldwide Garment Manufacturing, Inc., the same were in blank, the
typewritten entries not appearing therein prior to the time he affixed his signature.
In the mind of this Court, the only issue material to the resolution of this appeal is whether private
respondent Fermin Canlas is solidarily liable with the other defendants, namely Pinch Manufacturing
Corporation and Shozo Yamaguchi, on the nine promissory notes.
We hold that private respondent Fermin Canlas is solidarily liable on each of the promissory notes bearing
his signature for the following reasons:
The promissory motes are negotiable instruments and must be governed by the Negotiable Instruments
Law. 2
Under the Negotiable lnstruments Law, persons who write their names on the face of promissory notes are
makers and are liable as such. 3 By signing the notes, the maker promises to pay to the order of the payee
or any holder 4 according to the tenor thereof. 5 Based on the above provisions of law, there is no denying
that private respondent Fermin Canlas is one of the co-makers of the promissory notes. As such, he cannot
escape liability arising therefrom.
Where an instrument containing the words "I promise to pay" is signed by two or more persons, they are
deemed to be jointly and severally liable thereon. 6 An instrument which begins" with "I" ,We" , or "Either
of us" promise to, pay, when signed by two or more persons, makes them solidarily liable. 7 The fact that
the singular pronoun is used indicates that the promise is individual as to each other; meaning that each of
the co-signers is deemed to have made an independent singular promise to pay the notes in full.

In the case at bar, the solidary liability of private respondent Fermin Canlas is made clearer and certain,
without reason for ambiguity, by the presence of the phrase "joint and several" as describing the
unconditional promise to pay to the order of Republic Planters Bank. A joint and several note is one in
which the makers bind themselves both jointly and individually to the payee so that all may be sued
together for its enforcement, or the creditor may select one or more as the object of the suit. 8 A joint and
several obligation in common law corresponds to a civil law solidary obligation; that is, one of several
debtors bound in such wise that each is liable for the entire amount, and not merely for his proportionate
share. 9 By making a joint and several promise to pay to the order of Republic Planters Bank, private
respondent Fermin Canlas assumed the solidary liability of a debtor and the payee may choose to enforce
the notes against him alone or jointly with Yamaguchi and Pinch Manufacturing Corporation as solidary
debtors.
As to whether the interpolation of the phrase "and (in) his personal capacity" below the signatures of the
makers in the notes will affect the liability of the makers, We do not find it necessary to resolve and
decide, because it is immaterial and will not affect to the liability of private respondent Fermin Canlas as
a joint and several debtor of the notes. With or without the presence of said phrase, private respondent
Fermin Canlas is primarily liable as a co-maker of each of the notes and his liability is that of a solidary
debtor.
Finally, the respondent Court made a grave error in holding that an amendment in a corporation's Articles
of Incorporation effecting a change of corporate name, in this case from Worldwide Garment
manufacturing Inc to Pinch Manufacturing Corporation extinguished the personality of the original
corporation.
The corporation, upon such change in its name, is in no sense a new corporation, nor the successor of the
original corporation. It is the same corporation with a different name, and its character is in no respect
changed. 10
A change in the corporate name does not make a new corporation, and whether effected by special act or
under a general law, has no affect on the identity of the corporation, or on its property, rights,
or liabilities. 11
The corporation continues, as before, responsible in its new name for all debts or other liabilities which it
had previously contracted or incurred. 12
As a general rule, officers or directors under the old corporate name bear no personal liability for acts
done or contracts entered into by officers of the corporation, if duly authorized. Inasmuch as such officers
acted in their capacity as agent of the old corporation and the change of name meant only the continuation
of the old juridical entity, the corporation bearing the same name is still bound by the acts of its agents if
authorized by the Board. Under the Negotiable Instruments Law, the liability of a person signing as an
agent is specifically provided for as follows:
Sec. 20. Liability of a person signing as agent and so forth. Where the instrument contains or a person
adds to his signature words indicating that he signs for or on behalf of a principal , or in a representative
capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words
describing him as an agent, or as filling a representative character, without disclosing his principal, does
not exempt him from personal liability.
Where the agent signs his name but nowhere in the instrument has he disclosed the fact that he is acting in
a representative capacity or the name of the third party for whom he might have acted as agent, the agent
is personally liable to take holder of the instrument and cannot be permitted to prove that he was merely
acting as agent of another and parol or extrinsic evidence is not admissible to avoid the agent's personal
liability. 13
On the private respondent's contention that the promissory notes were delivered to him in blank for his
signature, we rule otherwise. A careful examination of the notes in question shows that they are the
stereotype printed form of promissory notes generally used by commercial banking institutions to be
signed by their clients in obtaining loans. Such printed notes are incomplete because there are blank
spaces to be filled up on material particulars such as payee's name, amount of the loan, rate of interest,
date of issue and the maturity date. The terms and conditions of the loan are printed on the note for the

borrower-debtor 's perusal. An incomplete instrument which has been delivered to the borrower for his
signature is governed by Section 14 of the Negotiable Instruments Law which provides, in so far as
relevant to this case, thus:
Sec. 14. Blanks: when may be filled. Where the instrument is wanting in any material particular, the
person in possesion thereof has a prima facie authority to complete it by filling up the blanks therein. ... In
order, however, that any such instrument when completed may be enforced against any person who
became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority
given and within a reasonable time...
Proof that the notes were signed in blank was only the self-serving testimony of private respondent
Fermin Canlas, as determined by the trial court, so that the trial court ''doubts the defendant (Canlas)
signed in blank the promissory notes". We chose to believe the bank's testimony that the notes were filled
up before they were given to private respondent Fermin Canlas and defendant Shozo Yamaguchi for their
signatures as joint and several promissors. For signing the notes above their typewritten names, they
bound themselves as unconditional makers. We take judicial notice of the customary procedure of
commercial banks of requiring their clientele to sign promissory notes prepared by the banks in printed
form with blank spaces already filled up as per agreed terms of the loan, leaving the borrowers-debtors to
do nothing but read the terms and conditions therein printed and to sign as makers or co-makers. When
the notes were given to private respondent Fermin Canlas for his signature, the notes were complete in the
sense that the spaces for the material particular had been filled up by the bank as per agreement. The notes
were not incomplete instruments; neither were they given to private respondent Fermin Canlas in blank as
he claims. Thus, Section 14 of the NegotiabIe Instruments Law is not applicable.
The ruling in case of Reformina vs. Tomol relied upon by the appellate court in reducing the interest rate
on the promissory notes from 16% to 12% per annum does not squarely apply to the instant petition. In
the abovecited case, the rate of 12% was applied to forebearances of money, goods or credit and court
judgemets thereon, only in the absence of any stipulation between the parties.
In the case at bar however , it was found by the trial court that the rate of interest is 9% per annum, which
interest rate the plaintiff may at any time without notice, raise within the limits allowed law. And so, as of
February 16, 1984 , the plaintiff had fixed the interest at 16% per annum.
This Court has held that the rates under the Usury Law, as amended by Presidential Decree No. 116, are
applicable only to interests by way of compensation for the use or forebearance of money. Article 2209 of
the Civil Code, on the other hand, governs interests by way of damages. 15 This fine distinction was not
taken into consideration by the appellate court, which instead made a general statement that the interest
rate be at 12% per annum.
Inasmuch as this Court had declared that increases in interest rates are not subject to any ceiling
prescribed by the Usury Law, the appellate court erred in limiting the interest rates at 12% per annum.
Central Bank Circular No. 905, Series of 1982 removed the Usury Law ceiling on interest rates. 16
In the 1ight of the foregoing analysis and under the plain language of the statute and jurisprudence on the
matter, the decision of the respondent: Court of Appeals absolving private respondent Fermin Canlas is
REVERSED and SET ASIDE. Judgement is hereby rendered declaring private respondent Fermin Canlas
jointly and severally liable on all the nine promissory notes with the following sums and at 16% interest
per annum from the dates indicated, to wit:
Under the promissory note marked as exhibit A, the sum of P300,000.00 with interest from January 29,
1981 until fully paid; under promissory note marked as Exhibit B, the sum of P40,000.00 with interest
from November 27, 1980: under the promissory note denominated as Exhibit C, the amount of
P166,466.00 with interest from January 29, 1981; under the promissory note denominated as Exhibit D,
the amount of P367,000.00 with interest from January 29, 1981 until fully paid; under the promissory
note marked as Exhibit E, the amount of P86,130.31 with interest from January 29, 1981; under the
promissory note marked as Exhibit F, the sum of P140,000.00 with interest from November 27, 1980 until
fully paid; under the promissory note marked as Exhibit G, the amount of P12,703.70 with interest from
November 27, 1980; the promissory note marked as Exhibit H, the sum of P281,875.91 with interest from

January 29, 1981; and the promissory note marked as Exhibit I, the sum of P200,000.00 with interest on
January 29, 1981.
The liabilities of defendants Pinch Manufacturing Corporation (formerly Worldwide Garment
Manufacturing, Inc.) and Shozo Yamaguchi, for not having appealed from the decision of the trial court,
shall be adjudged in accordance with the judgment rendered by the Court a quo.
With respect to attorney's fees, and penalty and service charges, the private respondent Fermin Canlas is
hereby held jointly and solidarity liable with defendants for the amounts found, by the Court a quo. With
costs against private respondent.
SO ORDERED.

DIGEST
FACTS:
In 1979, World Garment Manufacturing, through its board authorized Shozo Yamaguchi (president) and
Fermin Canlas (treasurer) to obtain credit facilities from Republic Planters Bank (RPB). For this, 9
promissory notes were executed. Each promissory note was uniformly written in the following manner:
The note became due and no payment was made. RPB eventually sued Yamaguchi and Canlas. Canlas, in
his defense, averred that he should not be held personally liable for such authorized corporate acts that he
performed inasmuch as he signed the promissory notes in his capacity as officer of the defunct Worldwide
Garment Manufacturing.
ISSUE:
Whether or not Canlas should be held liable for the promissory notes.
HELD:
Yes. The solidary liability of private respondent Fermin Canlas is made clearer and certain, without
reason for ambiguity, by the presence of the phrase joint and several as describing the unconditional
promise to pay to the order of Republic Planters Bank. Where an instrument containing the words I
promise to pay is signed by two or more persons, they are deemed to be jointly and severally liable
thereon.
Canlas is solidarily liable on each of the promissory notes bearing his signature for the following reasons:
The promissory notes are negotiable instruments and must be governed by the Negotiable Instruments
Law.
Under the Negotiable lnstruments Law, persons who write their names on the face of promissory notes are
makers and are liable as such. By signing the notes, the maker promises to pay to the order of the payee
or any holder according to the tenor thereof.

CHAPTER 4
G.R. No. 93048 March 3, 1994
BATAAN CIGAR AND CIGARETTE FACTORY, INC., petitioner,
vs.
THE COURT OF APPEALS and STATE INVESTMENT HOUSE, INC., respondents.
Teresita Gandiongco Oledan for petitioner.
Acaban & Sabado for private respondent.
NOCON, J.:
For our review is the decision of the Court of Appeals in the case entitled "State Investment House, Inc. v.
Bataan Cigar & Cigarette Factory Inc.," 1 affirming the decision of the Regional Trial Court 2 in a
complaint filed by the State Investment House, Inc. (hereinafter referred to as SIHI) for collection on
three unpaid checks issued by Bataan Cigar & Cigarette Factory, Inc. (hereinafter referred to as BCCFI).
The foregoing decisions unanimously ruled in favor of SIHI, the private respondent in this case.
Emanating from the records are the following facts. Petitioner, Bataan Cigar & Cigarette Factory, Inc.
(BCCFI), a corporation involved in the manufacturing of cigarettes, engaged one of its suppliers, King
Tim Pua George (herein after referred to as George King), to deliver 2,000 bales of tobacco leaf starting
October 1978. In consideration thereof, BCCFI, on July 13, 1978 issued crossed checks post dated
sometime in March 1979 in the total amount of P820,000.00. 3
Relying on the supplier's representation that he would complete delivery within three months from
December 5, 1978, petitioner agreed to purchase additional 2,500 bales of tobacco leaves, despite the
supplier's failure to deliver in accordance with their earlier agreement. Again petitioner issued post dated
crossed checks in the total amount of P1,100,000.00, payable sometime in September 1979. 4
During these times, George King was simultaneously dealing with private respondent SIHI. On July 19,
1978, he sold at a discount check TCBT 551826 5 bearing an amount of P164,000.00, post dated March
31, 1979, drawn by petitioner, naming George King as payee to SIHI. On December 19 and 26, 1978, he
again sold to respondent checks TCBT Nos. 608967 & 608968, 6 both in the amount of P100,000.00, post
dated September 15 & 30, 1979 respectively, drawn by petitioner in favor of George King.
In as much as George King failed to deliver the bales of tobacco leaf as agreed despite petitioner's
demand, BCCFI issued on March 30, 1979, a stop payment order on all checks payable to George King,
including check TCBT 551826. Subsequently, stop payment was also ordered on checks TCBT Nos.
608967 & 608968 on September 14 & 28, 1979, respectively, due to George King's failure to deliver the
tobacco leaves.
Efforts of SIHI to collect from BCCFI having failed, it instituted the present case, naming only BCCFI as
party defendant. The trial court pronounced SIHI as having a valid claim being a holder in due course. It
further said that the non-inclusion of King Tim Pua George as party defendant is immaterial in this case,
since he, as payee, is not an indispensable party.
The main issue then is whether SIHI, a second indorser, a holder of crossed checks, is a holder in due
course, to be able to collect from the drawer, BCCFI.
The Negotiable Instruments Law states what constitutes a holder in due course, thus:
Sec. 52 A holder in due course is a holder who has taken the instrument under the following
conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it had been previously
dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect
in the title of the person negotiating it.
Section 59 of the NIL further states that every holder is deemed prima facie a holder in due course.
However, when it is shown that the title of any person who has negotiated the instrument was defective,

the burden is on the holder to prove that he or some person under whom he claims, acquired the title as
holder in due course.
The facts in this present case are on all fours to the case of State Investment House, Inc. (the very
respondent in this case) v. Intermediate Appellate Court 7 wherein we made a discourse on the effects of
crossing of checks.
As preliminary, a check is defined by law as a bill of exchange drawn on a bank payable on
demand. 8 There are a variety of checks, the more popular of which are the memorandum check, cashier's
check, traveler's check and crossed check. Crossed check is one where two parallel lines are drawn across
its face or across a corner thereof. It may be crossed generally or specially.
A check is crossed specially when the name of a particular banker or a company is written between the
parallel lines drawn. It is crossed generally when only the words "and company" are written or nothing is
written at all between the parallel lines. It may be issued so that the presentment can be made only by a
bank. Veritably the Negotiable Instruments Law (NIL) does not mention "crossed checks," although
Article 541 9 of the Code of Commerce refers to such instruments.
According to commentators, the negotiability of a check is not affected by its being crossed, whether
specially or generally. It may legally be negotiated from one person to another as long as the one who
encashes the check with the drawee bank is another bank, or if it is specially crossed, by the bank
mentioned between the parallel lines. 10 This is specially true in England where the Negotiable Instrument
Law originated.
In the Philippine business setting, however, we used to be beset with bouncing checks, forging of checks,
and so forth that banks have become quite guarded in encashing checks, particularly those which name a
specific payee. Unless one is a valued client, a bank will not even accept second indorsements on checks.
In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of a
check should have the following effects: (a) the check may not be encashed but only deposited in the
bank; (b) the check may be negotiatedonly once to one who has an account with a bank; (c) and the act
of crossing the check serves as warning to the holder that the check has been issued for a definite
purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise, he is not
a holder in due course. 11
The foregoing was adopted in the case of SIHI v. IAC, supra. In that case, New Sikatuna Wood Industries,
Inc. also sold at a discount to SIHI three post dated crossed checks, issued by Anita Pea Chua naming as
payee New Sikatuna Wood Industries, Inc. Ruling that SIHI was not a holder in due course, we then said:
The three checks in the case at bar had been crossed generally and issued payable to New Sikatuna Wood
Industries, Inc. which could only mean that the drawer had intended the same for deposit only by the
rightful person, i.e. the payee named therein. Apparently, it was not the payee who presented the same for
payment and therefore, there was no proper presentment, and the liability did not attach to the drawer.
Thus, in the absence of due presentment, the drawer did not become liable. Consequently, no right of
recourse is available to petitioner (SIHI) against the drawer of the subject checks, private respondent wife
(Anita), considering that petitioner is not the proper party authorized to make presentment of the checks
in question.
xxx xxx xxx
That the subject checks had been issued subject to the condition that private respondents (Anita and her
husband) on due date would make the back up deposit for said checks but which condition apparently was
not made, thus resulting in the non-consummation of the loan intended to be granted by private
respondents to New Sikatuna Wood Industries, Inc., constitutes a good defense against petitioner who is
not a holder in due course. 12
It is then settled that crossing of checks should put the holder on inquiry and upon him devolves the duty
to ascertain the indorser's title to the check or the nature of his possession. Failing in this respect, the
holder is declared guilty of gross negligence amounting to legal absence of good faith, contrary to Sec.
52(c) of the Negotiable Instruments Law, 13 and as such the consensus of authority is to the effect that the
holder of the check is not a holder in due course.

In the present case, BCCFI's defense in stopping payment is as good to SIHI as it is to George King.
Because, really, the checks were issued with the intention that George King would supply BCCFI with the
bales of tobacco leaf. There being failure of consideration, SIHI is not a holder in due course.
Consequently, BCCFI cannot be obliged to pay the checks.
The foregoing does not mean, however, that respondent could not recover from the checks. The only
disadvantage of a holder who is not a holder in due course is that the instrument is subject to defenses as
if
it
were
non-negotiable. 14 Hence, respondent can collect from the immediate indorser, in this case, George King.
WHEREFORE, finding that the court a quo erred in the application of law, the instant petition is hereby
GRANTED. The decision of the Regional Trial Court as affirmed by the Court of Appeals is hereby
REVERSED. Cost against private respondent.
SO ORDERED.

DIGEST
FACTS:
Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a corporation involved in the manufacturing of
cigarettes purchased from King Tim Pua George (George King) 2,000 bales of tobacco leaf to be
delivered starting October 1978.
July 13, 1978: it issued crossed checks post dated sometime in March 1979 in the total
amount of P820K
George represented that he would complete delivery w/in 3 months from Dec 5 1978
so BCCFI agreed to purchase additional 2,500 bales of tobacco leaves, despite the previous
failure in delivery
It issued post dated crossed checks in the total amount of P1.1M payable sometime in
September 1979.
July 19, 1978: George sold to SIHI at a discount check amounting to P164K, post dated March
31, 1979, drawn by BCCFI w/ George as payee.
December 19 and 26, 1978: George sold 2 checks both in the amount of P100K, post dated
September 15 & 30, 1979 respectively, drawn by BCCFI w/ George as payee
Upon failure to deliver, BCCFI issued on March 30, 1979 and September 14 & 28, 1979 a stop
payment order for all checks
SIHI failing to claim, filed a claim against BCCFI
RTC: SIHI = holder in due course. Non-inclusion of Gearoge as party is immaterial to the case
ISSUE:
W/N SIHI is a holder in due course beign a second indorser and a holder of crossed checks
HELD:
YES. GRANTED. RTC reversed.
Sec. 52
1. That it is complete and regular upon its face
2. That he became the holder of it before it was overdue, and without notice that it had been
previously dishonored, if such was the fact
3. That he took it in good faith and for value
4. That at the time it was negotiated to him he had no notice of any infirmity in the instrument or
defect in the title of the person negotiating it
Sec. 59
every holder is deemed prima facie a holder in due course
However, when it is shown that the title of any person who has negotiated the instrument
was defective, the burden is on the holder to prove that he or some person under whom he
claims, acquired the title as holder in due course.
effect of crossing of a check
1. check may not be encashed but only deposited in the bank
2. check may be negotiated only once to one who has an account with a bank
3. act of crossing the check serves as warning to the holder that the check has been issued for a
definite purpose - he must inquire if he has received the check pursuant to that purpose,
otherwise, he is not a holder in due course
crossing of checks should put the holder on inquiry and upon him devolves the duty to ascertain
the indorser's title to the check or the nature of his possession - failure = guilty of gross
negligence amounting to legal absence of good faith, contrary to Sec. 52(c) of the Negotiable
Instruments Law

SIHI is not a holder in due course. Consequently, BCCFI cannot be obliged to pay the checks.
However, that SIHI could not recover from the checks. The only disadvantage of a holder who is
not a holder in due course is that the instrument is subject to defenses as if it were nonnegotiable. Hence, SIHI can collect from the immediate indorser, George

G.R. No. 72764 July 13, 1989

STATE INVESTMENT HOUSE, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, ANITA PEA CHUA and HARRIS CHUA, respondents.
Macalino, Salonga & Associates for petitioner.
Edgardo F. Sundiam for respondents.
FERNAN, C.J.:
Petitioner State Investment House seeks a review of the decision of respondent Intermediate Appellate
Court (now Court of Appeals) in AC-G.R. CV No. 04523 reversing the decision of the Regional Trial
Court of Manila, Branch XXXVII dated April 30, 1984 and dismissing the complaint for collection filed
by petitioner against private respondents Spouses Anita Pena Chua and Harris Chua.
It appears that shortly before September 5, 1980, New Sikatuna Wood Industries, Inc. requested for a loan
from private respondent Harris Chua. The latter agreed to grant the same subject to the condition that the
former should wait until December 1980 when he would have the money. In view of this agreement,
private respondent-wife, Anita Pena Chua issued three (3) crossed checks payable to New Sikatuna Wood
Industries, Inc. all postdated December 22, 1980 as follows:
DRAWEE BANK

CHECK NO.

DATE

AMOUNT

1. China Banking Corporation

589053

Dec. 22, 1980

P98,750.00

2. International Corporate Bank

04045549

Dec. 22, 1980

102,313.00

3. Metropolitan Bank & Trust Co.

036512

Dec. 22, 1980

98,387.00

The total value of the three (3) postdated checks amounted to P 299,450.00.
Subsequently, New Sikatuna Wood Industries, Inc. entered into an agreement with herein petitioner State
Investment House, Inc. whereby for and in consideration of the sum of Pl,047,402.91 under a deed of
sale, the former assigned and discounted with petitioner eleven (11) postdated checks including the
aforementioned three (3) postdated checks issued by herein private respondent-wife Anita Pea Chua to
New Sikatuna Wood Industries, Inc.
When the three checks issued by private respondent Anita Pena Chua were allegedly deposited by
petitioner, these checks were dishonored by reason of "insufficient funds", "stop payment" and "account
closed", respectively. Petitioner claims that despite demands on private respondent Anita Pea to make
good said checks, the latter failed to pay the same necessitating the former to file an action for collection
against the latter and her husband Harris Chua before the Regional Trial Court of Manila, Branch
XXXVII docketed as Civil Case No. 82-10547.
Private respondents-defendants filed a third party complaint against New Sikatuna Wood Industries, Inc.
for reimbursement and indemnification in the event that they be held liable to petitioner-plaintiff. For
failure of third party defendant to answer the third party complaint despite due service of summons, the
latter was declared in default.
On April 30, 1984, the lower court 1 rendered judgment against herein private respondents spouses, the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff or against the defendants ordering
the defendants to pay jointly and severally to the plaintiff the following amounts:
1. P 229,450.00 with interest at the rate of 12% per annum from February 24,1981 until fully paid;
2. P 29,945.00 as and for attorney's fees; and
3. the costs of suit.

On the third party complaint, third party defendant New Sikatuna Wood Industries, Inc. is ordered to pay
third party plaintiffs Anita Pena Chua and Harris Chua all amounts said defendants' third- party plaintiffs
may pay to the plaintiff on account of this case. 2
On appeal filed by private respondents in AC-G.R. CV No. 04523, the Intermediate Appellate
Court 3 (now Court of Appeals) reversed the lower court's judgment in the now assailed decision, the
dispositive portion of which reads:
WHEREFORE, finding this appeal meritorious, We Reverse and Set Aside the appealed judgment, dated
April 30, 1984 and a new judgment is hereby rendered dismissing the complaint, with costs against
plaintiff-appellee. 4
Hence, this petition.
The pivotal issue in this case is whether or not petitioner is a holder in due course as to entitle it to
proceed against private respondents for the amount stated in the dishonored checks.
Section 52(c) of the Negotiable Instruments Law defines a holder in due course as one who takes the
instrument "in good faith and for value". On the other hand, Section 52(d) provides that in order that one
may be a holder in due course, it is necessary that "at the time the instrument was negotiated to him he
had no notice of any x x x defect in the title of the person negotiating it." However, under Section 59
every holder is deemed prima facie to be a holder in due course.
Admittedly, the Negotiable Instruments Law regulating the issuance of negotiable checks as well as the
lights and liabilities arising therefrom, does not mention "crossed checks". But this Court has taken
cognizance of the practice that a check with two parallel lines in the upper left hand corner means that it
could only be deposited and may not be converted into cash. Consequently, such circumstance should put
the payee on inquiry and upon him devolves the duty to ascertain the holder's title to the check or the
nature of his possession. Failing in this respect, the payee is declared guilty of gross negligence
amounting to legal absence of good faith and as such the consensus of authority is to the effect that the
holder of the check is not a holder in good faith. 5
Petitioner submits that at the time of the negotiation and endorsement of the checks in question by New
Sikatuna Wood Industries, it had no knowledge of the transaction and/or arrangement made between the
latter and private respondents.
We agree with respondent appellate court.
Relying on the ruling in Ocampo v. Gatchalian (supra), the Intermediate Appellate Court (now Court of
Appeals), correctly elucidated that the effects of crossing a check are: the check may not be encashed but
only deposited in the bank; the check may be negotiated only once to one who has an account with a
bank; and the act of crossing the check serves as a warning to the holder that the check has been issued
for a definite purpose so that he must inquire if he has received the check pursuant to that purpose,
otherwise he is not a holder in due course. Further, the appellate court said:
It results therefore that when appellee rediscounted the check knowing that it was a crossed check he was
knowingly violating the avowed intention of crossing the check. Furthermore, his failure to inquire from
the holder, party defendant New Sikatuna Wood Industries, Inc., the purpose for which the three checks
were cross despite the warning of the crossing, prevents him from being considered in good faith and thus
he is not a holder in due course. Being not a holder in due course, plaintiff is subject to personal defenses,
such as lack of consideration between appellants and New Sikatuna Wood Industries. Note that under the
facts the checks were postdated and issued only as a loan to New Sikatuna Wood Industries, Inc. if and
when deposits were made to back up the checks. Such deposits were not made, hence no loan was made,
hence the three checks are without consideration (Sec. 28, Negotiable Instruments Law).
Likewise New Sikatuna Wood Industries negotiated the three checks in breach of faith in violation of
Article (sic) 55, Negotiable Instruments Law, which is a personal defense available to the drawer of the
check. 6
In addition, such instruments are mentioned in Section 541 of the Negotiable Instruments Law as follows:
Sec. 541. The maker or any legal holder of a check shall be entitled to indicate therein that it be paid to a
certain banker or institution, which he shall do by writing across the face the name of said banker or
institution, or only the words "and company."

The payment made to a person other than the banker or institution shall not exempt the person on whom it
is drawn, if the payment was not correctly made.
Under usual practice, crossing a check is done by placing two parallel lines diagonally on the left top
portion of the check. The crossing may be special wherein between the two parallel lines is written the
name of a bank or a business institution, in which case the drawee should pay only with the intervention
of that bank or company, or crossing may be general wherein between two parallel diagonal lines are
written the words "and Co." or none at all as in the case at bar, in which case the drawee should not
encash the same but merely accept the same for deposit.
The effect therefore of crossing a check relates to the mode of its presentment for payment. Under Section
72 of the Negotiable Instruments Law, presentment for payment to be sufficient must be made (a) by the
holder, or by some person authorized to receive payment on his behalf ... As to who the holder or
authorized person will be depends on the instructions stated on the face of the check.
The three subject checks in the case at bar had been crossed generally and issued payable to New
Sikatuna Wood Industries, Inc. which could only mean that the drawer had intended the same for deposit
only by the rightful person, i.e., the payee named therein. Apparently, it was not the payee who presented
the same for payment and therefore, there was no proper presentment, and the liability did not attach to
the drawer.
Thus, in the absence of due presentment, the drawer did not become liable. 7 Consequently, no right of
recourse is available to petitioner against the drawer of the subject checks, private respondent wife,
considering that petitioner is not the proper party authorized to make presentment of the checks in
question.
Yet it does not follow as a legal proposition that simply because petitioner was not a holder in due course
as found by the appellate court for having taken the instruments in question with notice that the same is
for deposit only to the account of payee named in the subject checks, petitioner could not recover on the
checks. The Negotiable Instruments Law does not provide that a holder who is not a holder in due course
may not in any case recover on the instrument for in the case at bar, petitioner may recover from the New
Sikatuna Wood Industries, Inc. if the latter has no valid excuse for refusing payment. The only
disadvantage of a holder who is not in due course is that the negotiable instrument is subject to defenses
as if it were non-negotiable. 8
That the subject checks had been issued subject to the condition that private respondents on due date
would make the back up deposit for said checks but which condition apparently was not made, thus
resulting in the non-consummation of the loan intended to be granted by private respondents to New
Sikatuna Wood Industries, Inc., constitutes a good defense against petitioner who is not a holder in due
course.
WHEREFORE, the decision appealed from is hereby AFFIRMED with costs against petitioner.
SO ORDERED.

DIGEST
FACTS
Nora Moulic issued to Corazon Victoriano, as security for pieces of jewellery to be sold on commission,
two postdated checks in the amount of fifty thousand each. Thereafter, Victoriano negotiated the checks to
State Investment House, Inc. When Moulic failed to sell the jewellry, she returned it to Victoriano before
the maturity of the checks. However, the checks cannot be retrieved as they have been negotiated. Before
the maturity date Moulic withdrew her funds from the bank contesting that she incurred no obligation on
the checks because the jewellery was never sold and the checks are negotiated without her knowledge and
consent. Upon presentment of for payment, the checks were dishonoured for insufficiency of funds.
ISSUES
1. Whether or not State Investment House inc. was a holder of the check in due course
2. Whether or not Moulic can set up against the petitioner the defense that there was failure or absence of
consideration
HELD
Yes, Section 52 of the NIL provides what constitutes a holder in due course. The evidence shows that: on
the faces of the post dated checks were complete and regular; that State Investment House Inc. bought the
checks from Victoriano before the due dates; that it was taken in good faith and for value; and there was
no knowledge with regard that the checks were issued as security and not for value. A prima facie
presumption exists that a holder of a negotiable instrument is a holder in due course. Moulic failed to
prove the contrary.
No, Moulic can only invoke this defense against the petitioner if it was a privy to the purpose for which
they were issued and therefore is not a holder in due course.
No, Section 119 of NIL provides how an instruments be discharged. Moulic can only invoke paragraphs c
and d as possible grounds for the discharge of the instruments. Since Moulic failed to get back the
possession of the checks as provided by paragraph c, intentional cancellation of instrument is impossible.
As provided by paragraph d, the acts which will discharge a simple contract of payment of money will
discharge the instrument. Correlating Article 1231 of the Civil Code which enumerates the modes of
extinguishing obligation, none of those modes outlined therein is applicable in the instant case. Thus,
Moulic may not unilaterally discharge herself from her liability by mere expediency of withdrawing her
funds from the drawee bank. She is thus liable as she has no legal basis to excuse herself from liability on
her check to a holder in due course. Moreover, the fact that the petitioner failed to give notice of dishonor
is of no moment. The need for such notice is not absolute; there are exceptions provided by Sec 114 of
NIL.

G.R. No. L-15126

November 30, 1961

VICENTE R. DE OCAMPO & CO., plaintiff-appellee,

vs.
ANITA GATCHALIAN, ET AL., defendants-appellants.
Vicente Formoso, Jr. for plaintiff-appellee.
Reyes and Pangalagan for defendants-appellants.
LABRADOR, J.:
Appeal from a judgment of the Court of First Instance of Manila, Hon. Conrado M. Velasquez, presiding,
sentencing the defendants to pay the plaintiff the sum of P600, with legal interest from September 10,
1953 until paid, and to pay the costs.
The action is for the recovery of the value of a check for P600 payable to the plaintiff and drawn by
defendant Anita C. Gatchalian. The complaint sets forth the check and alleges that plaintiff received it in
payment of the indebtedness of one Matilde Gonzales; that upon receipt of said check, plaintiff gave
Matilde Gonzales P158.25, the difference between the face value of the check and Matilde Gonzales'
indebtedness. The defendants admit the execution of the check but they allege in their answer, as
affirmative defense, that it was issued subject to a condition, which was not fulfilled, and that plaintiff
was guilty of gross negligence in not taking steps to protect itself.
At the time of the trial, the parties submitted a stipulation of facts, which reads as follows:
Plaintiff and defendants through their respective undersigned attorney's respectfully submit the following
Agreed Stipulation of Facts;
First. That on or about 8 September 1953, in the evening, defendant Anita C. Gatchalian who was then
interested in looking for a car for the use of her husband and the family, was shown and offered a car by
Manuel Gonzales who was accompanied by Emil Fajardo, the latter being personally known to defendant
Anita C. Gatchalian;
Second. That Manuel Gonzales represented to defend Anita C. Gatchalian that he was duly authorized
by the owner of the car, Ocampo Clinic, to look for a buyer of said car and to negotiate for and
accomplish said sale, but which facts were not known to plaintiff;
Third. That defendant Anita C. Gatchalian, finding the price of the car quoted by Manuel Gonzales to
her satisfaction, requested Manuel Gonzales to bring the car the day following together with the
certificate of registration of the car, so that her husband would be able to see same; that on this request of
defendant Anita C. Gatchalian, Manuel Gonzales advised her that the owner of the car will not be willing
to give the certificate of registration unless there is a showing that the party interested in the purchase of
said car is ready and willing to make such purchase and that for this purpose Manuel Gonzales requested
defendant Anita C. Gatchalian to give him (Manuel Gonzales) a check which will be shown to the owner
as evidence of buyer's good faith in the intention to purchase the said car, the said check to be for
safekeeping only of Manuel Gonzales and to be returned to defendant Anita C. Gatchalian the following
day when Manuel Gonzales brings the car and the certificate of registration, but which facts were not
known to plaintiff;
Fourth. That relying on these representations of Manuel Gonzales and with his assurance that said
check will be only for safekeeping and which will be returned to said defendant the following day when
the car and its certificate of registration will be brought by Manuel Gonzales to defendants, but which
facts were not known to plaintiff, defendant Anita C. Gatchalian drew and issued a check, Exh. "B"; that
Manuel Gonzales executed and issued a receipt for said check, Exh. "1";
Fifth. That on the failure of Manuel Gonzales to appear the day following and on his failure to bring
the car and its certificate of registration and to return the check, Exh. "B", on the following day as
previously agreed upon, defendant Anita C. Gatchalian issued a "Stop Payment Order" on the check, Exh.
"3", with the drawee bank. Said "Stop Payment Order" was issued without previous notice on plaintiff not
being know to defendant, Anita C. Gatchalian and who furthermore had no reason to know check was
given to plaintiff;

Sixth. That defendants, both or either of them, did not know personally Manuel Gonzales or any
member of his family at any time prior to September 1953, but that defendant Hipolito Gatchalian is
personally acquainted with V. R. de Ocampo;
Seventh. That defendants, both or either of them, had no arrangements or agreement with the Ocampo
Clinic at any time prior to, on or after 9 September 1953 for the hospitalization of the wife of Manuel
Gonzales and neither or both of said defendants had assumed, expressly or impliedly, with the Ocampo
Clinic, the obligation of Manuel Gonzales or his wife for the hospitalization of the latter;
Eight. That defendants, both or either of them, had no obligation or liability, directly or indirectly with
the Ocampo Clinic before, or on 9 September 1953;
Ninth. That Manuel Gonzales having received the check Exh. "B" from defendant Anita C. Gatchalian
under the representations and conditions herein above specified, delivered the same to the Ocampo Clinic,
in payment of the fees and expenses arising from the hospitalization of his wife;
Tenth. That plaintiff for and in consideration of fees and expenses of hospitalization and the release of
the wife of Manuel Gonzales from its hospital, accepted said check, applying P441.75 (Exhibit "A")
thereof to payment of said fees and expenses and delivering to Manuel Gonzales the amount of P158.25
(as per receipt, Exhibit "D") representing the balance on the amount of the said check, Exh. "B";
Eleventh. That the acts of acceptance of the check and application of its proceeds in the manner
specified above were made without previous inquiry by plaintiff from defendants:
Twelfth. That plaintiff filed or caused to be filed with the Office of the City Fiscal of Manila, a
complaint for estafa against Manuel Gonzales based on and arising from the acts of said Manuel Gonzales
in paying his obligations with plaintiff and receiving the cash balance of the check, Exh. "B" and that said
complaint was subsequently dropped;
Thirteenth. That the exhibits mentioned in this stipulation and the other exhibits submitted previously,
be considered as parts of this stipulation, without necessity of formally offering them in evidence;
WHEREFORE, it is most respectfully prayed that this agreed stipulation of facts be admitted and that the
parties hereto be given fifteen days from today within which to submit simultaneously their memorandum
to discuss the issues of law arising from the facts, reserving to either party the right to submit reply
memorandum, if necessary, within ten days from receipt of their main memoranda. (pp. 21-25,
Defendant's Record on Appeal).
No other evidence was submitted and upon said stipulation the court rendered the judgment already
alluded above.
In their appeal defendants-appellants contend that the check is not a negotiable instrument, under the facts
and circumstances stated in the stipulation of facts, and that plaintiff is not a holder in due course. In
support of the first contention, it is argued that defendant Gatchalian had no intention to transfer her
property in the instrument as it was for safekeeping merely and, therefore, there was no delivery required
by law (Section 16, Negotiable Instruments Law); that assuming for the sake of argument that delivery
was not for safekeeping merely, delivery was conditional and the condition was not fulfilled.
In support of the contention that plaintiff-appellee is not a holder in due course, the appellant argues that
plaintiff-appellee cannot be a holder in due course because there was no negotiation prior to plaintiffappellee's acquiring the possession of the check; that a holder in due course presupposes a prior party
from whose hands negotiation proceeded, and in the case at bar, plaintiff-appellee is the payee, the maker
and the payee being original parties. It is also claimed that the plaintiff-appellee is not a holder in due
course because it acquired the check with notice of defect in the title of the holder, Manuel Gonzales, and
because under the circumstances stated in the stipulation of facts there were circumstances that brought
suspicion about Gonzales' possession and negotiation, which circumstances should have placed the
plaintiff-appellee under the duty, to inquire into the title of the holder. The circumstances are as follows:
The check is not a personal check of Manuel Gonzales. (Paragraph Ninth, Stipulation of Facts). Plaintiff
could have inquired why a person would use the check of another to pay his own debt. Furthermore,
plaintiff had the "means of knowledge" inasmuch as defendant Hipolito Gatchalian is personally
acquainted with V. R. de Ocampo (Paragraph Sixth, Stipulation of Facts.).

The maker Anita C. Gatchalian is a complete stranger to Manuel Gonzales and Dr. V. R. de Ocampo
(Paragraph Sixth, Stipulation of Facts).
The maker is not in any manner obligated to Ocampo Clinic nor to Manuel Gonzales. (Par. 7, Stipulation
of Facts.)
The check could not have been intended to pay the hospital fees which amounted only to P441.75. The
check is in the amount of P600.00, which is in excess of the amount due plaintiff. (Par. 10, Stipulation of
Facts).
It was necessary for plaintiff to give Manuel Gonzales change in the sum P158.25 (Par. 10, Stipulation of
Facts). Since Manuel Gonzales is the party obliged to pay, plaintiff should have been more cautious and
wary in accepting a piece of paper and disbursing cold cash.
The check is payable to bearer. Hence, any person who holds it should have been subjected to inquiries.
EVEN IN A BANK, CHECKS ARE NOT CASHED WITHOUT INQUIRY FROM THE BEARER. The
same inquiries should have been made by plaintiff. (Defendants-appellants' brief, pp. 52-53)
Answering the first contention of appellant, counsel for plaintiff-appellee argues that in accordance with
the best authority on the Negotiable Instruments Law, plaintiff-appellee may be considered as a holder in
due course, citing Brannan's Negotiable Instruments Law, 6th edition, page 252. On this issue Brannan
holds that a payee may be a holder in due course and says that to this effect is the greater weight of
authority, thus:
Whether the payee may be a holder in due course under the N. I. L., as he was at common law, is a
question upon which the courts are in serious conflict. There can be no doubt that a proper interpretation
of the act read as a whole leads to the conclusion that a payee may be a holder in due course under any
circumstance in which he meets the requirements of Sec. 52.
The argument of Professor Brannan in an earlier edition of this work has never been successfully
answered and is here repeated.
Section 191 defines "holder" as the payee or indorsee of a bill or note, who is in possession of it, or the
bearer thereof. Sec. 52 defendants defines a holder in due course as "a holder who has taken the
instrument under the following conditions: 1. That it is complete and regular on its face. 2. That he
became the holder of it before it was overdue, and without notice that it had been previously dishonored,
if such was the fact. 3. That he took it in good faith and for value. 4. That at the time it was negotiated to
him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it."
Since "holder", as defined in sec. 191, includes a payee who is in possession the word holder in the first
clause of sec. 52 and in the second subsection may be replaced by the definition in sec. 191 so as to read
"a holder in due course is a payee or indorsee who is in possession," etc. (Brannan's on Negotiable
Instruments Law, 6th ed., p. 543).
The first argument of the defendants-appellants, therefore, depends upon whether or not the plaintiffappellee is a holder in due course. If it is such a holder in due course, it is immaterial that it was the payee
and an immediate party to the instrument.
The other contention of the plaintiff is that there has been no negotiation of the instrument, because the
drawer did not deliver the instrument to Manuel Gonzales with the intention of negotiating the same, or
for the purpose of giving effect thereto, for as the stipulation of facts declares the check was to remain in
the possession Manuel Gonzales, and was not to be negotiated, but was to serve merely as evidence of
good faith of defendants in their desire to purchase the car being sold to them. Admitting that such was
the intention of the drawer of the check when she delivered it to Manuel Gonzales, it was no fault of the
plaintiff-appellee drawee if Manuel Gonzales delivered the check or negotiated it. As the check was
payable to the plaintiff-appellee, and was entrusted to Manuel Gonzales by Gatchalian, the delivery to
Manuel Gonzales was a delivery by the drawer to his own agent; in other words, Manuel Gonzales was
the agent of the drawer Anita Gatchalian insofar as the possession of the check is concerned. So, when the
agent of drawer Manuel Gonzales negotiated the check with the intention of getting its value from
plaintiff-appellee, negotiation took place through no fault of the plaintiff-appellee, unless it can be shown
that the plaintiff-appellee should be considered as having notice of the defect in the possession of the
holder Manuel Gonzales. Our resolution of this issue leads us to a consideration of the last question

presented by the appellants, i.e., whether the plaintiff-appellee may be considered as a holder in due
course.
Section 52, Negotiable Instruments Law, defines holder in due course, thus:
A holder in due course is a holder who has taken the instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it had been previously
dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect
in the title of the person negotiating it.
The stipulation of facts expressly states that plaintiff-appellee was not aware of the circumstances under
which the check was delivered to Manuel Gonzales, but we agree with the defendants-appellants that the
circumstances indicated by them in their briefs, such as the fact that appellants had no obligation or
liability to the Ocampo Clinic; that the amount of the check did not correspond exactly with the obligation
of Matilde Gonzales to Dr. V. R. de Ocampo; and that the check had two parallel lines in the upper left
hand corner, which practice means that the check could only be deposited but may not be converted into
cash all these circumstances should have put the plaintiff-appellee to inquiry as to the why and
wherefore of the possession of the check by Manuel Gonzales, and why he used it to pay Matilde's
account. It was payee's duty to ascertain from the holder Manuel Gonzales what the nature of the latter's
title to the check was or the nature of his possession. Having failed in this respect, we must declare that
plaintiff-appellee was guilty of gross neglect in not finding out the nature of the title and possession of
Manuel Gonzales, amounting to legal absence of good faith, and it may not be considered as a holder of
the check in good faith. To such effect is the consensus of authority.
In order to show that the defendant had "knowledge of such facts that his action in taking the instrument
amounted to bad faith," it is not necessary to prove that the defendant knew the exact fraud that was
practiced upon the plaintiff by the defendant's assignor, it being sufficient to show that the defendant had
notice that there was something wrong about his assignor's acquisition of title, although he did not have
notice of the particular wrong that was committed. Paika v. Perry, 225 Mass. 563, 114 N.E. 830.
It is sufficient that the buyer of a note had notice or knowledge that the note was in some way tainted with
fraud. It is not necessary that he should know the particulars or even the nature of the fraud, since all that
is required is knowledge of such facts that his action in taking the note amounted bad faith. Ozark Motor
Co. v. Horton (Mo. App.), 196 S.W. 395. Accord. Davis v. First Nat. Bank, 26 Ariz. 621, 229 Pac. 391.
Liberty bonds stolen from the plaintiff were brought by the thief, a boy fifteen years old, less than five
feet tall, immature in appearance and bearing on his face the stamp a degenerate, to the defendants' clerk
for sale. The boy stated that they belonged to his mother. The defendants paid the boy for the bonds
without any further inquiry. Held, the plaintiff could recover the value of the bonds. The term 'bad faith'
does not necessarily involve furtive motives, but means bad faith in a commercial sense. The manner in
which the defendants conducted their Liberty Loan department provided an easy way for thieves to
dispose of their plunder. It was a case of "no questions asked." Although gross negligence does not of
itself constitute bad faith, it is evidence from which bad faith may be inferred. The circumstances thrust
the duty upon the defendants to make further inquiries and they had no right to shut their eyes deliberately
to obvious facts. Morris v. Muir, 111 Misc. Rep. 739, 181 N.Y. Supp. 913, affd. in memo., 191 App. Div.
947, 181 N.Y. Supp. 945." (pp. 640-642, Brannan's Negotiable Instruments Law, 6th ed.).
The above considerations would seem sufficient to justify our ruling that plaintiff-appellee should not be
allowed to recover the value of the check. Let us now examine the express provisions of the Negotiable
Instruments Law pertinent to the matter to find if our ruling conforms thereto. Section 52 (c) provides that
a holder in due course is one who takes the instrument "in good faith and for value;" Section 59, "that
every holder is deemed prima facie to be a holder in due course;" and Section 52 (d), that in order that one
may be a holder in due course it is necessary that "at the time the instrument was negotiated to him "he
had no notice of any . . . defect in the title of the person negotiating it;" and lastly Section 59, that every
holder is deemed prima facieto be a holder in due course.

In the case at bar the rule that a possessor of the instrument is prima faciea holder in due course does not
apply because there was a defect in the title of the holder (Manuel Gonzales), because the instrument is
not payable to him or to bearer. On the other hand, the stipulation of facts indicated by the appellants in
their brief, like the fact that the drawer had no account with the payee; that the holder did not show or tell
the payee why he had the check in his possession and why he was using it for the payment of his own
personal account show that holder's title was defective or suspicious, to say the least. As holder's title
was defective or suspicious, it cannot be stated that the payee acquired the check without knowledge of
said defect in holder's title, and for this reason the presumption that it is a holder in due course or that it
acquired the instrument in good faith does not exist. And having presented no evidence that it acquired
the check in good faith, it (payee) cannot be considered as a holder in due course. In other words, under
the circumstances of the case, instead of the presumption that payee was a holder in good faith, the fact is
that it acquired possession of the instrument under circumstances that should have put it to inquiry as to
the title of the holder who negotiated the check to it. The burden was, therefore, placed upon it to show
that notwithstanding the suspicious circumstances, it acquired the check in actual good faith.
The rule applicable to the case at bar is that described in the case of Howard National Bank v. Wilson, et
al., 96 Vt. 438, 120 At. 889, 894, where the Supreme Court of Vermont made the following disquisition:
Prior to the Negotiable Instruments Act, two distinct lines of cases had developed in this country. The first
had its origin in Gill v. Cubitt, 3 B. & C. 466, 10 E. L. 215, where the rule was distinctly laid down by the
court of King's Bench that the purchaser of negotiable paper must exercise reasonable prudence and
caution, and that, if the circumstances were such as ought to have excited the suspicion of a prudent and
careful man, and he made no inquiry, he did not stand in the legal position of a bona fide holder. The rule
was adopted by the courts of this country generally and seem to have become a fixed rule in the law of
negotiable paper. Later in Goodman v. Harvey, 4 A. & E. 870, 31 E. C. L. 381, the English court
abandoned its former position and adopted the rule that nothing short of actual bad faith or fraud in the
purchaser would deprive him of the character of a bona fide purchaser and let in defenses existing
between prior parties, that no circumstances of suspicion merely, or want of proper caution in the
purchaser, would have this effect, and that even gross negligence would have no effect, except as
evidence tending to establish bad faith or fraud. Some of the American courts adhered to the earlier rule,
while others followed the change inaugurated in Goodman v. Harvey. The question was before this court
in Roth v. Colvin, 32 Vt. 125, and, on full consideration of the question, a rule was adopted in harmony
with that announced in Gill v. Cubitt, which has been adhered to in subsequent cases, including those
cited above. Stated briefly, one line of cases including our own had adopted the test of the reasonably
prudent man and the other that of actual good faith. It would seem that it was the intent of the Negotiable
Instruments Act to harmonize this disagreement by adopting the latter test. That such is the view generally
accepted by the courts appears from a recent review of the cases concerning what constitutes notice of
defect. Brannan on Neg. Ins. Law, 187-201. To effectuate the general purpose of the act to make uniform
the Negotiable Instruments Law of those states which should enact it, we are constrained to hold (contrary
to the rule adopted in our former decisions) that negligence on the part of the plaintiff, or suspicious
circumstances sufficient to put a prudent man on inquiry, will not of themselves prevent a recovery, but
are to be considered merely as evidence bearing on the question of bad faith. See G. L. 3113, 3172, where
such a course is required in construing other uniform acts.
It comes to this then: When the case has taken such shape that the plaintiff is called upon to prove himself
a holder in due course to be entitled to recover, he is required to establish the conditions entitling him to
standing as such, including good faith in taking the instrument. It devolves upon him to disclose the facts
and circumstances attending the transfer, from which good or bad faith in the transaction may be inferred.
In the case at bar as the payee acquired the check under circumstances which should have put it to inquiry,
why the holder had the check and used it to pay his own personal account, the duty devolved upon it,
plaintiff-appellee, to prove that it actually acquired said check in good faith. The stipulation of facts
contains no statement of such good faith, hence we are forced to the conclusion that plaintiff payee has
not proved that it acquired the check in good faith and may not be deemed a holder in due course thereof.

For the foregoing considerations, the decision appealed from should be, as it is hereby, reversed, and the
defendants are absolved from the complaint. With costs against plaintiff-appellee.

DIGEST
FACTS
Anita Gatchalian was interested in buying a car when she was offered by Manuel Gonzales to a car owned
by the Ocampo Clinic. Gonzales claim that he was duly authorized to look for a buyer, negotiate and
accomplish the sale by the Ocampo Clinic. Anita accepted the offer and insisted to deliver the car with the
certificate of registration the next day but Gonzales advised that the owners would only comply only upon
showing of interest on the part of the buyer. Gonzales recommended issuing a check (P600 / payable-tobearer /cross-checked) as evidence of the buyers good faith. Gonzales added that it will only be for
safekeeping and will be returned to her the following day.
The next day, Gonzales never appeared. The failure of Gonzales to appeal resulted in Gatchalian to issue
a STOP PAYMENT ORDER on the check. It was later found out that Gonzales used the check as
payment to the Vicente de Ocampo (Ocampo Clinic) for the hospitalization fees of his wife (the fees were
only P441.75, so he got a refund of P158.25). De Ocampo now demands payment for the check, which
Gatchalian refused, arguing that de Ocampo is not a holder in due course and that there is no negotiation
of the check.
The Court of First Instance ordered Gatchalian to pay the amount of the check to De Ocampo. Hence this
case.
ISSUE
Whether or not De Ocampo is a holder in due course.
HELD
NO. De Ocampo is not a holder in due course. De Ocampo was negligent in his acquisition of the check.
There were many instances that arouse suspicion: the drawer in the check (Gatchalian) has no liability
with de Ocampo ; it was cross-checked(only for deposit) but was used a payment by Gonzales; it was not
the exact amount of the medical fees. The circumstances should have led him to inquire on the validity of
the check. However, he failed to exercise reasonable prudence and caution.
In
showing
a
person
had
knowledge
of
facts
that
his
action in taking the instrument amounted to bad faith need not prove that he knows the exact fraud. It is
sufficient to show that the person had NOTICE that there was something wrong. The bad faith here means
bad faith in the commercial sense obtaining an instrument with no questions asked or no further inquiry
upon suspicion.
The presumption of good faith did not apply to de Ocampo because the defect was apparent on the
instruments face it was not payable to Gonzales or bearer. Hence, the holders title is defective or
suspicious. Being the case, de Ocampo had the burden of proving he was a holder in due course, but
failed.

ROBERT DINO, Petitioner,

- versus MARIA LUISA JUDAL-LOOT,joined by her husband VICENTE LOOT, Respondents.
G.R. No. 170912 April 19, 2010
DECISION
CARPIO, J.:
The Case
This is a petition for review [1] of the 16 August 2005 Decision [2] and 30 November 2005
Resolution[3] of the Court of Appeals in CA-G.R. CV No. 57994. The Court of Appeals affirmed the
decision of the Regional Trial Court, 7th Judicial Region, Branch 56, Mandaue City (trial court), with the
deletion of the award of interest, moral damages, attorneys fees and litigation expenses. The trial court
ruled that respondents Maria Luisa Judal-Loot and Vicente Loot are holders in due course of Metrobank
Check No. C-MA 142119406 CA and ordered petitioner Robert Dino as drawer, together with codefendant Fe Lobitana as indorser, to solidarily pay respondents the face value of the check, among
others.
The Facts
Sometime in December 1992, a syndicate, one of whose members posed as an owner of several
parcels of land situated in Canjulao, Lapu-lapu City, approached petitioner and induced him to lend the
group P3,000,000.00 to be secured by a real estate mortgage on the properties. A member of the group,
particularly a woman pretending to be a certain Vivencia Ompok Consing, even offered to execute a Deed
of Absolute Sale covering the properties, instead of the usual mortgage contract. [4] Enticed and convinced
by the syndicates offer, petitioner issued three Metrobank checks totaling P3,000,000.00, one of which is
Check No. C-MA-142119406-CA postdated 13 February 1993 in the amount of P1,000,000.00 payable to
Vivencia Ompok Consing and/or Fe Lobitana.[5]
Upon scrutinizing the documents involving the properties, petitioner discovered that the documents
covered rights over government properties. Realizing he had been deceived, petitioner advised
Metrobank to stop payment of his checks. However, only the payment of Check No. C-MA- 142119406CA was ordered stopped. The other two checks were already encashed by the payees.
Meanwhile, Lobitana negotiated and indorsed Check No. C-MA- 142119406-CA to respondents in
exchange for cash in the sum of P948,000.00, which respondents borrowed from Metrobank and charged
against their credit line. Before respondents accepted the check, they first inquired from the drawee bank,
Metrobank, Cebu-Mabolo Branch which is also their depositary bank, if the subject check was
sufficiently funded, to which Metrobank answered in the positive. However, when respondents deposited
the check with Metrobank, Cebu-Mabolo Branch, the same was dishonored by the drawee bank for reason
PAYMENT STOPPED.
Respondents filed a collection suit [6] against petitioner and Lobitana before the trial court. In their
Complaint, respondents alleged, among other things, that they are holders in due course and for value of
Metrobank Check No. C-MA-142119406-CA and that they had no prior information concerning the
transaction between defendants.
In his Answer, petitioner denied respondents allegations that on the face of the subject check, no
condition or limitation was imposed and that respondents are holders in due course and for value of the
check. For her part, Lobitana denied the allegations in the complaint and basically claimed that the
transaction leading to the issuance of the subject check is a sale of a parcel of land by Vivencia Ompok
Consing to petitioner and that she was made a payee of the check only to facilitate its discounting.
The trial court ruled in favor of respondents and declared them due course holders of the subject
check, since there was no privity between respondents and defendants. The dispositive portion of the 14
March 1996 Decision of the trial court reads:
In summation, this Court rules for the Plaintiff and against the Defendants and hereby orders:

1.)
defendants to pay to Plaintiff, and severally, the amount of P1,000,000.00 representing the face
value of subject Metrobank check;
2.)
to pay to Plaintiff herein, jointly and severally, the sum of P101,748.00 for accrued and paid
interest;
3.)
to pay to Plaintiff, jointly and severally, moral damages in the amount of P100,000.00;
4.)
to pay to Plaintiff, jointly and severally, the sum of P200,000.00 for attorneys fees; and
5.)
to pay to Plaintiff, jointly and severally, litigation expenses in the sum of P10,000.00 and costs
of the suit.
SO ORDERED.
Only petitioner filed an appeal. Lobitana did not appeal the trial courts judgment.
The Ruling of the Court of Appeals
The Court of Appeals affirmed the trial courts finding that respondents are holders in due course
of Metrobank Check No. C-MA- 142119406-CA. The Court of Appeals pointed out that petitioners
own admission that respondents were never parties to the transaction among petitioner, Lobitana,
Concordio Toring, Cecilia Villacarlos, and Consing, proved respondents lack of knowledge of any
infirmity in the instrument or defect in the title of the person negotiating it. Moreover, respondents
verified from Metrobank whether the check was sufficiently funded before they accepted it. Therefore,
respondents must be excluded from the ambit of petitioners stop payment order.
The Court of Appeals modified the trial courts decision by deleting the award of interest, moral
damages, attorneys fees and litigation expenses. The Court of Appeals opined that petitioner was only
exercising (although incorrectly), what he perceived to be his right to stop the payment of the check
which he rediscounted. The Court of Appeals ruled that petitioner acted in good faith in ordering the
stoppage of payment of the subject check and thus, he must not be made liable for those amounts.
In its 16 August 2005 Decision, the Court of Appeals affirmed the trial courts decision with
modifications, thus:
WHEREFORE, premises considered, finding no reversible error in the decision of the lower court,
WE hereby DISMISS the appeal and AFFIRM the decision of the court a quo with modifications that the
award of interest, moral damages, attorneys fees and litigation expenses be deleted.
No pronouncement as to costs.
SO ORDERED.[8]
In its 30 November 2005 Resolution, the Court of Appeals denied petitioners motion for
reconsideration.
In denying the petitioners motion for reconsideration, the Court of Appeals noted that petitioner
raised the defense that the check is a crossed check for the first time on appeal (particularly in the motion
for reconsideration). The Court of Appeals rejected such defense considering that to entertain the same
would be offensive to the basic rules of fair play, justice, and due process.
Hence, this petition.
The Issues
Petitioner raises the following issues:
I.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE RESPONDENTS WERE
HOLDERS IN DUE COURSE. THE FACT THAT METROBANK CHECK NO. 142119406 IS A
CROSSED CHECK CONSTITUTES SUFFICIENT WARNING TO THE RESPONDENTS TO
EXERCISE EXTRAORDINARY DILIGENCE TO DETERMINE THE TITLE OF THE INDORSER.
II.
THE COURT OF APPEALS ERRED IN DENYING PETITIONERS MOTION FOR
RECONSIDERATION UPON THE GROUND THAT THE ARGUMENTS RELIED UPON HAVE
ONLY BEEN RAISED FOR THE FIRST TIME. EQUITY DEMANDS THAT THE COURT OF
APPEALS SHOULD HAVE MADE AN EXCEPTION TO PREVENT THE COMMISSION OF
MANIFEST WRONG AND INJUSTICE UPON THE PETITIONER. [9]

The Ruling of this Court

The petition is meritorious.
Respondents point out that petitioner raised the defense that Metrobank Check No. C-MA142119406-CA is a crossed check for the first time in his motion for reconsideration before the Court of
Appeals. Respondents insist that issues not raised during the trial cannot be raised for the first time on
appeal as it would be offensive to the elementary rules of fair play, justice and due process. Respondents
further assert that a change of theory on appeal is improper.
In his Answer, petitioner specifically denied, among others,
(1) Paragraph 4 of the
Complaint, concerning the allegation that on the face of the subject check, no condition or limitation was
imposed, and
(2) Paragraph 8 of the Complaint, regarding the allegation that respondents were
holders in due course and for value of the subject check. In his Special Affirmative Defenses, petitioner
claimed that for want or lack of the prestation, he could validly stop the payment of his check, and that
by rediscounting petitioners check, respondents took the risk of what might happen on the
check. Essentially, petitioner maintained that respondents are not holders in due course of the subject
check, and as such, respondents could not recover any liability on the check from petitioner.
Indeed, petitioner did not expressly state in his Answer or raise during the trial that Metrobank
Check No. C-MA-142119406-CA is a crossed check. It must be stressed, however, that petitioner
consistently argues that respondents are not holders in due course of the subject check, which is one of the
possible effects of crossing a check. The act of crossing a check serves as a warning to the holder that the
check has been issued for a definite purpose so that the holder thereof must inquire if he has received the
check pursuant to that purpose; otherwise, he is not a holder in due course. [10] Contrary to respondents
view, petitioner never changed his theory, that respondents are not holders in due course of the subject
check, as would violate fundamental rules of justice, fair play, and due process. Besides, the subject
check was presented and admitted as evidence during the trial and respondents did not and in fact cannot
deny that it is a crossed check.
In any event, the Court is clothed with ample authority to entertain issues or matters not raised in the
lower courts in the interest of substantial justice. [11] In Casa Filipina Realty v. Office of the President,
[12]
the Court held:
[T]he trend in modern-day procedure is to accord the courts broad discretionary power such that the
appellate court may consider matters bearing on the issues submitted for resolution which the parties
failed to raise or which the lower court ignored. Since rules of procedure are mere tools designed to
facilitate the attainment of justice, their strict and rigid application which would result in technicalities
that tend to frustrate rather than promote substantial justice, must always be avoided. Technicality should
not be allowed to stand in the way of equitably and completely resolving the rights and obligations of the
parties.[13]
Having disposed of the procedural issue, the Court shall now proceed to the merits of the case. The
main issue is whether respondents are holders in due course of Metrobank Check No. C-MA 142119406
CA as to entitle them to collect the face value of the check from its drawer or petitioner herein.
Section 52 of the Negotiable Instruments Law defines a holder in due course, thus:
A holder in due course is a holder who has taken the instrument under the following conditions:
(a)
That it is complete and regular upon its face;
(b)
That he became the holder of it before it was overdue, and without notice that it has been
previously dishonored, if such was the fact;
(c)
That he took it in good faith and for value;
(d)
That at the time it was negotiated to him, he had no notice of any infirmity in the instrument
or defect in the title of the person negotiating it.
In the case of a crossed check, as in this case, the following principles must additionally be
considered: A crossed check (a) may not be encashed but only deposited in the bank; (b) may be
negotiated only once to one who has an account with a bank; and (c) warns the holder that it has been
issued for a definite purpose so that the holder thereof must inquire if he has received the check pursuant
to that purpose; otherwise, he is not a holder in due course. [14]

Based on the foregoing, respondents had the duty to ascertain the indorsers, in this case Lobitanas,
title to the check or the nature of her possession. This respondents failed to do. Respondents verification
from Metrobank on the funding of the check does not amount to determination of Lobitanas title to the
check. Failing in this respect, respondents are guilty of gross negligence amounting to legal absence of
good faith,[15] contrary to Section 52(c) of the Negotiable Instruments Law. Hence, respondents are not
deemed holders in due course of the subject check. [16]
State Investment House v. Intermediate Appellate Court [17] squarely applies to this
case. There, New Sikatuna Wood Industries, Inc. sold at a discount to State Investment House three postdated crossed checks, issued by Anita Pea Chua naming as payee New Sikatuna Wood Industries,
Inc. The Court found State Investment House not a holder in due course of the checks. The Court also
expounded on the effect of crossing a check, thus:
Under usual practice, crossing a check is done by placing two parallel lines diagonally on the left
top portion of the check. The crossing may be special wherein between the two parallel lines is written the
name of a bank or a business institution, in which case the drawee should pay only with the intervention
of that bank or company, or crossing may be general wherein between two parallel diagonal lines are
written the words and Co. or none at all as in the case at bar, in which case the drawee should not
encash the same but merely accept the same for deposit.
The effect therefore of crossing a check relates to the mode of its presentment for payment. Under
Section 72 of the Negotiable Instruments Law, presentment for payment to be sufficient must be made (a)
by the holder, or by some person authorized to receive payment on his behalf
x x x As to who the
holder or authorized person will be depends on the instructions stated on the face of the check.
The three subject checks in the case at bar had been crossed generally and issued payable to New
Sikatuna Wood Industries, Inc. which could only mean that the drawer had intended the same for deposit
only by the rightful person, i.e., the payee named therein. Apparently, it was not the payee who presented
the same for payment and therefore, there was no proper presentment, and the liability did not attach to
the drawer.
Thus, in the absence of due presentment, the drawer did not become liable. Consequently, no right
of recourse is available to petitioner against the drawer of the subject checks, private respondent wife,
considering that petitioner is not the proper party authorized to make presentment of the checks in
question.
In this case, there is no question that the payees of the check, Lobitana or Consing, were not the
ones who presented the check for payment. Lobitana negotiated and indorsed the check to respondents in
exchange for P948,000.00. It was respondents who presented the subject check for payment; however, the
check was dishonored for reason PAYMENT STOPPED. In other words, it was not the payee who
presented the check for payment; and thus, there was no proper presentment. As a result, liability did not
attach to the drawer. Accordingly, no right of recourse is available to respondents against the drawer of
the check, petitioner herein, since respondents are not the proper party authorized to make presentment of
the subject check.
However, the fact that respondents are not holders in due course does not automatically mean that
they cannot recover on the check.[18] The Negotiable Instruments Law does not provide that a holder who
is not a holder in due course may not in any case recover on the instrument. The only disadvantage of a
holder who is not in due course is that the negotiable instrument is subject to defenses as if it were nonnegotiable.[19] Among such defenses is the absence or failure of consideration, [20] which petitioner
sufficiently established in this case. Petitioner issued the subject check supposedly for a loan in favor of
Consings group, who turned out to be a syndicate defrauding gullible individuals. Since there is in fact
no valid loan to speak of, there is no consideration for the issuance of the check. Consequently, petitioner
cannot be obliged to pay the face value of the check.
Respondents can collect from the immediate indorser,[21] in this case Lobitana. Significantly,
Lobitana did not appeal the trial courts decision, finding her solidarily liable to pay, among others, the
face value of the subject check. Therefore, the trial courts judgment has long become final and executory
as to Lobitana.

WHEREFORE, we GRANT the petition. We SET ASIDE the 16 August 2005 Decision and 30
November 2005 Resolution of the Court of Appeals in CA-G.R. CV No. 57994.
SO ORDERED.

DIGEST
FACTS
Petitioner was induced to lend a syndicate P3,000,000.00 to be secured by a real estate mortgage on
several parcels of land situated in Canjulao, Lapu-lapu City. Upon scrutinizing the documents involving
the properties, petitioner discovered that the documents covered rights over government properties.
Realizing he had been deceived, petitioner advised Metrobank tostop payment of his checks. However,
only the payment of Check No. C-MA- 142119406-CAwas ordered stopped. The other two checks were
already encashed by the payees. Meanwhile, Check No. C-MA- 142119406-CA (a cross-check) was
negotiated and indorsed to respondents by petitioner in exchange for cash in the sum of P948,000.00,
which respondents borrowed from Metrobank and charged against their credit line. Drawee bank,
Metrobank, Cebu-Mabolo Branch, which is also their depositary bank, answered that the checks were
sufficiently funded. However, the same was dishonored by the drawee bank when they tried to deposit it
for reason PAYMENT STOPPED. Respondents filed a collection suit against petitioner and Lobitana
before the trial court. The trial court ruled in favor of respondents and declared them due course holders
of the subject check, since there was no privity between respondents and defendants. CA affirmed
butmodified the trial courts decision by deleting the award of interest, moral damages, attorneys fees and
litigation expenses. The Court of Appeals opined that petitioner was only exercising (although
incorrectly), what he perceived to be his right to stop the payment of the check which he rediscounted.
The Court of Appeals ruled that petitioner acted in good faith in ordering the stoppage of payment of the
subject check and thus, he must not be made liable for those amounts.
ISSUE
Whether or not The respondents were holders in due course?
HELD
PETITION GRANTED. Section 52 of the Negotiable Instruments Law defines a holder in due course,
thus: A holder in due course is a holder who has taken the instrument under the following conditions: (a)
That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue,
and without notice that it has been previously dishonored, if such was the fact;(c) That he took it in good
faith and for value;(d) That at the time it was negotiated to him, he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it. In the case of a crossed check, as in this case,
the following principles must additionally be considered: A crossed check (a) may not be encashed but
only deposited in the bank; (b) maybe negotiated only once to one who has an account with a bank;
and (c) warns the holder that it has been issued for a definite purpose so that the holder thereof must
inquire if he has received the check pursuant to that purpose; otherwise, he is not a holder in due course.
Based on the foregoing, respondents had the duty to ascertain the indorsers, in this case Lobitanas, title
to the check or the nature of her possession. This, respondents failed to do. Respondents verification
from Metrobank on the funding of the check does not amount to determination of Lobitanas title to the
check. Failing in this respect, respondents are guilty of gross negligence amounting to legal absence of
good faith,[15] contrary to Section 52(c) of the Negotiable Instruments Law. Hence, respondents are not
deemed holders in due course of the subject check. However, the fact that respondents are not holders in
due course does not automatically mean that they cannot recover on the check. The Negotiable
Instruments Law does not provide that a holder who is not a holder in due course may not in any case
recover on the instrument. The only disadvantage of a holder who is not in due course is that the
negotiable instrument is subject to defenses as if it were non-negotiable. Among such defenses is the
absence or failure of consideration,[ which petitioner sufficiently established in this case. Petitioner issued
the subject check supposedly for a loan in favor of Consings group, who turned out to be a syndicate
defrauding gullible individuals. Since there is in fact no valid loan to speak of, there is no consideration
for the issuance of the check. Consequently, petitioner cannot be obliged to pay the face value of the
check.

G.R. No. L-24224

November 3, 1925
THE PHILIPPINE NATIONAL BANK, plaintiff-appellee,
vs.
RAMON MAZA and FRANCISCO MECENAS, defendants-appellants.
Lutero, Lutero and Maza for appellants.
Roman J. Lacson for appellee.
MALCOLM, J.:
The Philippine National Bank is suing Ramon Maza and Francisco Mecenas on five promissory notes of
ten thousand pesos (P10,000) each.
Maza and Mecenas executed two of the promissory notes on January 20, 1921, due three months after
date. The three other notes due four months after date. The three other notes due four months after date
were executed by the same parties on January 21, 1921. One of the above-mentioned notes, typical of the
rest reads as follows:
P10,000
ILOILO, I.F. Jan. 20, 1921.
A los tres meses de la fecha, pagaremos mancomunada y solidariamente a la orden del Philippine
National Bank, Iloilo, Iloilo, I. F., la cantidad de diez mil (P10,000) pesos en el Philippine National Bank.
Iloilo, I. F.
Valor Recibido.
No. 340 Pagadero el 4/20/21
(Fdos.) RAMOS MAZA
FRANCISCO MECENAS
The notes were not taken up by Maza and Mecenas at maturity. The obligations with accumulated interest
totaled P65,207.73 on September 22, 1924.
To recover the amounts stated on the face of the notes with back interest, action was begun by the
Philippine National Bank in the court of first instance of Iloilo against Ramon Maza and Francisco
Mecenas. The special defense interposed by the defendants was that the promissory notes were sent in
blank to them by Enrique Echaus with the request that they sign them so that he, Echaus, might negotiate
them with the Philippine National Bank in case of need; that the defendants have not negotiated the
promissory notes with the bank, nor have they received the value thereof, or delivered them to the bank in
payment of any preexisting debt; and that it was Enrique Echaus who negotiated the noted with the bank
and who is accordingly the real party in interest and the party liable for the payment of the notes.
Defendants also moved that Echaus be ordered included as one of the defendants. The trial judge denied
the motion. Judgment was rendered in favor of the plaintiff and against the defendants jointly and
severally for a total of P65,207.73, with interest at 9 per cent on twenty thousand pesos (P5) a day, and
with interest at 9 per cent on thirty thousand pesos (P30,000) from September 23, 1924, or at the rate of
P7.5 a day, and with costs.
Four errors are assigned by the defendants on appeal. The first error relates to the order of the trial judge
refusing to require Enrique Echaus to become a party to the action. As the defendants failed to duly
except to the order, they are not now entitled to ask this court to review the ruling. Moreover, it is not
evident that Echaus was an indispensable party. The other three error go to the merits and rest on the same
foundation as the special defense.
From the pleadings and the stipulation of facts, it is deduced that the defendants admit the genuineness
and due execution of the instruments sued on . Neither do the appellants point out any mistake in regard
to the amount and interest that the lower court sentenced them to pay to the plaintiff bank. Predicated on
these premises, from whatever point of view we look at the case, we arrive at the same conclusion that
the defendants are liable.
On the first assumption that Maza and Mecenas were the principals and Echaus the agent, as argued by
counsel for the appellee, the principals must fulfill their obligations. On another assumption, which is a

fact, that the defendants are exactly what they appear to be, the makers of the negotiable instruments, then
they must keep their engagement and must pay as promised. Their liability on the instruments is primary
and unconditional.
The most plausible and reasonable stand for the defendants is that they are accommodation parties. but as
accommodation parties, the defendants having signed the instruments without receiving value therefor
and for the purpose of lending their names to some other person, are still liable on the instruments. The
law now is that the accommodation party can claim no benefit as such, but he is liable according to the
face of his undertaking, the same as if he were himself financially interested in the transaction. lawph!
1.net
The defense is made to the action that the defendants never received the value of the promissory notes. it
is, of course, fundamental that an instrument given without consideration does not create any obligation at
law or in equity in favor of the payee. However, to fasten liability upon an accommodation maker, it is not
necessary that any consideration should move to him. The consideration which supports the promise of
the accommodation maker is that parted with by the person taking the note and received by the person
accommodated.
While perhaps unnecessary to this decision, it may properly be remarked that when the accommodation
parties make payment to the holder of the notes, they have the right to sue the accommodated party for
reimbursement, since the relation between them is in effect that of principal and sureties, the
accommodation parties being the sureties.
Judgment affirmed with costs.

DIGEST
FACTS:
Maza and Macenas executed a total of five promissory notes. These were not paid at maturity. And to
recover the amounts stated on the face of the promissory notes, PNB initiated an action against the
two. The special defense posed by the two is that the promissory notes were delivered to
them in blank by a certain Enchaus and were made to sign the notes so that the latter could
secure a loan from the bank. They also alleged that they never negotiated the notes with the bank nor
have they received any value thereof. They also prayed that Enchaus be impleaded in the
complaint but such was denied.
The trial court then held in favor of the bank.
HELD:
The defendants attested to the genuineness of the instruments sued on. Neither did they point
out any mistake in regard to the amount and interest that the lower court sentenced them to
pay. Given such, the defendants are liable. They appear as the makers of the promissory notes
and as such, they must keep their engagement and pay as promised.
And assuming that they are accommodation parties, the defendants having signed the instruments without
receiving value thereof, for the purpose of lending their names to some other person, are still liable for the
promissory notes. The law now is such that an accommodation party cannot claim no benefit as such,
but he is liable according to the face of his undertaking, the same as he himself financially interest
in the transaction. It is also no defense to say that they didn't receive the value of the notes. To fasten
liability however to an accommodation maker, it is not necessary that any consideration should move to
him. The accommodation which supports the promise of the accommodation maker is that parted
with by the person taking the note and received by the person accommodated.

June 29, 1965

G.R. Nos. L-20787-8
J. ANTONIO ARANETA, plaintiff-appellee,
vs.
ANTONIO PEREZ, defendant-appellant.
Araneta, Mendoza and Papa for plaintiff-appellee.
Alfonso Felix, Jr. for defendant-appellant.
BAUTISTA ANGELO, J.:
On June 16, 1961, Antonio M. Perez executed a promissory note wherein he agreed to pay J. Antonio
Araneta, or order, the sum of P3,700.00 119 days from said date, or on October 13, 1961, and if it is not
paid on the date of maturity, to pay interest at 9% per annum on the amount of the loan, and P370.00 as
attorney's fees in addition to costs and other disbursements taxable under the Rules of Court.
The note having become due and Antonio M. Perez having failed to pay it despite demand made upon
him to do so, Araneta filed on October 31, 1961 a complaint in the Municipal Court of Manila to collect
its import under the terms therein stipulated (Civil Case No. 92265).
In his answer, defendant Perez admitted the execution of the promissory note as well as his failure to pay
it despite its maturity and demand, but he averred certain allegations that were irrelevant to the complaint.
Thus, Perez alleged that the proceeds of the note were applied by him to the payment of the medical
treatment of his minor daughter Angela Perez y Tuason, who is the beneficiary of the trust then
administered by Araneta as trustee in Special Proceeding No. Q-73 of the Court of First Instance of
Quezon City, and that the trust estate is bound to pay the expenses of said treatment because they were for
the benefit of said minor and so the personal fund he borrowed from Araneta and for which he executed
the aforesaid promissory note should be paid by Araneta in the manner above-stated. In the same answer,
Perez set up a counterclaim demanding several amounts by way of moral damages, exemplary damages,
and attorney's fees.
On motion for judgment on the pleadings filed by Araneta, and without any opposition on the part of
defendant Perez, the municipal court rendered a decision on April 1962 ordering Perez to pay the amounts
prayed for in the complaint and dismissing his counterclaim for damages. His motion for reconsideration
having been denied, Perez appealed to the court a quo where the appeal was docketed as Civil Case No.
50707 and where he filed practically the same answer he filed in the municipal court.
In the meantime, or on February 8, 1962, Perez filed a complaint in the Municipal Court of Manila
against Araneta in his capacity as trustee of the minor child Angela Perez y Tuason in Special Proceeding
No. Q-73 of the Court of First Instance of Quezon City wherein, making reference to Civil Case No.
92265 filed against him by Araneta, he repeated the same allegations contained in the answer he
interposed to the complaint of Araneta and prayed that Araneta as trustee be required to pay Perez the
amount of P3,700.00 advanced by the latter in order to meet the obligation of the trust estate. And on the
basis of a motion to dismiss filed by Araneta as trustee, and over the opposition of Perez, the municipal
court dismissed the latter's complaint. His motion for reconsideration having been denied, Perez appealed
to the court a quo were his case was docketed as Civil Case No. 50706 and where he filed an amended
complaint against Araneta.
Considering that the two cases involved the same parties and the same promissory note, they were
ordered consolidated. And on September 7, 1962, the court a quo issued a joint order wherein it affirmed
the judgment on the pleadings rendered by the municipal court in Civil Case No. 50707, while it affirmed
the order of dismissal that was likewise issued by the same court in Civil Case No. 50706. His motion for
reconsideration filed in the two consolidated cases having been denied, Perez interposed the present joint
appeal.
Appellant contends that (1) the court a quo erred in finding Antonio Perez indebted to Antonio Araneta in
the sum of P3,700.00 requiring him to pay said amount to Araneta with interest at the rate of 9% per
annum from October 13, 1961 until its full payment, plus P370.00 as attorney's fees, and in failing to find
that the true debtor was the trust estate of the children of Angela I. Tuason; and (2) assuming that the

court a quocorrectly ruled in requiring Antonio Perez to pay the above amount to Antonio Araneta,
nevertheless, the court a quo erred in failing to require Araneta in his capacity as trustee of the aforesaid
children to reimburse Antonio Perez that amount upon proof by the latter of the payment made by him of
said amount.
1. The promissory note signed by appellant clearly states that he agreed to pay Araneta or order the sum
of P3,700.00 on October 13, 1961 and if the same is not paid on said date to pay 9% interest thereon per
annum until fully paid, plus the sum of P370.00 as attorney's fees, in addition to the costs and other
disbursements taxable under the Rules of Court. Under these terms it is clear that appellant bound himself
to pay personally said promissory note which he cannot shift to another without the consent of the payee.
Such is the undertaking of the maker. Indeed, Section 60 of the Negotiable Instrument, Law provides that
"the maker of a negotiable instrument by making it engages that he will pay it according to its tenor and
admits the existence of the payee and his then capacity to indorse so that appellant cannot now escape
liability as maker by alleging that he spent the money for the medical treatment of his daughter since it is
not the payee's concern to know how said proceeds should be spent. That is the sole concern of the maker.
Payee's interest is merely to see that the note be paid according to its terms.
Neither can appellant escape liability by resorting to the expedient that appellee, by moving for judgment
on the pleadings, is deemed to have admitted the material allegations of his answer in Civil Case No.
50707, for the reason that said allegations are irrelevant and have no bearing whatsoever on appellant's
personal liability. In this connection, it is meet to recall that appellant, after admitting the execution of the
promissory note and his failure to pay it despite demand thereof, made averments which in substance had
the effect of a recoupment of what he had spent against any share in the trust fund that may come to the
minor for whose benefit he claims to have spent the money.
Thus, he made the following affirmative defenses: That Da. Angela Tuason died in 1948 leaving estate
worth five million pesos 2/9 of which she left in trust for the benefit of the children of said Angela Tuason
under the administration of appellee Araneta; that the will was prepared by Araneta; that the estate is now
worth one million pesos and despite thereof Araneta professed inability to pay the allowance of
P18,000.00 a year due the beneficiaries; that Araneta sold some income producing properties of the
trust and speculated with trust funds in the stock market; that appellant had to advance certain expenses
for the minors and secure for them properties worth at least a quarter of a million pesos; that the two
beneficiaries are for unknown reasons short of funds so, that the appellant had to borrow the sum of
P3,700.00 for the medical treatment of minor Angela Perez y Tuason; that appellant asked the trustee to
advance said amount with the concurrence of the beneficiaries but the trustee refused though he offered to
lend the money out of his own pocket, and so appellant executed the promissory note in question.
It is clear that insofar as the personal liability of appellant Perez on the promissory note is concerned,
which he admittedly executed for value in favor of appellee Araneta, all the above recited allegations are
irrelevant and immaterial and cannot tender any issue that will affect his personal liability under the note.
And this is so because the allegation regarding the existence of the trust and its mismanagement on the
part of appellee Araneta as trustee, certainly, has nothing to do with the money lent by him to appellant.
Neither has the allegation that the proceeds of the note were spent by appellant for the medical treatment
of minor Angela anything to do with his personal obligation because the destination of the proceeds of
said note is certainly not the concern of Araneta. We are, therefore, of the opinion that the court a quo did
not err in rendering judgment on the pleadings in the light of what is averred in appellee's complaint.
2. But even assuming for the sake of argument that what is claimed by appellant as to how he spent the
proceeds of the notes is true, that will not exempt him from his liability to Araneta but would merely give
him some basis to claim for recoupment against the share of the trust fund belonging to the benefited
minor if it is properly shown that there is fund coming to said minor. Here, no such showing was made.
Moreover, the trust herein created merely provides for delivery to the beneficiaries of the share that may
correspond to them in the net income of the trust fund, but does not impose upon the trustee the duty to
pay any obligation or expenses that may be needed by said beneficiaries.
Appellant has cited several authorities to support his stand that the medical expenses in question which
were made for the sake of the beneficiary should be borne by the trust fund, but from an examination

thereof one may see that they require that beneficiary be insolvent in order that the trust estate may be
obliged to shoulder the expenses.[[1]] Here the beneficiary is not in that situation for, as appellant himself
has admitted, said beneficiary has properties that are worth at least a quarter of a million pesos which are
under the Guardianship Court of Manila. There is, therefore, no room for the application of the ruling laid
down in the cited authorities.
The other authorities cited by appellant to bolster his claim are also inapplicable for they sanction the
applications of the trust fund to medical or other expenses of the beneficiaries only when there is absolute
necessity therefor, or when they themselves are unable to provide for those expenses. As already stated,
the beneficiaries here are well off or have enough to provide for their necessities if only their guardian
should take steps to attend to them as required by the circumstances. But instead of doing so, appellant
insists on having appellee recoup with trust money what he had allegedly spent for his daughter's benefit
thus giving rise to the present dual litigation.
We take note of the written manifestation or "constancia" submitted to this Court by appellant dated
August 22, 1963 in his capacity as judicial guardian of the beneficiaries herein, as well as of supplement
thereof made on September 20, 1963, inviting attention of this Court to an order issued by the Juvenile
and Domestic Relations Court authorizing appellant as such guardian to assign the amount of P3,700.00
to appellee herein for the purpose of reimbursing him for the amount he had advanced and which is the
subject of the promissory note for which reason appellant now claims that this case is now moot and
should be dismissed. But to such manifestation appellee has filed a rejoinder dated September 2, 1963
stating that the request for dismissal is untenable since the order appealed from calls not only for the
payment of the sum of P3,700.00 but of 9% interest thereon per annum from October 13, 1961 until
payment and of the sum of P370.00 as attorney's fees.
We hold that appellant's claim is not justified considering that appellee was forced to file the present suit
in view of appellant's refusal to honor the note under consideration. The request, therefore, for dismissal
has no legal basis.
WHEREFORE, with the modification that the payment of interest on the note should start from the date
of extrajudicial demand, or October 18, 1961, we hereby affirm the order appealed from in all other
respects, without pronouncement as to costs.
Bengzon, C.J., Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala, Makalintal, Bengzon, J.P., and
Zaldivar,
JJ.,
concur.
Barrera, J., is on leave.
Footnotes
[[ ]]
1 So where a trust fund is to be applied to the support of the beneficiary, a claim for medical services
rendered on the request of the beneficiary with the knowledge of the trustee, may be enforced in equity as
against the trustee where the beneficiary is insolvent and it does not appear that the trustee had furnished
him with all that is necessary with respect to medical attendance. (90 C.J.S. p. 113)

G.R. No. 168274

August 20, 2008
FAR EAST BANK & TRUST COMPANY, petitioner,
vs.
GOLD PALACE JEWELLERY CO., as represented by Judy L. Yang, Julie Yang-Go and Kho Soon
Huat, respondent.
DECISION
NACHURA, J.:
For the review of the Court through a Rule 45 petition are the following issuances of the Court of Appeals
(CA) in CA-G.R. CV No. 71858: (1) the March 15, 2005 Decision 1 which reversed the trial court's ruling,
and (2) the May 26, 2005 Resolution2 which denied the motion for reconsideration of the said CA
decision.
The instant controversy traces its roots to a transaction consummated sometime in June 1998, when a
foreigner, identified as Samuel Tagoe, purchased from the respondent Gold Palace Jewellery Co.'s (Gold
Palace's) store at SM-North EDSA several pieces of jewelry valued atP258,000.00. 3 In payment of the
same, he offered Foreign Draft No. M-069670 issued by the United Overseas Bank (Malaysia) BHD
Medan Pasar, Kuala Lumpur Branch (UOB), addressed to the Land Bank of the Philippines, Manila
(LBP), and payable to the respondent company forP380,000.00. 4
Before receiving the draft, respondent Judy Yang, the assistant general manager of Gold Palace, inquired
from petitioner Far East Bank & Trust Company's (Far East's) SM North EDSA Branch, its neighbor mall
tenant, the nature of the draft. The teller informed her that the same was similar to a manager's check, but
advised her not to release the pieces of jewelry until the draft had been cleared. 5 Following the bank's
advice, Yang issued Cash Invoice No. 1609 6 to the foreigner, asked him to come back, and informed him
that the pieces of jewelry would be released when the draft had already been cleared. 7 Respondent Julie
Yang-Go, the manager of Gold Palace, consequently deposited the draft in the company's account with
the aforementioned Far East branch on June 2, 1998. 8
When Far East, the collecting bank, presented the draft for clearing to LBP, the drawee bank, the latter
cleared the same 9-UOB's account with LBP was debited, 10 and Gold Palace's account with Far East was
credited with the amount stated in the draft.11
The foreigner eventually returned to respondent's store on June 6, 1998 to claim the purchased goods.
After ascertaining that the draft had been cleared, respondent Yang released the pieces of jewelry to
Samuel Tagoe; and because the amount in the draft was more than the value of the goods purchased, she
issued, as his change, Far East Check No. 1730881 12 for P122,000.00.13This check was later presented for
encashment and was, in fact, paid by the said bank. 14
On June 26, 1998, or after around three weeks, LBP informed Far East that the amount in Foreign Draft
No. M-069670 had been materially altered from P300.00 to P380,000.00 and that it was returning the
same. Attached to its official correspondence were Special Clearing Receipt No. 002593 and the duly
notarized and consul-authenticated affidavit of a corporate officer of the drawer, UOB. 15 It is noted at this
point that the material alteration was discovered by UOB after LBP had informed it that its funds were
being depleted following the encashment of the subject draft. 16 Intending to debit the amount from
respondent's account, Far East subsequently refunded the P380,000.00 earlier paid by LBP.
Gold Palace, in the meantime, had already utilized portions of the amount. Thus, on July 20, 1998, as the
outstanding balance of its account was already inadequate, Far East was able to debit
onlyP168,053.36,17 but this was done without a prior written notice to the account holder. 18 Far East only
notified by phone the representatives of the respondent company. 19
On August 12, 1998, petitioner demanded from respondents the payment of P211,946.64 or the difference
between the amount in the materially altered draft and the amount debited from the respondent company's
account.20 Because Gold Palace did not heed the demand, Far East consequently instituted Civil Case No.
99-296 for sum of money and damages before the Regional Trial Court (RTC), Branch 64 of Makati
City.21

In their Answer, respondents specifically denied the material allegations in the complaint and interposed
as a defense that the complaint states no cause of action-the subject foreign draft having been cleared and
the respondent not being the party who made the material alteration. Respondents further counterclaimed
for actual damages, moral and exemplary damages, and attorney's fees considering, among others, that the
petitioner had confiscated without basis Gold Palace's balance in its account resulting in operational loss,
and had maliciously imputed to the latter the act of alteration. 22
After trial on the merits, the RTC rendered its July 30, 2001 Decision 23 in favor of Far East, ordering Gold
Palace to pay the former P211,946.64 as actual damages and P50,000.00 as attorney's fees. 24 The trial
court ruled that, on the basis of its warranties as a general indorser, Gold Palace was liable to Far East. 25
On appeal, the CA, in the assailed March 15, 2005 Decision, 26 reversed the ruling of the trial court and
awarded respondents' counterclaim. It ruled in the main that Far East failed to undergo the proceedings on
the protest of the foreign draft or to notify Gold Palace of the draft's dishonor; thus, Far East could not
charge Gold Palace on its secondary liability as an indorser. 27 The appellate court further ruled that the
drawee bank had cleared the check, and its remedy should be against the party responsible for the
alteration. Considering that, in this case, Gold Palace neither altered the draft nor knew of the alteration, it
could not be held liable.28 The dispositive portion of the CA decision reads:
WHEREFORE, premises considered, the appeal is GRANTED; the assailed Decision dated 30 July 2001
of the Regional Trial Court of Makati City, Branch 64 is hereby REVERSED and SET ASIDE; the
Complaint dated January 1999 is DISMISSED; and appellee Far East Bank and Trust Company is hereby
ordered to pay appellant Gold Palace Jewellery Company the amount of Php168,053.36 for actual
damages plus legal interest of 12% per annum from 20 July 1998, Php50,000.00 for exemplary damages,
and Php50,000.00 for attorney's fees. Costs against appellee Far East Bank and Trust Company. 29
The appellate court, in the further challenged May 26, 2005 Resolution, 30 denied petitioner's Motion for
Reconsideration,31 which prompted the petitioner to institute before the Court the instant Petition for
Review on Certiorari.32
We deny the petition.
Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the acceptor, by
accepting the instrument, engages that he will pay it according to the tenor of his acceptance.33This
provision applies with equal force in case the drawee pays a bill without having previously accepted it.
His actual payment of the amount in the check implies not only his assent to the order of the drawer and a
recognition of his corresponding obligation to pay the aforementioned sum, but also, his clear compliance
with that obligation.34 Actual payment by the drawee is greater than his acceptance, which is merely a
promise in writing to pay. The payment of a check includes its acceptance. 35
Unmistakable herein is the fact that the drawee bank cleared and paid the subject foreign draft and
forwarded the amount thereof to the collecting bank. The latter then credited to Gold Palace's account the
payment it received. Following the plain language of the law, the drawee, by the said payment, recognized
and complied with its obligation to pay in accordance with the tenor of his acceptance. The tenor of the
acceptance is determined by the terms of the bill as it is when the drawee accepts. 36 Stated simply, LBP
was liable on its payment of the check according to the tenor of the check at the time of payment, which
was the raised amount.
Because of that engagement, LBP could no longer repudiate the payment it erroneously made to a due
course holder. We note at this point that Gold Palace was not a participant in the alteration of the draft,
was not negligent, and was a holder in due course-it received the draft complete and regular on its face,
before it became overdue and without notice of any dishonor, in good faith and for value, and absent any
knowledge of any infirmity in the instrument or defect in the title of the person negotiating it. 37 Having
relied on the drawee bank's clearance and payment of the draft and not being negligent (it delivered the
purchased jewelry only when the draft was cleared and paid), respondent is amply protected by the said
Section 62. Commercial policy favors the protection of any one who, in due course, changes his position
on the faith of the drawee bank's clearance and payment of a check or draft. 38
This construction and application of the law gives effect to the plain language of the NIL 39 and is in line
with the sound principle that where one of two innocent parties must suffer a loss, the law will leave the

loss where it finds it.40 It further reasserts the usefulness, stability and currency of negotiable paper
without seriously endangering accepted banking practices. Indeed, banking institutions can readily protect
themselves against liability on altered instruments either by qualifying their acceptance or certification, or
by relying on forgery insurance and special paper which will make alterations obvious. 41 This is not to
mention, but we state nevertheless for emphasis, that the drawee bank, in most cases, is in a better
position, compared to the holder, to verify with the drawer the matters stated in the instrument. As we
have observed in this case, were it not for LBP's communication with the drawer that its account in the
Philippines was being depleted after the subject foreign draft had been encashed, then, the alteration
would not have been discovered. What we cannot understand is why LBP, having the most convenient
means to correspond with UOB, did not first verify the amount of the draft before it cleared and paid the
same. Gold Palace, on the other hand, had no facility to ascertain with the drawer, UOB Malaysia, the true
amount in the draft. It was left with no option but to rely on the representations of LBP that the draft was
good.
In arriving at this conclusion, the Court is not closing its eyes to the other view espoused in common law
jurisdictions that a drawee bank, having paid to an innocent holder the amount of an uncertified, altered
check in good faith and without negligence which contributed to the loss, could recover from the person
to whom payment was made as for money paid by mistake.42 However, given the foregoing discussion, we
find no compelling reason to apply the principle to the instant case.
The Court is also aware that under the Uniform Commercial Code in the United States of America, if an
unaccepted draft is presented to a drawee for payment or acceptance and the drawee pays or accepts the
draft, the person obtaining payment or acceptance, at the time of presentment, and a previous transferor
of the draft, at the time of transfer, warrant to the drawee making payment or accepting the draft in good
faith that the draft has not been altered.43 Nonetheless, absent any similar provision in our law, we cannot
extend the same preferential treatment to the paying bank.
Thus, considering that, in this case, Gold Palace is protected by Section 62 of the NIL, its collecting
agent, Far East, should not have debited the money paid by the drawee bank from respondent company's
account. When Gold Palace deposited the check with Far East, the latter, under the terms of the deposit
and the provisions of the NIL, became an agent of the former for the collection of the amount in the
draft.44 The subsequent payment by the drawee bank and the collection of the amount by the collecting
bank closed the transaction insofar as the drawee and the holder of the check or his agent are concerned,
converted the check into a mere voucher,45 and, as already discussed, foreclosed the recovery by the
drawee of the amount paid. This closure of the transaction is a matter of course; otherwise, uncertainty in
commercial transactions, delay and annoyance will arise if a bank at some future time will call on the
payee for the return of the money paid to him on the check. 46
As the transaction in this case had been closed and the principal-agent relationship between the payee and
the collecting bank had already ceased, the latter in returning the amount to the drawee bank was already
acting on its own and should now be responsible for its own actions. Neither can petitioner be considered
to have acted as the representative of the drawee bank when it debited respondent's account, because, as
already explained, the drawee bank had no right to recover what it paid. Likewise, Far East cannot invoke
the warranty of the payee/depositor who indorsed the instrument for collection to shift the burden it
brought upon itself. This is precisely because the said indorsement is only for purposes of collection
which, under Section 36 of the NIL, is a restrictive indorsement. 47 It did not in any way transfer the title
of the instrument to the collecting bank. Far East did not own the draft, it merely presented it for payment.
Considering that the warranties of a general indorser as provided in Section 66 of the NIL are based upon
a transfer of title and are available only to holders in due course, 48 these warranties did not attach to the
indorsement for deposit and collection made by Gold Palace to Far East. Without any legal right to do so,
the collecting bank, therefore, could not debit respondent's account for the amount it refunded to the
drawee bank.
The foregoing considered, we affirm the ruling of the appellate court to the extent that Far East could not
debit the account of Gold Palace, and for doing so, it must return what it had erroneously taken. Far East's

remedy under the law is not against Gold Palace but against the drawee-bank or the person responsible for
the alteration. That, however, is another issue which we do not find necessary to discuss in this case.
However, we delete the exemplary damages awarded by the appellate court. Respondents have not shown
that they are entitled to moral, temperate or compensatory damages. 49 Neither was petitioner impelled by
malice or bad faith in debiting the account of the respondent company and in pursuing its cause. 50 On the
contrary, petitioner was honestly convinced of the propriety of the debit. We also delete the award of
attorney's fees for, in a plethora of cases, we have ruled that it is not a sound public policy to place a
premium on the right to litigate. No damages can be charged to those who exercise such precious right in
good faith, even if done erroneously.51
WHEREFORE, premises considered, the March 15, 2005 Decision and the May 26, 2005 Resolution of
the Court of Appeals in CA-G.R. CV No. 71858 are AFFIRMED WITH THE MODIFICATION that
the award of exemplary damages and attorney's fees is DELETED.
SO ORDERED.

DIGEST

FACTS

June 1998: Samuel Tagoe, a foreigner, purchased from Gold Palace Jewellery Co.'s (Gold
Palace's) store at SM-North EDSA several pieces of jewelry valued at P258,000
paid w/ Foreign Draft issued by the United Overseas Bank (Malaysia) to Land Bank of
the Philippines, Manila (LBP) for P380,000
Teller of Far East Bank, next door tenant, informed Julie Yang-Go (manager of Gold Palace) that
a foreign draft has similar nature to a manager's check, but advised her not to release the pieces of
jewelry until the draft had been cleared
Yang issued Cash Invoice so the jewelries can be released
Yang deposited the draft in the company's account with the Far East on June 2, 1998
When Far East, the collecting bank, presented the draft for clearing to LBP, the drawee bank,
cleared the it and Gold Palace's account with Far East was credited
June 6, 1998: The foreigner eventually returned to claim the purchased goods.
After ascertaining that the draft had been cleared, Yang released the pieces of jewelry and
his change, Far East Check of P122,000 paid by the bank
June 26, 1998: LBP informed Far East that the Foreign Draft had been materially altered from
P300 to P300,000and that it was returning the same
Far East refunded the amount to LBP and debit only P168,053.36 of the amount left in
Gold Palace' account without a prior written notice to the account holder
Far East only notified by phone the representatives of the Gold Palace
August 12, 1998: Far East demanded from Gold Palace the payment of balance and upon refusal
filed in the RTC
RTC: in favor of Far East on the basis that Gold Palace was liable under the liabilities of a general
indorser
CA: reversed since Far East failed to undergo the proceedings on the protest of the foreign draft
or to notify Gold Palace of the draft's dishonor; thus, Far East could not charge Gold Palace on its
secondary liability as an indorser

ISSUE
Whether or not Gold Palace should be liable for the altered Foreign Draft
HELD
NO. AFFIRMED WITH THE MODIFICATION that the award of exemplary damages and attorney's
fees is DELETED
Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the acceptor, by
accepting the instrument, engages that he will pay it according to the tenor of his acceptance.
This provision applies with equal force in case the drawee pays a bill without having previously
accepted it.
Actual payment by the drawee is greater than his acceptance, which is merely a promise
in writing to pay
The payment of a check includes its acceptance
The tenor of the acceptance is determined by the terms of the bill as it is when the drawee
accepts.
LBP was liable on its payment of the check according to the tenor of the check at the time
of payment, which was the raised amount.
Gold Palace was not a participant in the alteration of the draft, was not negligent, and was a
holder in due course
LBP, having the most convenient means to correspond with UOB, did not first verify the
amount of the draft before it cleared and paid the same

Gold Palace had no facility to ascertain with the drawer, UOB Malaysia, the true amount
inthe draft. It was left with no option but to rely on the representations of LBP that the
draft was good
Principle that the drawee bank, having paid to an innocent holder the amount of an uncertified,
altered check in good faith and without negligence which contributed to the loss, could recover
from the person to whom payment was made as for money paid by mistake - NOT applicable
The Court is also aware that under the Uniform Commercial Code in the United States of
America, if an unaccepted draft is presented to a drawee for payment or acceptance and the
drawee pays or accepts the draft, the person obtaining payment or acceptance, at the time of
presentment, and a previous transferor of the draft, at the time of transfer, warrant to the drawee
making payment or accepting the draft in good faith that the drafthas not been altered - absent
any similar provision in our law, cannot extend the same preferential treatment to the paying bank
Gold Palace is protected by Section 62 of the NIL, its collecting agent, Far East, should not have
debited the money paid by the drawee bank from respondent company's account. When Gold
Palace deposited the check with Far East, it, under the terms of the deposit and the provisions of
the NIL, became an agent of the Gold Palace for the collection of the amount in the draft
The subsequent payment by the drawee bank and the collection of the amount by the collecting
bank closed the transaction insofar as the drawee and the holder of the check or his agent are
concerned, converted the check into a mere voucher, and, as already discussed, foreclosed the
recovery by the drawee of the amount paid. This closure of the transaction is a matter of course;
otherwise, uncertainty in commercial transactions, delay and annoyance will arise if a bank at
some future time will call on the payee for the return of the money paid to him on the check
As the transaction in this case had been closed and the principal-agent relationship
between the payee and the collecting bank had already ceased, the latter in returning the
amount to the drawee bank was already acting on its own and should now be responsible
for its own actions. Neither can petitioner be considered to have acted as the
representative of the drawee bank when it debited respondent's account, because, as
already explained, the drawee bank had no right to recover what it paid. Likewise, Far
East cannot invoke the warranty of the payee/depositor who indorsed the instrument for
collection to shift the burden it brought upon itself. This is precisely because the said
indorsement is only for purposes of collection which, under Section 36 of the NIL, is a
restrictive indorsement. It did not in any way transfer the title of the instrument to the
collecting bank. Far East did not own the draft, it merely presented it for payment.
Considering that the warranties of a general indorser as provided in Section 66 of the NIL
are based upon a transfer of title and are available only to holders in due course, these
warranties did not attach to the indorsement for deposit and collection made by Gold
Palace to Far East. Without any legal right to do so, the collecting bank, therefore, could
not debit respondent's account for the amount it refunded to the drawee bank.

BANK OF THE PHILIPPINE ISLANDS, Petitioner,

- versus COURT OF APPEALS, ANNABELLE A. SALAZAR, and JULIO R. TEMPLONUEVO,
Respondents.
G.R. No. 136202 January 25, 2007
DECISION
AZCUNA, J.:
This is a petition for review under Rule 45 of the Rules of Court seeking the reversal of the
Decision[1] dated April 3, 1998, and the Resolution[2] dated November 9, 1998, of the Court of Appeals in
CA-G.R. CV No. 42241
The facts[3] are as follows:
A.A. Salazar Construction and Engineering Services filed an action for a sum of money with damages
against herein petitioner Bank of the Philippine Islands (BPI) on December 5, 1991 before Branch 156 of
the Regional Trial Court (RTC) of Pasig City. The complaint was later amended by substituting the name
of Annabelle A. Salazar as the real party in interest in place of A.A. Salazar Construction and Engineering
Services. Private respondent Salazar prayed for the recovery of the amount of Two Hundred Sixty-Seven
Thousand, Seven Hundred Seven Pesos and Seventy Centavos (P267,707.70) debited by petitioner BPI
from her account. She likewise prayed for damages and attorneys fees.
Petitioner BPI, in its answer, alleged that on August 31, 1991, Julio R. Templonuevo, third-party
defendant and herein also a private respondent, demanded from the former payment of the amount of Two
Hundred Sixty-Seven Thousand, Six Hundred Ninety-Two Pesos and Fifty Centavos (P267,692.50)
representing the aggregate value of three (3) checks, which were allegedly payable to him, but which
were deposited with the petitioner bank to private respondent Salazars account (Account No. 0203-118767) without his knowledge and corresponding endorsement.
Accepting that Templonuevos claim was a valid one, petitioner BPI froze Account No. 0201-0588-48 of
A.A. Salazar and Construction and Engineering Services, instead of Account No. 0203-1187-67 where the
checks were deposited, since this account was already closed by private respondent Salazar or had an
insufficient balance.
Private respondent Salazar was advised to settle the matter with Templonuevo but they did not arrive at
any settlement. As it appeared that private respondent Salazar was not entitled to the funds represented by
the checks which were deposited and accepted for deposit, petitioner BPI decided to debit the amount
of P267,707.70 from her Account No. 0201-0588-48 and the sum of P267,692.50 was paid to
Templonuevo by means of a cashiers check. The difference between the value of the checks
(P267,692.50) and the amount actually debited from her account (P267,707.70) represented bank charges
in connection with the issuance of a cashiers check to Templonuevo.
In the answer to the third-party complaint, private respondent Templonuevo admitted the payment to him
of P267,692.50 and argued that said payment was to correct the malicious deposit made by private
respondent Salazar to her private account, and that petitioner banks negligence and tolerance regarding
the matter was violative of the primary and ordinary rules of banking. He likewise contended that the
debiting or taking of the reimbursed amount from the account of private respondent Salazar by petitioner
BPI was a matter exclusively between said parties and may be pursuant to banking rules and regulations,
but did not in any way affect him. The debiting from another account of private respondent Salazar,
considering that her other account was effectively closed, was not his concern.
After trial, the RTC rendered a decision, the dispositive portion of which reads thus:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff [private
respondent Salazar] and against the defendant [petitioner BPI] and ordering the latter to pay as follows:
1.
The amount of P267,707.70 with 12% interest thereon from September 16, 1991 until the said
amount is fully paid;

2.
The amount of P30,000.00 as and for actual damages;
3.
The amount of P50,000.00 as and for moral damages;
4.
The amount of P50,000.00 as and for exemplary damages;
5.
The amount of P30,000.00 as and for attorneys fees; and
6.
Costs of suit.
The counterclaim is hereby ordered DISMISSED for lack of factual basis.
The third-party complaint [filed by petitioner] is hereby likewise ordered DISMISSED for lack of merit.
Third-party defendants [i.e., private respondent Templonuevos] counterclaim is hereby likewise
DISMISSED for lack of factual basis.
SO ORDERED.[4]
On appeal, the Court of Appeals (CA) affirmed the decision of the RTC and held that respondent Salazar
was entitled to the proceeds of the three (3) checks notwithstanding the lack of endorsement thereon by
the payee. The CA concluded that Salazar and Templonuevo had previously agreed that the checks
payable to JRT Construction and Trading[5] actually belonged to Salazar and would be deposited to her
account, with petitioner acquiescing to the arrangement. [6]
Petitioner therefore filed this petition on these grounds:
I.
The Court of Appeals committed reversible error in misinterpreting Section 49 of the Negotiable
Instruments Law and Section 3 (r and s) of Rule 131 of the New Rules on Evidence.
II.
The Court of Appeals committed reversible error in NOT applying the provisions of Articles 22, 1278 and
1290 of the Civil Code in favor of BPI.
III.
The Court of Appeals committed a reversible error in holding, based on a misapprehension of facts, that
the account from which BPI debited the amount of P267,707.70 belonged to a corporation with a separate
and distinct personality.
IV.
The Court of Appeals committed a reversible error in holding, based entirely on speculations, surmises or
conjectures, that there was an agreement between SALAZAR and TEMPLONUEVO that checks payable
to TEMPLONUEVO may be deposited by SALAZAR to her personal account and that BPI was privy to
this agreement.
V.
The Court of Appeals committed reversible error in holding, based entirely on speculation, surmises or
conjectures, that SALAZAR suffered great damage and prejudice and that her business standing was
eroded.
VI.
The Court of Appeals erred in affirming instead of reversing the decision of the lower court against BPI
and dismissing SALAZARs complaint.
VII.
The Honorable Court erred in affirming the decision of the lower court dismissing the third-party
complaint of BPI.[7]
The issues center on the propriety of the deductions made by petitioner from private respondent Salazars
account. Stated otherwise, does a collecting bank, over the objections of its depositor, have the authority
to withdraw unilaterally from such depositors account the amount it had previously paid upon certain
unendorsed order instruments deposited by the depositor to another account that she later closed?
Petitioner argues thus:
1.
There is no presumption in law that a check payable to order, when found in the possession
of a person who is neither a payee nor the indorsee thereof, has been lawfully transferred for value.
Hence, the CA should not have presumed that Salazar was a transferee for value within the contemplation
of Section 49 of the Negotiable Instruments Law, [8] as the latter applies only to a holder defined under
Section 191of the same.[9]

2.
Salazar failed to adduce sufficient evidence to prove that her possession of the three checks
was lawful despite her allegations that these checks were deposited pursuant to a prior internal
arrangement with Templonuevo and that petitioner was privy to the arrangement.
3.
The CA should have applied the Civil Code provisions on legal compensation because in
deducting the subject amount from Salazars account, petitioner was merely rectifying the undue payment
it made upon the checks and exercising its prerogative to alter or modify an erroneous credit entry in the
regular course of its business.
4.
The debit of the amount from the account of A.A. Salazar Construction and Engineering
Services was proper even though the value of the checks had been originally credited to the personal
account of Salazar because A.A. Salazar Construction and Engineering Services, an unincorporated single
proprietorship, had no separate and distinct personality from Salazar.
5.
Assuming the deduction from Salazars account was improper, the CA should not have
dismissed petitioners third-party complaint against Templonuevo because the latter would have the legal
duty to return to petitioner the proceeds of the checks which he previously received from it.
6.
There was no factual basis for the award of damages to Salazar.
The petition is partly meritorious.
First, the issue raised by petitioner requires an inquiry into the factual findings made by the CA. The CAs
conclusion that the deductions from the bank account of A.A. Salazar Construction and Engineering
Services were improper stemmed from its finding that there was no ineffective payment to Salazar which
would call for the exercise of petitioners right to set off against the formers bank deposits. This finding,
in turn, was drawn from the pleadings of the parties, the evidence adduced during trial and upon the
admissions and stipulations of fact made during the pre-trial, most significantly the following:
(a)
That Salazar previously had in her possession the following checks:
(1)
Solid Bank Check No. CB766556 dated January 30, 1990 in the amount of P57,712.50;
(2)
Solid Bank Check No. CB898978 dated July 31, 1990 in the amount of P55,180.00; and,
(3)
Equitable Banking Corporation Check No. 32380638 dated August 28, 1990 for the amount
of P154,800.00;
(b)
That these checks which had an aggregate amount of P267,692.50 were payable to the order of
JRT Construction and Trading, the name and style under which Templonuevo does business;
(c)
That despite the lack of endorsement of the designated payee upon such checks, Salazar was
able to deposit the checks in her personal savings account with petitioner and encash the same;
(d)
That petitioner accepted and paid the checks on three (3) separate occasions over a span of
eight months in 1990; and
(e)
That Templonuevo only protested the purportedly unauthorized encashment of the checks
after the lapse of one year from the date of the last check. [10]
Petitioner concedes that when it credited the value of the checks to the account of private respondent
Salazar, it made a mistake because it failed to notice the lack of endorsement thereon by the designated
payee. The CA, however, did not lend credence to this claim and concluded that petitioners actions were
deliberate, in view of its admission that the mistake was committed three times on three separate
occasions, indicating acquiescence to the internal arrangement between Salazar and Templonuevo. The
CA explained thus:
It was quite apparent that the three checks which appellee Salazar deposited were not indorsed. Three
times she deposited them to her account and three times the amounts borne by these checks were credited
to the same. And in those separate occasions, the bank did not return the checks to her so that she could
have them indorsed. Neither did the bank question her as to why she was depositing the checks to her
account considering that she was not the payee thereof, thus allowing us to come to the conclusion that
defendant-appellant BPI was fully aware that the proceeds of the three checks belong to appellee.
For if the bank was not privy to the agreement between Salazar and Templonuevo, it is most unlikely that
appellant BPI (or any bank for that matter) would have accepted the checks for deposit on three separate
times nary any question. Banks are most finicky over accepting checks for deposit without the

corresponding indorsement by their payee. In fact, they hesitate to accept indorsed checks for deposit if
the depositor is not one they know very well.[11]
The CA likewise sustained Salazars position that she received the checks from Templonuevo pursuant to
an internal arrangement between them, ratiocinating as follows:
If there was indeed no arrangement between Templonuevo and the plaintiff over the three questioned
checks, it baffles us why it was only on August 31, 1991 or more than a year after the third and last check
was deposited that he demanded for the refund of the total amount of P267,692.50.
A prudent man knowing that payment is due him would have demanded payment by his debtor from the
moment the same became due and demandable. More so if the sum involved runs in hundreds of thousand
of pesos. By and large, every person, at the very moment he learns that he was deprived of a thing which
rightfully belongs to him, would have created a big fuss. He would not have waited for a year within
which to do so. It is most inconceivable that Templonuevo did not do this. [12]
Generally, only questions of law may be raised in an appeal by certiorari under Rule 45 of the Rules of
Court.[13] Factual findings of the CA are entitled to great weight and respect, especially when the CA
affirms the factual findings of the trial court. [14] Such questions on whether certain items of evidence
should be accorded probative value or weight, or rejected as feeble or spurious, or whether or not the
proofs on one side or the other are clear and convincing and adequate to establish a proposition in issue,
are questions of fact. The same holds true for questions on whether or not the body of proofs presented by
a party, weighed and analyzed in relation to contrary evidence submitted by the adverse party may be said
to be strong, clear and convincing, or whether or not inconsistencies in the body of proofs of a party are
of such gravity as to justify refusing to give said proofs weight all these are issues of fact which are not
reviewable by the Court.[15]
This rule, however, is not absolute and admits of certain exceptions, namely: a) when the conclusion is a
finding grounded entirely on speculations, surmises, or conjectures; b) when the inference made is
manifestly mistaken, absurd, or impossible; c) when there is a grave abuse of discretion; d) when the
judgment is based on a misapprehension of facts; e) when the findings of fact are conflicting; f) when the
CA, in making its findings, went beyond the issues of the case and the same are contrary to the
admissions of both appellant and appellee; g) when the findings of the CA are contrary to those of the trial
court; h) when the findings of fact are conclusions without citation of specific evidence on which they are
based; i) when the finding of fact of the CA is premised on the supposed absence of evidence but is
contradicted by the evidence on record; and j) when the CA manifestly overlooked certain relevant facts
not disputed by the parties and which, if properly considered, would justify a different conclusion. [16]
In the present case, the records do not support the finding made by the CA and the trial court that a prior
arrangement existed between Salazar and Templonuevo regarding the transfer of ownership of the checks.
This fact is crucial as Salazars entitlement to the value of the instruments is based on the assumption that
she is a transferee within the contemplation of Section 49 of the Negotiable Instruments Law.
Section 49 of the Negotiable Instruments Law contemplates a situation whereby the payee or indorsee
delivers a negotiable instrument for value without indorsing it, thus:
Transfer without indorsement; effect of- Where the holder of an instrument payable to his order transfers
it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein,
and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the
purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of
the time when the indorsement is actually made. [17]
It bears stressing that the above transaction is an equitable assignment and the transferee acquires the
instrument subject to defenses and equities available among prior parties. Thus, if the transferor had legal
title, the transferee acquires such title and, in addition, the right to have the indorsement of the transferor
and also the right, as holder of the legal title, to maintain legal action against the maker or acceptor or
other party liable to the transferor. The underlying premise of this provision, however, is that a valid
transfer of ownership of the negotiable instrument in question has taken place.
Transferees in this situation do not enjoy the presumption of ownership in favor of holders since they are
neither payees nor indorsees of such instruments. The weight of authority is that the mere possession of a

negotiable instrument does not in itself conclusively establish either the right of the possessor to receive
payment, or of the right of one who has made payment to be discharged from liability. Thus, something
more than mere possession by persons who are not payees or indorsers of the instrument is necessary to
authorize payment to them in the absence of any other facts from which the authority to receive payment
may be inferred.[18]
The CA and the trial court surmised that the subject checks belonged to private respondent Salazar based
on the pre-trial stipulation that Templonuevo incurred a one-year delay in demanding reimbursement for
the proceeds of the same. To the Courts mind, however, such period of delay is not of such unreasonable
length as to estop Templonuevo from asserting ownership over the checks especially considering that it
was readily apparent on the face of the instruments [19] that these were crossed checks.
In State Investment House v. IAC,[20] the Court enumerated the effects of crossing a check, thus: (1) that
the check may not be encashed but only deposited in the bank; (2) that the check may be negotiated only
once - to one who has an account with a bank; and (3) that the act of crossing the check serves as a
warning to the holder that the check has been issued for a definite purpose so that such holder must
inquire if the check has been received pursuant to that purpose.
Thus, even if the delay in the demand for reimbursement is taken in conjunction with Salazars possession
of the checks, it cannot be said that the presumption of ownership in Templonuevos favor as the
designated payee therein was sufficiently overcome. This is consistent with the principle that if
instruments payable to named payees or to their order have not been indorsed in blank, only such payees
or their indorsees can be holders and entitled to receive payment in their own right. [21]
The presumption under Section 131(s) of the Rules of Court stating that a negotiable instrument was
given for a sufficient consideration will not inure to the benefit of Salazar because the term given does
not pertain merely to a transfer of physical possession of the instrument. The phrase given or indorsed
in the context of a negotiable instrument refers to the manner in which such instrument may be
negotiated. Negotiable instruments are negotiated by transfer to one person or another in such a manner
as to constitute the transferee the holder thereof. If payable to bearer it is negotiated by delivery. If
payable to order it is negotiated by the indorsement completed by delivery. [22] The present case involves
checks payable to order. Not being a payee or indorsee of the checks, private respondent Salazar could
not be a holder thereof.
It is an exception to the general rule for a payee of an order instrument to transfer the instrument without
indorsement. Precisely because the situation is abnormal, it is but fair to the maker and to prior holders to
require possessors to prove without the aid of an initial presumption in their favor, that they came into
possession by virtue of a legitimate transaction with the last holder. [23] Salazar failed to discharge this
burden, and the return of the check proceeds to Templonuevo was therefore warranted under the
circumstances despite the fact that Templonuevo may not have clearly demonstrated that he never
authorized Salazar to deposit the checks or to encash the same. Noteworthy also is the fact that petitioner
stamped on the back of the checks the words: "All prior endorsements and/or lack of endorsements
guaranteed," thereby making the assurance that it had ascertained the genuineness of all prior
endorsements. Having assumed the liability of a general indorser, petitioners liability to the designated
payee cannot be denied.
Consequently, petitioner, as the collecting bank, had the right to debit Salazars account for the value of
the checks it previously credited in her favor. It is of no moment that the account debited by petitioner
was different from the original account to which the proceeds of the check were credited because both
admittedly belonged to Salazar, the former being the account of the sole proprietorship which had no
separate and distinct personality from her, and the latter being her personal account.
The right of set-off was explained in Associated Bank v. Tan:[24]
A bank generally has a right of set-off over the deposits therein for the payment of any withdrawals on the
part of a depositor. The right of a collecting bank to debit a client's account for the value of a dishonored
check that has previously been credited has fairly been established by jurisprudence. To begin with,
Article 1980 of the Civil Code provides that "[f]ixed, savings, and current deposits of money in banks and
similar institutions shall be governed by the provisions concerning simple loan.

Hence, the relationship between banks and depositors has been held to be that of creditor and debtor.
Thus, legal compensation under Article 1278 of the Civil Code may take place "when all the requisites
mentioned in Article 1279 are present," as follows:
(1)
That each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;
(2)
That both debts consist in a sum of money, or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated;
(3)
That the two debts be due;
(4)
That they be liquidated and demandable;
(5)
That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
While, however, it is conceded that petitioner had the right of set-off over the amount it paid to
Templonuevo against the deposit of Salazar, the issue of whether it acted judiciously is an entirely
different matter.[25] As businesses affected with public interest, and because of the nature of their
functions, banks are under obligation to treat the accounts of their depositors with meticulous care, always
having in mind the fiduciary nature of their relationship. [26] In this regard, petitioner was clearly remiss in
its duty to private respondent Salazar as its depositor.
To begin with, the irregularity appeared plainly on the face of the checks. Despite the obvious lack of
indorsement thereon, petitioner permitted the encashment of these checks three times on three separate
occasions. This negates petitioners claim that it merely made a mistake in crediting the value of the
checks to Salazars account and instead bolsters the conclusion of the CA that petitioner recognized
Salazars claim of ownership of checks and acted deliberately in paying the same, contrary to ordinary
banking policy and practice. It must be emphasized that the law imposes a duty of diligence on the
collecting bank to scrutinize checks deposited with it, for the purpose of determining their genuineness
and regularity. The collecting bank, being primarily engaged in banking, holds itself out to the public as
the expert on this field, and the law thus holds it to a high standard of conduct. [27] The taking and
collection of a check without the proper indorsement amount to a conversion of the check by the bank. [28]
More importantly, however, solely upon the prompting of Templonuevo, and with full knowledge of the
brewing dispute between Salazar and Templonuevo, petitioner debited the account held in the name of the
sole proprietorship of Salazar without even serving due notice upon her. This ran contrary to petitioners
assurances to private respondent Salazar that the account would remain untouched, pending the resolution
of the controversy between her and Templonuevo. [29] In this connection, the CA cited the letter
dated September 5, 1991 of Mr. Manuel Ablan, Senior Manager of petitioner banks Pasig/Ortigas branch,
to private respondent Salazar informing her that her account had been frozen, thus:
From the tenor of the letter of Manuel Ablan, it is safe to conclude that Account No. 0201-0588-48 will
remain frozen or untouched until herein [Salazar] has settled matters with Templonuevo. But, in an
unexpected move, in less than two weeks (eleven days to be precise) from the time that letter was written,
[petitioner] bank issued a cashiers check in the name of Julio R. Templonuevo of the J.R.T. Construction
and Trading for the sum of P267,692.50 (Exhibit 8) and debited said amount from Ms. Arcillas account
No. 0201-0588-48 which was supposed to be frozen or controlled. Such a move by BPI is, to Our minds,
a clear case of negligence, if not a fraudulent, wanton and reckless disregard of the right of its depositor.
The records further bear out the fact that respondent Salazar had issued several checks drawn against the
account of A.A. Salazar Construction and Engineering Services prior to any notice of deduction being
served. The CA sustained private respondent Salazars claim of damages in this regard:
The act of the bank in freezing and later debiting the amount of P267,692.50 from the account of A.A.
Salazar Construction and Engineering Services caused plaintiff-appellee great damage and prejudice
particularly when she had already issued checks drawn against the said account. As can be expected, the
said checks bounced. To prove this, plaintiff-appellee presented as exhibits photocopies of checks
dated September 8, 1991, October 28, 1991, and November 14, 1991 (Exhibits D, E and F
respectively) [30]

These checks, it must be emphasized, were subsequently dishonored, thereby causing private respondent
Salazar undue embarrassment and inflicting damage to her standing in the business community. Under
the circumstances, she was clearly not given the opportunity to protect her interest when petitioner
unilaterally withdrew the above amount from her account without informing her that it had already done
so.
For the above reasons, the Court finds no reason to disturb the award of damages granted by the CA
against petitioner. This whole incident would have been avoided had petitioner adhered to the standard of
diligence expected of one engaged in the banking business. A depositor has the right to recover reasonable
moral damages even if the banks negligence may not have been attended with malice and bad faith, if the
former suffered mental anguish, serious anxiety, embarrassment and humiliation. [31] Moral damages are
not meant to enrich a complainant at the expense of defendant. It is only intended to alleviate the moral
suffering she has undergone. The award of exemplary damages is justified, on the other hand, when the
acts of the bank are attended by malice, bad faith or gross negligence. The award of reasonable attorneys
fees is proper where exemplary damages are awarded. It is proper where depositors are compelled to
litigate to protect their interest.[32]
WHEREFORE, the petition is partially GRANTED. The assailed Decision dated April 3, 1998 and
Resolution dated April 3, 1998 rendered by the Court of Appeals in CA-G.R. CV No.
42241 are MODIFIED insofar as it ordered petitioner Bank of the Philippine Islands to return the amount
of Two Hundred Sixty-seven Thousand Seven Hundred and Seven and 70/100 Pesos (P267,707.70) to
respondent Annabelle A. Salazar, which portion is REVERSED and SET ASIDE. In all other respects,
the same areAFFIRMED.
No costs.
SO ORDERED.

DIGEST
FACTS
Templonuevo demanded payment from petitioner of a sum of money representing the aggregate
value of three checks which were allegedly payable to him but which were deposited with the
petitioner to Salazars account, without his knowledge and corresponding endorsement. Finding
merit in the demands of Templonuevo, the bank then froze the account of the engineering firm as the
account of Salazar was already closed or had insufficient funds. Failure of any settlement between
Templonuevo and Salazar, this prompted the bank to debit the account of Salazar and give back the
money to Templonuevo through cashiers check. The account of Salazar was also debited for whatever
charges incurred for the issuance of the cashiers check.
The trial court held in favor of Salazar.
ISSUE
Does a collecting bank, over the objections of its depositor, have the authority to withdraw
unilaterally from such depositors account the amount it had previously paid upon certain unendorsed
order instruments deposited by the depositor to another account that she later closed?
HELD
In the present case, the records do not support the finding made by the CA and the trial court that a prior
arrangement existed between Salazar and Templonuevo regarding the transfer of ownership of the checks.
This fact is crucial as Salazars entitlement to the value of the instruments is based on the assumption that
she is a transferee within the contemplation of Section 49 of the Negotiable Instruments Law.
Transferees in this situation do not enjoy the presumption of ownership in favor of holders since they
are neither payees nor indorsees of such instruments. The weight of authority is that the mere
possession of a negotiable instrument does not in itself conclusively establish either the right of the
possessor to receive payment, or of the right of one who has made payment to be discharged from
liability. Thus, something more than mere possession by persons who are not payees or indorsers
of the instrument is necessary to authorize payment to them in the absence of any other facts
from which the authority to receive payment may be inferred.
Even if the delay in the demand for reimbursement is taken in conjunction with Salazars possession of
the checks, it cannot be said that the presumption of ownership in Templonuevos favor as the
designated payee therein was sufficiently overcome. This is consistent with the principle that if
instruments payable to named payees or to their order have not been indorsed in blank, only such
payees or their indorsees can be holders and entitled
to
receive
payment
in
their own
right.
The presumption that a negotiable instrument was given for a sufficient consideration will not
inure to the benefit of Salazar because the term given does not pertain merely to a transfer of
physical possession of the instrument. The phrase given or indorsed in the context of a negotiable
instrument refers to the manner in which such instrument may be negotiated.
It is an exception to the general rule for a payee of an order instrument to transfer the instrument
without indorsement. Precisely because the situation is abnormal, it is but fair to the maker
and to prior holders to require possessors to prove without the aid of an initial presumption in
their favor, that they came into possession by virtue of a legitimate transaction with the last
holder. Salazar failed to discharge this burden, and the return of the check proceeds to

Templonuevo was therefore warranted under the circumstances despite the fact that Templonuevo
may not have clearly demonstrated that he never authorized Salazar to deposit the checks or to encash
the same. Noteworthy also is the fact that petitioner stamped on the back of the checks the
words: "All prior endorsements and/or lack of endorsements guaranteed," thereby making the
assurance that it had ascertained the genuineness of all prior endorsements. Having assumed
the liability of a general indorser, petitioners liability to the designated payee cannot be
denied.
Consequently, petitioner, as the collecting bank, had the right to debit Salazars account for the
value of the checks it previously credited in her favor. However, the issue of whether it acted
judiciously is an entirely different matter. As businesses affected with public interest, and because
of the nature of their functions, banks are under obligation to treat the accounts of their
depositors with meticulous care, always having in mind the fiduciary nature of their relationship.
In this regard, petitioner was clearly remiss in its duty to private respondent Salazar as its
depositor.
To begin with, the irregularity appeared plainly on the face of the checks. Despite the obvious lack of
indorsement thereon, petitioner permitted the encashment of these checks three times on three separate
occasions. This negates petitioners claim that it merely made a mistake in crediting the value of
the checks to Salazars account and instead bolsters the conclusion of the CA that petitioner recognized
Salazars claim of ownership of checks and acted deliberately in paying the same, contrary to
ordinary banking policy and practice. It must be emphasized that the law imposes a duty of diligence on
the collecting bank to scrutinize checks deposited with it, for the purpose of determining their
genuineness and regularity. The collecting bank, being primarily engaged in banking, holds itself out to
the public as the expert on this field, and the law thus holds it to a high standard of conduct.
The taking and collection of a check without the proper indorsement amount to a conversion
of the check by the bank.
More importantly, however, solely upon the prompting of Templonuevo, and with full knowledge
of the brewing dispute between Salazar and Templonuevo, petitioner debited the account held in the
name of the sole proprietorship of Salazar without even serving due notice upon her. This ran
contrary to petitioners assurances to private respondent Salazar that the account would remain
untouched, pending the resolution of the controversy between her and Templonuevo. For the above
reasons, the Court finds no reason to disturb the award of damages granted by the CA against
petitioner. This whole incident would have been avoided had petitioner adhered to the standard
of diligence expected of one engaged in the banking business. A depositor has the right to recover
reasonable moral damages even if the banks negligence may not have been attended with malice
and bad faith, if the former suffered mental anguish, serious anxiety, embarrassment and humiliation.

MARIA TUAZON, ALEJANDRO P. TUAZON, MELECIO P. TUAZON, Spouses ANASTACIO

and MARY BUENAVENTURA,Petitioners,
- versus HEIRS OF BARTOLOME RAMOS, Respondents.
G.R. No. 156262 July 14, 2005
DECISION
PANGANIBAN, J.:
S tripped of nonessentials, the present case involves the collection of a sum of money. Specifically, this
case arose from the failure of petitioners to pay respondents predecessor-in-interest. This fact was shown
by the non-encashment of checks issued by a third person, but indorsed by herein Petitioner Maria Tuazon
in favor of the said predecessor. Under these circumstances, to enable respondents to collect on the
indebtedness, the check drawer need not be impleaded in the Complaint. Thus, the suit is directed, not
against the drawer, but against the debtor who indorsed the checks in payment of the obligation.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, challenging the July 31,
2002 Decision[2] of the Court of Appeals (CA) in CA-GR CV No. 46535. The decretal portion of the
assailed Decision reads:
WHEREFORE, the appeal is DISMISSED and the appealed decision is AFFIRMED.
On the other hand, the affirmed Decision [3] of Branch 34 of the Regional Trial Court (RTC) of
Gapan, Nueva Ecija, disposed as follows
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendants,
ordering the defendants spouses Leonilo Tuazon and Maria Tuazon to pay the plaintiffs, as follows:
1. The sum of P1,750,050.00, with interests from the filing of the second amended complaint;
2. The sum of P50,000.00, as attorneys fees;
3. The sum of P20,000.00, as moral damages
4. And to pay the costs of suit.
xxx

x x x[4]

xxx

The Facts
The facts are narrated by the CA as follows:
[Respondents] alleged that between the period of May 2, 1988 and June 5, 1988, spouses Leonilo and
Maria Tuazon purchased a total of 8,326 cavans of rice from [the deceased Bartolome] Ramos
[predecessor-in-interest of respondents]. That of this [quantity,] x x x only 4,437 cavans [have been paid
for so far], leaving unpaid 3,889 cavans valued at P1,211,919.00. In payment therefor, the spouses
Tuazon issued x x x [several] Traders Royal Bank checks.
xxx

xxx

xxx

[B]ut when these [checks] were encashed, all of the checks bounced due to insufficiency of funds.
[Respondents] advanced that before issuing said checks[,] spouses Tuazon already knew that they had no
available fund to support the checks, and they failed to provide for the payment of these despite repeated
demands made on them
[Respondents] averred that because spouses Tuazon anticipated that they would be sued, they
conspired with the other [defendants] to defraud them as creditors by executing x x x fictitious sales of
their properties. They executed x x x simulated sale[s] [of three lots] in favor of the x x x spouses
Buenaventura x x x[,] as well as their residential lot and the house thereon[,] all located at Nueva Ecija,
and another simulated deed of sale dated July 12, 1988 of a Stake Toyota registered with the Land
Transportation Office of Cabanatuan City on September 7, 1988. [Co-petitioner] Melecio Tuazon, a son

of spouses Tuazon, registered a fictitious Deed of Sale on July 19, 1988 x x x over a residential lot located
at Nueva Ecija. Another simulated sale of a Toyota Willys was executed on January 25, 1988 in favor of
their other son, [co-petitioner] Alejandro Tuazon x x x. As a result of the said sales, the titles of these
properties issued in the names of spouses Tuazon were cancelled and new ones were issued in favor of the
[co-]defendants spouses Buenaventura, Alejandro Tuazon and Melecio Tuazon. Resultantly, by the said
ante-dated and simulated sales and the corresponding transfers there was no more property left registered
in the names of spouses Tuazon answerable to creditors, to the damage and prejudice of [respondents].
For their part, defendants denied having purchased x x x rice from [Bartolome] Ramos. They
alleged that it was Magdalena Ramos, wife of said deceased, who owned and traded the merchandise and
Maria Tuazon was merely her agent. They argued that it was Evangeline Santos who was the buyer of the
rice and issued the checks to Maria Tuazon as payments therefor. In good faith[,] the checks were
received [by petitioner] from Evangeline Santos and turned over to Ramos without knowing that these
were not funded. And it is for this reason that [petitioners] have been insisting on the inclusion of
Evangeline Santos as an indispensable party, and her non-inclusion was a fatal error. Refuting that the
sale of several properties were fictitious or simulated, spouses Tuazon contended that these were sold
because they were then meeting financial difficulties but the disposals were made for value and in good
faith and done before the filing of the instant suit. To dispute the contention of plaintiffs that they were
the buyers of the rice, they argued that there was no sales invoice, official receipts or like evidence to
prove this. They assert that they were merely agents and should not be held answerable. [5]
The corresponding civil and criminal cases were filed by respondents against Spouses Tuazon.
Those cases were later consolidated and amended to include Spouses Anastacio and Mary Buenaventura,
with Alejandro Tuazon and Melecio Tuazon as additional defendants. Having passed away before the
pretrial, Bartolome Ramos was substituted by his heirs, herein respondents.
Contending that Evangeline Santos was an indispensable party in the case, petitioners moved to file
a third-party complaint against her. Allegedly, she was primarily liable to respondents, because she was
the one who had purchased the merchandise from their predecessor, as evidenced by the fact that the
checks had been drawn in her name. The RTC, however, denied petitioners Motion.
Since the trial court acquitted petitioners in all three of the consolidated criminal cases, they
appealed only its decision finding them civilly liable to respondents.
Ruling of the Court of Appeals
Sustaining the RTC, the CA held that petitioners had failed to prove the existence of an agency
between respondents and Spouses Tuazon. The appellate court disbelieved petitioners contention that
Evangeline Santos should have been impleaded as an indispensable party. Inasmuch as all the checks had
been indorsed by Maria Tuazon, who thereby became liable to subsequent holders for the amounts stated
in those checks, there was no need to implead Santos.
Hence, this Petition.[6]
Issues
Petitioners raise the following issues for our consideration:
1. Whether or not the Honorable Court of Appeals erred in ruling that petitioners are not agents of
the respondents.
2. Whether or not the Honorable Court of Appeals erred in rendering judgment against the
petitioners despite x x x the failure of the respondents to include in their action Evangeline Santos, an
indispensable party to the suit.[7]
The Courts Ruling
The Petition is unmeritorious.
First Issue:
Agency

Well-entrenched is the rule that the Supreme Courts role in a petition under Rule 45 is limited to
reviewing errors of law allegedly committed by the Court of Appeals. Factual findings of the trial court,
especially when affirmed by the CA, are conclusive on the parties and this Court. [8] Petitioners have not
given us sufficient reasons to deviate from this rule.
In a contract of agency, one binds oneself to render some service or to do something in representation or
on behalf of another, with the latters consent or authority. [9] The following are the elements of agency:
(1) the parties consent, express or implied, to establish the relationship; (2) the object, which is the
execution of a juridical act in relation to a third person; (3) the representation, by which the one who acts
as an agent does so, not for oneself, but as a representative; (4) thelimitation that the agent acts within the
scope of his or her authority.[10] As the basis of agency is representation, there must be, on the part of the
principal, an actual intention to appoint, an intention naturally inferable from the principals words or
actions. In the same manner, there must be an intention on the part of the agent to accept the appointment
and act upon it. Absent such mutual intent, there is generally no agency.[11]
This Court finds no reversible error in the findings of the courts a quo that petitioners were the rice buyers
themselves; they were not mere agents of respondents in their rice dealership. The question of whether a
contract is one of sale or of agency depends on the intention of the parties. [12]
The declarations of agents alone are generally insufficient to establish the fact or extent of their authority.
[13]
The law makes no presumption of agency; proving its existence, nature and extent is incumbent upon
the person alleging it.[14] In the present case, petitioners raise the fact of agency as an affirmative defense,
yet fail to prove its existence.
The Court notes that petitioners, on their own behalf, sued Evangeline Santos for collection of the
amounts represented by the bounced checks, in a separate civil case that they sought to be consolidated
with the current one. If, as they claim, they were mere agents of respondents, petitioners should have
brought the suit against Santos for and on behalf of their alleged principal, in accordance with Section 2
of Rule 3 of the Rules on Civil Procedure. [15] Their filing a suit against her in their own names negates
their claim that they acted as mere agents in selling the rice obtained from Bartolome Ramos.
Second Issue:
Indispensable Party
Petitioners argue that the lower courts erred in not allowing Evangeline Santos to be impleaded as
an indispensable party. They insist that respondents Complaint against them is based on the bouncing
checks she issued; hence, they point to her as the person primarily liable for the obligation.
We hold that respondents cause of action is clearly founded on petitioners failure to pay the
purchase price of the rice. The trial court held that Petitioner Maria Tuazon had indorsed the questioned
checks in favor of respondents, in accordance with Sections 31 and 63 of the Negotiable Instruments Law.
[16]
That Santos was the drawer of the checks is thus immaterial to the respondents cause of action.
As indorser, Petitioner Maria Tuazon warranted that upon due presentment, the checks were to be
accepted or paid, or both, according to their tenor; andthat in case they were dishonored, she would pay
the corresponding amount.[17] After an instrument is dishonored by nonpayment, indorsers cease to be
merely secondarily liable; they become principal debtors whose liability becomes identical to that of the
original obligor. The holder of a negotiable instrument need not even proceed against the maker before
suing the indorser.[18] Clearly, Evangeline Santos -- as the drawer of the checks -- is not an indispensable
party in an action against Maria Tuazon, the indorser of the checks.
Indispensable parties are defined as parties in interest without whom no final determination can be
had.[19] The instant case was originally one for the collection of the purchase price of the rice bought by
Maria Tuazon from respondents predecessor. In this case, it is clear that there is no privity of contract
between respondents and Santos. Hence, a final determination of the rights and interest of the parties may
be made without any need to implead her.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against
petitioners.

DIGEST
Tuazon, et. Al. vs. Heirs of Bartolome Ramos. G.R. No. 156262, July 14, 2005
FACTS
Heirs of Bartolome Ramos alleged that spouses Leonilo and Maria Tuazon purchased a total of 8,326
cavans of rice from [the deceased Bartolome] Ramos [predecessor-in-interest of respondents]. That of this
[quantity,] . . . only 4,437 cavans [have been paid for so far], leaving unpaid 3,889 cavans valued at
P1,211,919.00. In payment therefor, the spouses Tuazon issued several Traders Royal Bank checks. But
when these checks were encashed, all of the checks bounced due to insufficiency of funds. [Respondents]
advanced that before issuing said checks[,] spouses Tuazon already knew that they had no available fund
to support the checks, and they failed to provide for the payment of these despite repeated demands made
on them.
For their part, defendants denied having purchased rice from [Bartolome] Ramos. They alleged that it was
Magdalena Ramos, wife of said deceased, who owned and traded the merchandise and Maria Tuazon was
merely her agent. They argued that it was Evangeline Santos who was the buyer of the rice and issued the
checks to Maria Tuazon as payments therefor. In good faith[,] the checks were received [by petitioner]
from Evangeline Santos and turned over to Ramos without knowing that these were not funded.
ISSUE
Whether or not there was a contract of agency between spouses Tuazon and spouses Ramos
HELD
There was no contract of Agency
Ratio: In a contract of agency, one binds oneself to render some service or to do something in
representation or on behalf of another, with the latter's consent or authority. 9 The following are the
elements of agency: (1) the parties' consent, express or implied, to establish the relationship; (2) the
object, which is the execution of a juridical act in relation to a third person; (3) the representation, by
which the one who acts as an agent does so, not for oneself, but as a representative; (4) the limitation that
the agent acts within the scope of his or her authority. 10 As the basis of agency is representation, there
must be, on the part of the principal, an actual intention to appoint, an intention naturally inferable from
the principal's words or actions. In the same manner, there must be an intention on the part of the agent to
accept the appointment and act upon it. Absent such mutual intent, there is generally no agency. 11
This Court finds no reversible error in the findings of the courts a quo that petitioners were the rice buyers
themselves; they were not mere agents of respondents in their rice dealership. The question of whether a
contract is one of sale or of agency depends on the intention of the parties.
The Court notes that petitioners, on their own behalf, sued Evangeline Santos for collection of the
amounts represented by the bounced checks, in a separate civil case that they sought to be consolidated
with the current one. If, as they claim, they were mere agents of respondents, petitioners should have
brought the suit against Santos for and on behalf of their alleged principal, in accordance with Section 2
of Rule 3 of the Rules on Civil Procedure. 15 Their filing a suit against her in their own names negates
their claim that they acted as mere agents in selling the rice obtained from Bartolome Ramos.

G.R. No. 156294

November 29, 2006
MELVA THERESA ALVIAR GONZALES, Petitioner,
vs.
RIZAL COMMERCIAL BANKING CORPORATION, Respondent.
DECISION
GARCIA, J.:
An action for a sum of money originating from the Regional Trial Court (RTC) of Makati City, Branch
61, thereat docketed as Civil Case No. 88-1502, was decided in favor of therein plaintiff, now respondent
Rizal Commercial Banking Corporation (RCBC). On appeal to the Court of Appeals (CA) in CA-G.R.
CV No. 48596, that court, in a decision 1 dated August 30, 2002, affirmed the RTC minus the award of
attorneys fees. Upon the instance of herein petitioner Melva Theresa Alviar Gonzales, the case is now
before this Court via this petition for review on certiorari, based on the following undisputed facts as
unanimously found by the RTC and the CA, which the latter summarized as follows:
Gonzales was an employee of Rizal Commercial Banking Corporation (or RCBC) as New Accounts
Clerk in the Retail Banking Department at its Head Office.
A foreign check in the amount of $7,500 was drawn by Dr. Don Zapanta of the Ade Medical Group with
address at 569 Western Avenue, Los Angeles, California, against the drawee bank Wilshire Center Bank,
N.A., of Los Angeles, California, U.S.A., and payable to Gonzales mother, defendant Eva Alviar (or
Alviar). Alviar then endorsed this check. Since RCBC gives special accommodations to its employees to
receive the checks value without awaiting the clearing period, Gonzales presented the foreign check to
Olivia Gomez, the RCBCs Head of Retail Banking. After examining this, Olivia Gomez requested
Gonzales to endorse it which she did. Olivia Gomez then acquiesced to the early encashment of the check
and signed the check but indicated thereon her authority of "up to P17,500.00 only". Afterwards, Olivia
Gomez directed Gonzales to present the check to RCBC employee Carlos Ramos and procure his
signature. After inspecting the check, Carlos Ramos also signed it with an "ok" annotation. After getting
the said signatures Gonzales presented the check to Rolando Zornosa, Supervisor of the Remittance
section of the Foreign Department of the RCBC Head Office, who after scrutinizing the entries and
signatures therein authorized its encashment. Gonzales then received its peso equivalent of P155,270.85.
RCBC then tried to collect the amount of the check with the drawee bank by the latter through its
correspondent bank, the First Interstate Bank of California, on two occasions dishonored the check
because of "END. IRREG" or irregular indorsement. Insisting, RCBC again sent the check to the drawee
bank, but this time the check was returned due to "account closed". Unable to collect, RCBC demanded
from Gonzales the payment of the peso equivalent of the check that she received. Gonzales settled the
matter by agreeing that payment be made thru salary deduction. This temporary arrangement for salary
deductions was communicated by Gonzales to RCBC through a letter dated November 27, 1987 xxx
xxx
xxx
xxx
The deductions was implemented starting October 1987. On March 7, 1988 RCBC sent a demand letter to
Alviar for the payment of her obligation but this fell on deaf ears as RCBC did not receive any response
from Alviar. Taking further action to collect, RCBC then conveyed the matter to its counsel and on June
16, 1988, a letter was sent to Gonzales reminding her of her liability as an indorser of the subject check
and that for her to avoid litigation she has to fulfill her commitment to settle her obligation as assured in
her said letter. On July 1988 Gonzales resigned from RCBC. What had been deducted from her salary was
only P12,822.20 covering ten months.
It was against the foregoing factual backdrop that RCBC filed a complaint for a sum of money against
Eva Alviar, Melva Theresa Alviar-Gonzales and the latters husband Gino Gonzales. The spouses
Gonzales filed an Answer with Counterclaim praying for the dismissal of the complaint as well as
payment of P10,822.20 as actual damages, P20,000.00 as moral damages, P20,000.00 as exemplary

damages, and P20,000.00 as attorneys fees and litigation expenses. Defendant Eva Alviar, on the other
hand, was declared in default for having filed her Answer out of time.
After trial, the RTC, in its three-page decision, 2 held two of the three defendants liable as follows:
WHEREFORE, premises above considered and plaintiff having established its case against the defendants
as above stated, judgment is hereby rendered for plaintiff and as against defendant EVA. P. ALVIAR as
principal debtor and defendants MELVA THERESA ALVIAR GONZLAES as guarantor as follows:
1. To pay plaintiff the amount of P142,648.65 (P155,270.85 less the amount of P12,622.20, as salary
deduction of [Gonzales]), representing the outstanding obligation of the defendants with interest of 12%
per annum starting February 1987 until fully paid;
2. To pay the amount of P40,000.00 as and for attorneys fees; and to
3. Pay the costs of this suit.
SO ORDERED.
On appeal, the CA, except for the award of attorneys fees, affirmed the RTC judgment.
Hence, this recourse by the petitioner on her submission that the CA erred
XXX IN FINDING [PETITIONER], AN ACCOMMODATION PARTY TO A CHECK
SUBSEQUENTLY ENDORSED PARTIALLY, LIABLE TO RCBC AS GUARANTOR;
XXX IN FINDING THAT THE SIGNATURE OF GOMEZ, AN RCBC EMPLOYEE, DOES NOT
CONSTITUTE AS AN ENDORSEMENT BUT ONLY AN INTER-BANK APPROVAL OF
SIGNATURE NECESSARY FOR THE ENCASHMENT OF THE CHECK;
XXX IN NOT FINDING RCBC LIABLE ON THE COUNTERCLAIMS OF [THE PETITIONER].
The recourse is impressed with merit.
The dollar-check3 in question in the amount of $7,500.00 drawn by Don Zapanta of Ade Medical Group
(U.S.A.) against a Los Angeles, California bank, Wilshire Center Bank N.A., was dishonored because of
"End. Irregular," i.e., an irregular endorsement. While the foreign drawee bank did not specifically state
which among the four signatures found on the dorsal portion of the check made the check irregularly
endorsed, it is absolutely undeniable that only the signature of Olivia Gomez, an RCBC employee, was a
qualified endorsement because of the phrase "up to P17,500.00 only." There can be no other acceptable
explanation for the dishonor of the foreign check than this signature of Olivia Gomez with the phrase "up
to P17,500.00 only" accompanying it. This Court definitely agrees with the petitioner that the foreign
drawee bank would not have dishonored the check had it not been for this signature of Gomez with the
same phrase written by her.
The foreign drawee bank, Wilshire Center Bank N.A., refused to pay the bearer of this dollar-check drawn
by Don Zapanta because of the defect introduced by RCBC, through its employee, Olivia Gomez. It is,
therefore, a useless piece of paper if returned in that state to its original payee, Eva Alviar.
There is no doubt in the mind of the Court that a subsequent party which caused the defect in the
instrument cannot have any recourse against any of the prior endorsers in good faith. Eva Alviars and the
petitioners liability to subsequent holders of the foreign check is governed by the Negotiable Instruments
Law as follows:
Sec. 66. Liability of general indorser. - Every indorser who indorses without qualification, warrants to all
subsequent holders in due course;
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and
(b) That the instrument is, at the time of his indorsement, valid and subsisting;
And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the case
may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be
duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be
compelled to pay it.
The matters and things mentioned in subdivisions (a), (b) and (c) of Section 65 are the following:
(a) That the instrument is genuine and in all respects what it purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;

Under Section 66, the warranties for which Alviar and Gonzales are liable as general endorsers in favor of
subsequent endorsers extend only to the state of the instrument at the time of their endorsements,
specifically, that the instrument is genuine and in all respects what it purports to be; that they have good
title thereto; that all prior parties had capacity to contract; and that the instrument, at the time of their
endorsements, is valid and subsisting. This provision, however, cannot be used by the party which
introduced a defect on the instrument, such as respondent RCBC in this case, which qualifiedly endorsed
the same, to hold prior endorsers liable on the instrument because it results in the absurd situation
whereby a subsequent party may render an instrument useless and inutile and let innocent parties bear the
loss while he himself gets away scot-free. It cannot be over-stressed that had it not been for the qualified
endorsement ("up toP17,500.00 only") of Olivia Gomez, who is the employee of RCBC, there would
have been no reason for the dishonor of the check, and full payment by drawee bank therefor would have
taken place as a matter of course.
Section 66 of the Negotiable Instruments Law which further states that the general endorser additionally
engages that, on due presentment, the instrument shall be accepted or paid, or both, as the case may be,
according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly
taken, he will pay the amount thereof to the holder, or to any subsequent endorser who may be compelled
to pay it, must be read in the light of the rule in equity requiring that those who come to court should
come with clean hands. The holder or subsequent endorser who tries to claim under the instrument which
had been dishonored for "irregular endorsement" must not be the irregular endorser himself who gave
cause for the dishonor. Otherwise, a clear injustice results when any subsequent party to the instrument
may simply make the instrument defective and later claim from prior endorsers who have no knowledge
or participation in causing or introducing said defect to the instrument, which thereby caused its dishonor.
Courts in this jurisdiction are not only courts of law but also of equity, and therefore cannot unqualifiedly
apply a provision of law so as to cause clear injustice which the framers of the law could not have
intended to so deliberately cause. In Carceller v. Court of Appeals, 4 this Court had occasion to stress:
Courts of law, being also courts of equity, may not countenance such grossly unfair results without doing
violence to its solemn obligation to administer fair and equal justice for all.
RCBC, which caused the dishonor of the check upon presentment to the drawee bank, through the
qualified endorsement of its employee, Olivia Gomez, cannot hold prior endorsers, Alviar and Gonzales
in this case, liable on the instrument.
Moreover, it is a well-established principle in law that as between two parties, he who, by his acts, caused
the loss shall bear the same. 5 RCBC, in this instance, should therefore bear the loss.
Relative to the petitioners counterclaim against RCBC for the amount of P12,822.20 which it admittedly
deducted from petitioners salary, the Court must order the return thereof to the petitioner, with legal
interest of 12% per annum, notwithstanding the petitioners apparent acquiescence to such an
arrangement. It must be noted that petitioner is not any ordinary client or depositor with whom RCBC had
this isolated transaction. Petitioner was a rank-and-file employee of RCBC, being a new accounts clerk
thereat. It is easy to understand how a vulnerable Gonzales, who is financially dependent upon RCBC,
would rather bite the bullet, so to speak, and expectedly opt for salary deduction rather than lose her job
and her entire salary altogether. In this sense, we cannot take petitioners apparent acquiescence to the
salary deduction as being an entirely free and voluntary act on her part. Additionally, under the obtaining
facts and circumstances surrounding the present complaint for collection of sum of money by RCBC
against its employee, which may be deemed tantamount to harassment, and the fact that RCBC itself was
the one, acting through its employee, Olivia Gomez, which gave reason for the dishonor of the dollarcheck in question, RCBC may likewise be held liable for moral and exemplary damages and attorneys
fees by way of damages, in the amount of P20,000.00 for each.
WHEREFORE, the assailed CA Decision dated August 30, 2002 is REVERSED and SET ASIDE and
the Complaint in this case DISMISSED for lack of merit. Petitioners counterclaim is GRANTED,
ordering the respondent RCBC to reimburse petitioner the amount P12,822.20, with legal interest
computed from the time of salary deduction up to actual payment, and to pay petitioner the total amount
of P60,000.00 as moral and exemplary damages, and attorneys fees.

DIGEST
FACTS

Gonzales, New Accounts Clerk in the Retail Banking Department at RCBC Head Office
Dr. Don Zapanta of the Ade Medical Group drew a foreign check of $7,500 against the drawee
bank Wilshire Center Bank, LA, California payable to Eva Alviar (Alviar), Gonzales mother.
Alviar then endorsed this check.
Since RCBC gives special accommodations to its employees to receive the checks value w/o
awaiting the clearing period, Gonzales presented the foreign check to Olivia Gomez, the RCBCs
Head of Retail Banking
Olivia Gomez requested Gonzales to endorse it which she did. Olivia Gomez then
acquiesced to the early encashment of the check and signed the check but indicated
thereon her authority of "up to P17,500.00 only".
Carlos Ramos signed it with an "ok" annotation.
Presented the check to Rolando Zornosa, Supervisor of the Remittance section of the
Foreign Department of the RCBC Head Office, who after scrutinizing the entries and
signatures authorized its encashment.
Gonzales received its peso equivalent P155,270.85
RCBC tried to collect through its correspondent bank, the First Interstate Bank of California but it
was dishonored the check because:
"END. IRREG" or irregular indorsemen
"account closed"
Unable to collect, RCBC demanded from Gonzales
November 27, 1987: Through letter Gonzales agreed that the payment be made thru
salary deduction.
October 1987: deductions started
March 7, 1988: RCBC sent a demand letter to Alviar for the payment but she did not respond
June 16, 1988: a letter was sent to Gonzales reminding her of her liability as an indorser
July 1988: Gonzales resigned from RCBC paying only P12,822.20 covering 10 months
RCBC filed a complaint for a sum of money against Eva Alviar, Melva Theresa Alviar-Gonzales
and the latters husband Gino Gonzales
CA Affirmed RTC: liable Eva Alviar as principal debtor and Melva Theresa Alviar-Gonzales as
guarantor

ISSUE
Whether or not Eva Alviar and Melva Theresa Alvia-Gonzales is liable as general endorsers
HELD
NO. CA REVERSED. RCBC reimburse Gonzales
Sec. 66. Liability of general indorser. - Every indorser who indorses without qualification,
warrants to all subsequent holders in due course
1. The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section;
(a) That the instrument is genuine and in all respects what it purports to be
(b)
That
he
has
a
good
title
to
it
(c) That all prior parties had capacity to contract
2. That the instrument is, at the time of his indorsement, valid and subsisting

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

Under Section 66, the warranties for which Alviar and Gonzales are liable as general endorsers in
favor of subsequent endorsers extend only to the state of the instrument at the time of their
endorsements,
This provision cannot be used by the party which introduced a defect on the instrument (RCBC)
w/c qualifiedly endorsed it
Had it not been for the qualified endorsement "up to P17,500.00 only" of Olivia Gomez,
who is the employee of RCBC, there would have been no reason for the dishonor of the
check
The holder or subsequent endorser who tries to claim under the instrument which had been
dishonored for "irregular endorsement" must not be the irregular endorser himself who gave
cause for the dishonor.
Otherwise, a clear injustice results when any subsequent party to the instrument may
simply make the instrument defective and later claim from prior endorsers who have no
knowledge or participation in causing or introducing said defect to the instrument, which
thereby caused its dishonor.

G.R. No. 92244 February 9, 1993

NATIVIDAD
vs.
THE
HONORABLE
COURT
OF
APPEALS
and
COMMUNICATIONS, respondents.
L.B. Camins for petitioner.
Angara, Abello, Concepcion, Regals & Cruz for private respondent

GEMPESAW, petitioner,
PHILIPPINE

BANK

OF

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. A73), 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 nonpayment. Assuming that even one single complaint had been made, petitioner would have been dutybound, 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.

DIGEST
FACTS:
Natividad Gempesaw issued checks, prepared by her bookkeeper, a total of 82 checks in favor of several
supplies. Most of the checks for amounts in excess of actual obligations as shown in their corresponding
invoices. It was only after the lapse of more than 2 years did she discovered the fraudulent manipulations
of her bookkeeper. It was also learned that the indorsements of the payee were forged, and the checks
were brought to the chief accountant of Philippine Bank of Commerce (the Drawee Bank, Buendia
Branch) who deposited them in the accounts of Alfredo Romero and Benito Lam. Gempesaw made
demand upon the bank to credit the amount charged due the checks. The bank refused. Hence, the present
action.
ISSUE:
Who shall bear the loss resulting from the forged indorsements.
HELD:
As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot charge
the drawers account for the amount of said check. An exception to the rule is where the drawer is guilty
of such negligence which causes the bank to honor such checks. Gempesaw did not exercise prudence in
taking steps that a careful and prudent businessman would take in circumstances to discover discrepancies
in her account. Her negligence was the proximate cause of her loss, and under Section 23 of the
Negotiable Instruments Law, is precluded from using forgery as a defense.
On the other hand, 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 said checks. The only kind of indorsement which stops the
further negotiation of an instrument is a restrictive indorsement which prohibits the further negotiation
thereof, pursuant to Section 36 of the Negotiable Instruments Law.
In light of any case not provided for in the Act that is to be governed by the provisions of existing
legislation, pursuant to Section 196 of the Negotiable Instruments Law, the bank may be held liable for
damages in accordance with Article 1170 of the Civil Code. The drawee bank, in its failure to discover the
fraud committed by its employee and in contravention banking rules in allowing a chief accountant to
deposit the checks bearing second indorsements, was adjudged liable to share the loss with Gempesaw on
a 50:50 ratio.

G.R. No. L-39641 February 28, 1983

METROPOL (BACOLOD) FINANCING & INVESTMENT CORPORATION, plaintiff-appellee,
vs.
SAMBOK MOTORS COMPANY and NG SAMBOK SONS MOTORS CO., LTD., defendantsappellants.
Rizal Quimpo & Cornelio P. Revena for plaintiff-appellee.
Diosdado Garingalao for defendants-appellants.
DE CASTRO, J.:
The former Court of Appeals, by its resolution dated October 16, 1974 certified this case to this Court the
issue issued therein being one purely of law.
On April 15, 1969 Dr. Javier Villaruel executed a promissory note in favor of Ng Sambok Sons Motors
Co., Ltd., in the amount of P15,939.00 payable in twelve (12) equal monthly installments, beginning May
18, 1969, with interest at the rate of one percent per month. It is further provided that in case on nonpayment of any of the installments, the total principal sum then remaining unpaid shall become due and
payable with an additional interest equal to twenty-five percent of the total amount due.
On the same date, Sambok Motors Company (hereinafter referred to as Sambok), a sister company of Ng
Sambok Sons Motors Co., Ltd., and under the same management as the former, negotiated and indorsed
the note in favor of plaintiff Metropol Financing & Investment Corporation with the following
indorsement:
Pay to the order of Metropol Bacolod Financing & Investment Corporation with recourse. Notice of
Demand; Dishonor; Protest; and Presentment are hereby waived.
SAMBOK MOTORS CO. (BACOLOD)
By:
RODOLFO G. NONILLO Asst. General Manager
The maker, Dr. Villaruel defaulted in the payment of his installments when they became due, so on
October 30, 1969 plaintiff formally presented the promissory note for payment to the maker. Dr. Villaruel
failed to pay the promissory note as demanded, hence plaintiff notified Sambok as indorsee of said note of
the fact that the same has been dishonored and demanded payment.
Sambok failed to pay, so on November 26, 1969 plaintiff filed a complaint for collection of a sum of
money before the Court of First Instance of Iloilo, Branch I. Sambok did not deny its liability but
contended that it could not be obliged to pay until after its co-defendant Dr. Villaruel has been declared
insolvent.
During the pendency of the case in the trial court, defendant Dr. Villaruel died, hence, on October 24,
1972 the lower court, on motion, dismissed the case against Dr. Villaruel pursuant to Section 21, Rule 3 of
the Rules of Court. 1
On plaintiff's motion for summary judgment, the trial court rendered its decision dated September 12,
1973, the dispositive portion of which reads as follows:
WHEREFORE, judgment is rendered:
(a) Ordering Sambok Motors Company to pay to the plaintiff the sum of P15,939.00 plus the legal rate of
interest from October 30, 1969;
(b) Ordering same defendant to pay to plaintiff the sum equivalent to 25% of P15,939.00 plus interest
thereon until fully paid; and
(c) To pay the cost of suit.
Not satisfied with the decision, the present appeal was instituted, appellant Sambok raising a lone
assignment of error as follows:
The trial court erred in not dismissing the complaint by finding defendant appellant Sambok Motors
Company as assignor and a qualified indorsee of the subject promissory note and in not holding it as only
secondarily liable thereof.
Appellant Sambok argues that by adding the words "with recourse" in the indorsement of the note, it
becomes a qualified indorser that being a qualified indorser, it does not warrant that if said note is

dishonored by the maker on presentment, it will pay the amount to the holder; that it only warrants the
following pursuant to Section 65 of the Negotiable Instruments Law: (a) that the instrument is genuine
and in all respects what it purports to be; (b) that he has a good title to it; (c) that all prior parties had
capacity to contract; (d) that he has no knowledge of any fact which would impair the validity of the
instrument or render it valueless.
The appeal is without merit.
A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be
made by adding to the indorser's signature the words "without recourse" or any words of similar
import. 2 Such an indorsement relieves the indorser of the general obligation to pay if the instrument is
dishonored but not of the liability arising from warranties on the instrument as provided in Section 65 of
the Negotiable Instruments Law already mentioned herein. However, appellant Sambok indorsed the note
"with recourse" and even waived the notice of demand, dishonor, protest and presentment.
"Recourse" means resort to a person who is secondarily liable after the default of the person who is
primarily liable. 3Appellant, by indorsing the note "with recourse" does not make itself a qualified
indorser but a general indorser who is secondarily liable, because by such indorsement, it agreed that if
Dr. Villaruel fails to pay the note, plaintiff-appellee can go after said appellant. The effect of such
indorsement is that the note was indorsed without qualification. A person who indorses without
qualification engages that on due presentment, the note shall be accepted or paid, or both as the case may
be, and that if it be dishonored, he will pay the amount thereof to the holder. 4 Appellant Sambok's
intention of indorsing the note without qualification is made even more apparent by the fact that the
notice of demand, dishonor, protest and presentment were an waived. The words added by said appellant
do not limit his liability, but rather confirm his obligation as a general indorser.
Lastly, the lower court did not err in not declaring appellant as only secondarily liable because after an
instrument is dishonored by non-payment, the person secondarily liable thereon ceases to be such and
becomes a principal debtor. 5His liabiliy becomes the same as that of the original obligor. 6 Consequently,
the holder need not even proceed against the maker before suing the indorser.
WHEREFORE, the decision of the lower court is hereby affirmed. No costs.
SO ORDERED.

DIGEST
FACTS
Sambok Motors Company negotiated and indorsed the note in favor of plaintiff Metropol Financing &
Investment
Corporation
with
the
following
indorsement:
Pay to the order of Metropol Bacolod Financing & Investment Corporation with recourse. Notice of
Demand; Dishonor; Protest; and Presentment are hereby waived. SAMBOK MOTORS CO. (BACOLOD)
By:
RODOLFO
G.
NONILLO
Asst.
General
Manager
The maker, Dr. Villaruel defaulted in the payment. Plaintiff notified Sambok as indorsee of said note of
the fact that the same has been dishonored and demanded payment. Sambok failed to pay. Trial court
rendered its decision in favour of Plaintiff. Appellant Sambok argues that by adding the words with
recourse in the indorsement of the note, it becomes a qualified indorser; that being a qualified indorser, it
does not warrant that if said note is dishonored by the maker on presentment, it will pay the amount to the
holder.
ISSUE
Whether or not Sambok is a qualified indorser.
HELD
Appellant, by indorsing the note with recourse does not make itself a qualified indorser but a general
indorser who is secondarily liable, because by such indorsement, it agreed that if Dr. Villaruel fails to pay
the note, plaintiff-appellee can go after said appellant. The effect of such indorsement is that the note was
indorsed without qualification. A person who indorses without qualification engages that on due
presentment, the note shall be accepted or paid, or both as the case may be, and that if it be dishonored, he
will pay the amount thereof to the holder. Appellant Samboks intention of indorsing the note without
qualification is made even more apparent by the fact that the notice of demand, dishonor, protest and
presentment were all waived. The words added by said appellant do not limit his liability, but rather
confirm his obligations as a general indorser.

G.R. No. 17230

March 17, 1922
JOSE VELASCO, plaintiff-appelle,
vs.
TAN LIUAN & CO., TAN LIUAN, UY TENGPIAO, and AW YONG CHIOW SOO, defendants.
AW YONG CHIOW SOO, appellant.
Jesus E. Blanco for appellant.
De Joya and Espiritu for appellee.
STATEMENT
The defendant Tan Liuan and Co. executed to the defendant Aw Yong Chiow Soo four certain promissory
notes: The first, for P12,000, dated February 18th, the second, for P16,000, dated February 23d, the third,
for P38,000, dated March 17th, and the fourth, for P21,000, dated March 27th, all in the year 1919, and
each payable six months after its respective date.
March 17, 1919, the defendant Aw Yong Chiow Soo drew a bill of exchange or sight draft, for P33,500
Yen on Jing Kee and Co., 2 Kaisandori 5-Chone, Kobe, in favor of the Philippine National Bank, which at
first it refused to cash. The plaintiff was then induced to, and did, endorse it, and the bank cashed the
draft, no part of which plaintiff received, and it is claimed that all of the money was paid to Tan Liauan
and Co. In the ordinary course of business, the draft was dishonored when presented, and later the
plaintiff was requested to, and did, personally execute to the Philippine National Bank his promissory
note, for the amount of the draft, interest and expenses.
August 18, 1991, Tan Liuan made the following written statement:
In consideration for the indorsement by Jose Velasco at my request of a draft drawn by Aw Yong Chiow
Soo on Messrs. Jing Kee and Co., 2 Kaisandori 5-Chone, Kobe, Japan, for the payment of which he
became liable upon his indorsement for the sum of 33,500 Yen, I promise to pay to Jose Velasco, or oder,
within ten days after he shall have been obligated to pay the amount of said draft, or any part thereof, the
full amount with all costs, expenses and attorney's fees which he shall pay on account of his indorsement
of said draft, with interest on the amount paid by him at 10 per cent per annum thereon from the time of
payment.
On the same day, the plaintiff made the following written statement:
Aw Yong Chiow Soo having this day transferred to me his claim of credit against the firm of Tan Liuan
and Co. as collateral security in consideration of my having indorsed his draft made by him on Messrs.
Jing Kee and Co. for the sum of 33,500 Yen and presented to the Philippine National Bank by which it
was cashed, now if the drawer of said draft or the said Aw Yong Chiow Soo shall pay the said draft so that
I am relieved from all responsibility in connection therewith and the expenses incurred on account
thereof, then I will reassign the said claim against Tan Liuan and Co. to him, and if I am obliged to pay
said draft, any amount which I may receive on account of said claim assigned to me over and above the
amount paid by me, including all expenses and attorney's fees, shall be delivered to the said Aw Yong
Chiow Soo.
August 22, 1919, the defendant Aw Yong Chiow Soo made the following written statement:
For value received and to me in hand paid, I hereby assign, transfer and deliver to Jose Velasco the whole
amount of my credit against Tan Liuan and Co., amounting to eighty-seven thousand pesos (P87,000),
evidenced by four (4) promissory notes, which are described as follows:
1. Promissory note dated Manila, February 18, 1919, for the sum of P12,000; for six (6) months;
2. Promissory note dated Manila, February 23, 1919, for the sum of P16,000; for six (6) months;
3. Promissory note dated Manila, March 17, 1919, for the sum of P38,000; for six (6) months;
4. Promissory note dated Manila, March 27, 1919, for the sum of P21,000; for six (6) months;
the above-mentioned promissory notes being attached hereto and made a part hereof, and fully autnorize
the said Jose Velasco to collect and receive the said amount from Tan Liuan and Co., or from the legal
representative of, or liquidator of said Tan Liuan and Co.
Concurrent therewith, the defendant unqualifiedly indorsed the four promissory notes to the plaintiff,
who, on February 19, 1920, commenced this action against the defendants.

The complaints alleges the execution of the notes by the defendant Tan Liuan and Co. to the defendant
Aw Yong Chiow Soo. That the defendant Aw Yong Chiow Soo indorsed the notes to the plaintiff; that at
their maturity they were duly presented to Tan Liuan and Co.; and that payment was refused, of which
refusal the defendant Aw Yong Chiow Soo was duly notified.
For answer, Aw Yong Chiow Soo makes a general denial, and, as a further and separate defense, alleges
the drawing of the sight draft, and that it was an accommodation only, and that, conforming to the
agreement, it was duly indorsed by the plaintiff, and Aw Yong Chiow So delivered the money to the
defendant Tan Liuan. The defendant then alleges the making of the written statement by Tan Liuan of
August 18, 1919, above quoted. On that date, Aw Yong Chiow Soo was a creditor of the defendant Tan
Liuan and Co., evidenced by the promissory notes above described, and that Tan Liuan and Co. was
insolvent. That by reason thereof, one of the promissory notes was executed to guarantee Aw Yong Chiow
Soo against any liability in case that Tan Liuan or the plaintiff would not pay the sight draft, and because
the bank had requested the plaintiff to pay the draft, this defendant and the plaintiff agreed that this
defendant should transfer to him all of its interest in the four promissory notes, under an agreement that,
in case Jing Kee and Co. should pay the draft, the plaintiff would transfer the note to this defendant, but in
the event that the plaintiff was required to pay the draft, the he would endeavor to collect the notes in full,
and from the proceeds would first reimburse himself and then pay any remainder to the defendant. It is
also alleged that the palintiff has not paid the draft or made any effort to collect it from Tan Liuan. That
this defendant is not liable to the plaintiff on any contract, and does not owe him anything, but that, under
the agreement, the plaintiff should return to this defendant any amount which he should collect over the
amount of his personal claim. That, by reason of the contract between the plaintiff and the defendant, Tan
Liuan, this defendant has been released and discharged of all liability, and that the action is premature.
Upon such issues, the case was tried, and the lower court rendered judgment against the defendants Tan
Liuan and Co. and Tan Liuan and Uy Tengpiao, for the full amount of the notes, from which the plaintiff
should only receive a sufficient amount to fully compensate him as an indorser of the draft; to wit,
P46,135.70, and that, if collected, the remainder, if any, should be paid to Aw Yong Chiow Soo against
whom judgment was rendered for the amount of P46,135.70 should be defendant Tan Liuan and Co. fail
to pay the judgment. From this, the defendant Aw Yong Chiow Soo only appealed, claiming that the lower
court erred in rendering judgment against it upon the four promissory notes, or that it was liable for the
payment of either of them, or that it should pay the plaintiff P46,135.70, or that he should have any
judgment against this defendant.
JOHNS, J.:
It will be noted that two of the promissory notes are dated in February; that the third is dated March 17th,
and the last March 27th, all in 1919. That each promissory note is payable six months after date, and is
executed by Tan Liuan and Co. in favor of Aw Yong Chiow Soo.
The sight draft is dated March 17, 1919, payable thirty days after date, and is drawn by Aw Yong Chiow
Soo upon Jing Kee and Co. in favor of the Philippine National Bank.
The written statement of Tan Liuan is dated August 18, 1919, and that three of the promissory notes were
then due and payable.
Although it is claimed taht Tan Liuan and Co. received the proceeds from the draft, its name does not
appear in or upon the draft, and it is very apparent that the written statement of Tan Liuan and Co., of
August 18th, was signed, for the purpose of showing the true relations of that firm to the transaction, and
that within ten days after the plaintiff had assumed and paid the amount of the draft, with costs and
expenses, Tan Liuan and Co. would pay the plaintiff the full amount which plaintiff had obligated himself
to pay. In other words, Tan Liuan and Co., by that writing, assumes all liability for the amount of the draft
and promises to pay the plaintiff and release him from all liability. In legal effect, plaintiff's written
statement of August 18th, is an acknowledgment of the reciept from Aw Yong Chiow Soo of the four
promissory notes as collateral security for his indorsement of the draft, and that, in the event the plaintiff
is released from his liability, he will then reassign the notes to the defendant, Aw Yong Chiow Soo, and

that, if he is required to pay the draft, any amount which he may receive on account of the promissory
notes over and above the amount which he is required to pay, he will then pay any remainder to the
defendant Aw Yong Chiow Soo. The indorsement of Aw Yong Chiow Soo of the notes to the plaintiff was
unqualified, and the law fixes the liability of an unqualified indorser, and oral testimony is not admisible
to vary or contradict the terms of a written instrument.
Section 30 of Act No. 2031, of the Philippine Legislature, known as "The Negotiable Instruments Law,"
says:
SEC. 30. What constitutes negotiation. An instrument is negotiated when it is transferred from one
person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it
is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder completed
by delivery.
SEC. 31. Indorsement; how made. The indorsement must be written on the instrument itself or upon a
paper attached thereto. The signature of the indorser, without additional words, is a sufficient
indorsement.
SEC. 33. Kinds of indorsement. An indorsement may be either special or in blank; and it may also be
either restrictive or qualified, or conditional.
SEC. 38. Qualified indorsement. A qualified indorsement constitutes the indorser a mere assignor of the
title to the instrument. It may be made by adding to the indorser's signature the words "without recourse"
or any words of similar import. Such an indorsement does not impair the negotiable character of the
instrument.
SEC. 45. Time of indorsement; presumption. Except where an indorsement bears date after the maturity
of the instrument, every negotiation is deemed prima facie to have been effected before the instrument
was overdue.
SEC. 63. When person deemed indorser. A person placing his signature upon an instrument otherwise
than as maker, drawer, or acceptor is deemed to be an indorser, unless he clearly indicates by appropriate
words his intention to be bound in some other capacity.
SEC. 66. Liability of general indorser. Every indorser who indorses without qualification, warrants to
all subsequent holders in due course
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and
(b) That the instrument is at the time of his indorsement valid and subsisting.
And, in addition, he engages that on due presentment, it shall be accepted or paid, or both, as the case
may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be
duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be
compelled to pay it.
SEC. 114. When notice need not be given to drawer. Notice of dishonor is not required to be given to
the drawer in either of the following cases:
xxx
xxx
xxx
(d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the
instrument.
Aw Yong Chiow Soo, being an unqualified indorser, the law fixes its liability.
If it was not its purpose or intent to assume and agree to pay the notes, it should have indorsed them
"without recourse," or in such a manner as to discliam any personal liability. When a person makes an
unqualified indorsement of a promissory note, the Negotiable Instruments Law specifies and defines his
liability, and parol testimony is not admissible to explain or defeat such liability. Here, the bill of
exchange was drawn by the defendant, Aw Yong Chiow Soo, and it was the bill of exchange which was
indorsed by the plaintiff, and the testimony is conclusive taht plaintiff's indorsement was required by the
bank as one of the conditions upon which it would cash the draft. Three of the notes had matured at the
time they were indorsed and the written instruments signed. Although the draft was drawn by Aw Yong
Chiow Soo, it was dishonored, and the plaintiff was required by the bank to execute his note for its
amount. At the time of the execution of the notes, Aw Yong Chiow Soo was a creditor of Tan Liuan and
Co. for the amount of the notes.

The action here is not based upon the draft. It is founded upon the promissory notes. The plaintiff did not
receive any part of the proceeds of the draft, but has been required by the bank to make his promissory
note for the amount of the draft. As collateral and to indemnify and protect plaintiff from any liability, Aw
Yong Chiow Soo indorsed the promissory notes, which it held against Tan Liuan and Co. to the plaintiff
and did not in any manner qualify its indorsement, and the Negotiable Instruments Act says that
Every indorser who indorses without qualification, warrants to all subsequent holders in due course, etc.,
engages that on due presentment, it shall be accepted or paid, or both, as the case may be, according to its
tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay
the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it.
Section 80 of the Act says:
Presentment for payment is not required in order to charge an indorser where the instrument was made or
accepted for his accommodation and he has no reason to expect that the instrument will be paid if
presented.
And subdivision (d), of section 114, says:
Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument.
The draft was drawn on March 18, 1919, payable thirty days after sight, and it was dishonored. Three of
the notes were past due at the time the written agreements were made, and the testimony is conclusive
that Tan Liuan and Co. was insolvent, and that Aw Yong Chiow Soo knew it, and that none of the notes
would be paid if presented, and the evidence shows that, before they were indorsed, the first two had been
duly presented and dishonored. In other words, at the time the unqualified indorsement was made, two of
the notes had been protested, and Aw Yong Chiow Soo knew that Tan Liuan and Co. was insolvent, and
had no reason to expect that the notes would be paid if presented. There is no claim or pretense that its
claim was prejudiced or that it lost any legal right, because the last two notes were not protested, the first
of which was past due when it was indorsed.
The purpose and intent of the August written statements was to explain the transactions between the
parties, to whom the proceeds from the draft were paid, and that the notes were indorsed by Aw Yong
Chiow Soo to palintiff, as collateral, to protect and hold him harmless in his indorsement of the draft, an
to specify that Aw Yong Chiow Soo should have any proceeds from the notes after the draft had been fully
paid therefrom and the plaintiff released from his liability as an indorser. The statements do not make any
reference to the legal liability of Aw Yong Chiow Soo as an indorser of the notes, do not and were never
contended to fully discharge and release that firm from its liability as an indorser.
With all due respect to the able and ingenious brief for the appellant, there is no merit in the defense, and
the judgment of the lower court is affirmed, with costs in favor of the plaintiff. So ordered

CHAPTER 5
G.R. No. 72764 July 13, 1989

STATE INVESTMENT HOUSE, petitioner,

vs.
INTERMEDIATE APPELLATE COURT, ANITA PEA CHUA and HARRIS CHUA, respondents.
Macalino, Salonga & Associates for petitioner.
Edgardo F. Sundiam for respondents.
FERNAN, C.J.:
Petitioner State Investment House seeks a review of the decision of respondent Intermediate Appellate
Court (now Court of Appeals) in AC-G.R. CV No. 04523 reversing the decision of the Regional Trial
Court of Manila, Branch XXXVII dated April 30, 1984 and dismissing the complaint for collection filed
by petitioner against private respondents Spouses Anita Pena Chua and Harris Chua.
It appears that shortly before September 5, 1980, New Sikatuna Wood Industries, Inc. requested for a loan
from private respondent Harris Chua. The latter agreed to grant the same subject to the condition that the
former should wait until December 1980 when he would have the money. In view of this agreement,
private respondent-wife, Anita Pena Chua issued three (3) crossed checks payable to New Sikatuna Wood
Industries, Inc. all postdated December 22, 1980 as follows:
DRAWEE BANK

CHECK NO.

DATE

AMOUNT

1. China Banking Corporation

589053

Dec. 22, 1980

P98,750.00

2. International Corporate Bank

04045549

Dec. 22, 1980

102,313.00

3. Metropolitan Bank & Trust Co.

036512

Dec. 22, 1980

98,387.00

The total value of the three (3) postdated checks amounted to P 299,450.00.
Subsequently, New Sikatuna Wood Industries, Inc. entered into an agreement with herein petitioner State
Investment House, Inc. whereby for and in consideration of the sum of Pl,047,402.91 under a deed of
sale, the former assigned and discounted with petitioner eleven (11) postdated checks including the
aforementioned three (3) postdated checks issued by herein private respondent-wife Anita Pea Chua to
New Sikatuna Wood Industries, Inc.
When the three checks issued by private respondent Anita Pena Chua were allegedly deposited by
petitioner, these checks were dishonored by reason of "insufficient funds", "stop payment" and "account
closed", respectively. Petitioner claims that despite demands on private respondent Anita Pea to make
good said checks, the latter failed to pay the same necessitating the former to file an action for collection
against the latter and her husband Harris Chua before the Regional Trial Court of Manila, Branch
XXXVII docketed as Civil Case No. 82-10547.
Private respondents-defendants filed a third party complaint against New Sikatuna Wood Industries, Inc.
for reimbursement and indemnification in the event that they be held liable to petitioner-plaintiff. For
failure of third party defendant to answer the third party complaint despite due service of summons, the
latter was declared in default.
On April 30, 1984, the lower court 1 rendered judgment against herein private respondents spouses, the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff or against the
defendants ordering the defendants to pay jointly and severally to the plaintiff the
following amounts:
1. P 229,450.00 with interest at the rate of 12% per annum from February
24,1981 until fully paid;
2. P 29,945.00 as and for attorney's fees; and
3. the costs of suit.

On the third party complaint, third party defendant New Sikatuna Wood Industries, Inc. is
ordered to pay third party plaintiffs Anita Pena Chua and Harris Chua all amounts said
defendants' third- party plaintiffs may pay to the plaintiff on account of this case. 2
On appeal filed by private respondents in AC-G.R. CV No. 04523, the Intermediate Appellate
Court 3 (now Court of Appeals) reversed the lower court's judgment in the now assailed decision, the
dispositive portion of which reads:
WHEREFORE, finding this appeal meritorious, We Reverse and Set Aside the appealed
judgment, dated April 30, 1984 and a new judgment is hereby rendered dismissing the
complaint, with costs against plaintiff-appellee. 4
Hence, this petition.
The pivotal issue in this case is whether or not petitioner is a holder in due course as to entitle it to
proceed against private respondents for the amount stated in the dishonored checks.
Section 52(c) of the Negotiable Instruments Law defines a holder in due course as one who takes the
instrument "in good faith and for value". On the other hand, Section 52(d) provides that in order that one
may be a holder in due course, it is necessary that "at the time the instrument was negotiated to him he
had no notice of any x x x defect in the title of the person negotiating it." However, under Section 59
every holder is deemed prima facie to be a holder in due course.
Admittedly, the Negotiable Instruments Law regulating the issuance of negotiable checks as well as the
lights and liabilities arising therefrom, does not mention "crossed checks". But this Court has taken
cognizance of the practice that a check with two parallel lines in the upper left hand corner means that it
could only be deposited and may not be converted into cash. Consequently, such circumstance should put
the payee on inquiry and upon him devolves the duty to ascertain the holder's title to the check or the
nature of his possession. Failing in this respect, the payee is declared guilty of gross negligence
amounting to legal absence of good faith and as such the consensus of authority is to the effect that the
holder of the check is not a holder in good faith. 5
Petitioner submits that at the time of the negotiation and endorsement of the checks in question by New
Sikatuna Wood Industries, it had no knowledge of the transaction and/or arrangement made between the
latter and private respondents.
We agree with respondent appellate court.
Relying on the ruling in Ocampo v. Gatchalian (supra), the Intermediate Appellate Court (now Court of
Appeals), correctly elucidated that the effects of crossing a check are: the check may not be encashed but
only deposited in the bank; the check may be negotiated only once to one who has an account with a
bank; and the act of crossing the check serves as a warning to the holder that the check has been issued
for a definite purpose so that he must inquire if he has received the check pursuant to that purpose,
otherwise he is not a holder in due course. Further, the appellate court said:
It results therefore that when appellee rediscounted the check knowing that it was a
crossed check he was knowingly violating the avowed intention of crossing the check.
Furthermore, his failure to inquire from the holder, party defendant New Sikatuna Wood
Industries, Inc., the purpose for which the three checks were cross despite the warning of
the crossing, prevents him from being considered in good faith and thus he is not a holder
in due course. Being not a holder in due course, plaintiff is subject to personal defenses,
such as lack of consideration between appellants and New Sikatuna Wood Industries.
Note that under the facts the checks were postdated and issued only as a loan to New
Sikatuna Wood Industries, Inc. if and when deposits were made to back up the checks.
Such deposits were not made, hence no loan was made, hence the three checks are
without consideration (Sec. 28, Negotiable Instruments Law).
Likewise New Sikatuna Wood Industries negotiated the three checks in breach of faith in
violation of Article (sic) 55, Negotiable Instruments Law, which is a personal defense
available to the drawer of the check. 6
In addition, such instruments are mentioned in Section 541 of the Negotiable Instruments Law as follows:

Sec. 541. The maker or any legal holder of a check shall be entitled to indicate therein
that it be paid to a certain banker or institution, which he shall do by writing across the
face the name of said banker or institution, or only the words "and company."
The payment made to a person other than the banker or institution shall not exempt the
person on whom it is drawn, if the payment was not correctly made.
Under usual practice, crossing a check is done by placing two parallel lines diagonally on the left top
portion of the check. The crossing may be special wherein between the two parallel lines is written the
name of a bank or a business institution, in which case the drawee should pay only with the intervention
of that bank or company, or crossing may be general wherein between two parallel diagonal lines are
written the words "and Co." or none at all as in the case at bar, in which case the drawee should not
encash the same but merely accept the same for deposit.
The effect therefore of crossing a check relates to the mode of its presentment for payment. Under Section
72 of the Negotiable Instruments Law, presentment for payment to be sufficient must be made (a) by the
holder, or by some person authorized to receive payment on his behalf ... As to who the holder or
authorized person will be depends on the instructions stated on the face of the check.
The three subject checks in the case at bar had been crossed generally and issued payable to New
Sikatuna Wood Industries, Inc. which could only mean that the drawer had intended the same for deposit
only by the rightful person, i.e., the payee named therein. Apparently, it was not the payee who presented
the same for payment and therefore, there was no proper presentment, and the liability did not attach to
the drawer.
Thus, in the absence of due presentment, the drawer did not become liable. 7 Consequently, no right of
recourse is available to petitioner against the drawer of the subject checks, private respondent wife,
considering that petitioner is not the proper party authorized to make presentment of the checks in
question.
Yet it does not follow as a legal proposition that simply because petitioner was not a holder in due course
as found by the appellate court for having taken the instruments in question with notice that the same is
for deposit only to the account of payee named in the subject checks, petitioner could not recover on the
checks. The Negotiable Instruments Law does not provide that a holder who is not a holder in due course
may not in any case recover on the instrument for in the case at bar, petitioner may recover from the New
Sikatuna Wood Industries, Inc. if the latter has no valid excuse for refusing payment. The only
disadvantage of a holder who is not in due course is that the negotiable instrument is subject to defenses
as if it were non-negotiable. 8
That the subject checks had been issued subject to the condition that private respondents on due date
would make the back up deposit for said checks but which condition apparently was not made, thus
resulting in the non-consummation of the loan intended to be granted by private respondents to New
Sikatuna Wood Industries, Inc., constitutes a good defense against petitioner who is not a holder in due
course.
WHEREFORE, the decision appealed from is hereby AFFIRMED with costs against petitioner.
SO ORDERED.

DIGEST
FACTS
New Sikatuna Wood Industries requested for a load from Chua who issue 3 crossed checks. Then, NSWI
entered in an agreement with the State Investment House Inc., under a deed of sale, where the former
assigned and discounted 11 postdated checks including the 3 issued by Chua. When the 3 checks were
allegedly deposited by SIHI, the checks were dishonored due to insufficient funds, stop payment and
account closed. SIHI made demands upon Chua but he failed to do so.
ISSUE
Whether or not SIHI is a holder in due course so as to recover the amounts in the Checks from Chua, the
drawer.
HELD
NIL does not mention crossed checks but the Court recognized that crossing the check (by 2 parallel lines
I the upper left portion of the check may be negotiated only once (to the one who has account with a
bank). The act serves as a warning to the holder that the check has been issued for a definite purpose so
that he must inquire if he has received the check pursuant to that purpose otherwise he is not a holder in
due course. Here, SIHI rediscounted the check knowing that it was a crossed check. His failure to inquire
from the holder (NSWI) the purpose of crossing the checks prevents him from being considered in good
faith and a holder in due course. Thus, SIHI is subject to personal defenses such as lack of consideration
between NSWI and Chua.

G.R. No. L-16477

November 22, 1921
R. N. CLARK, plaintiff-appellant,
vs.
GEORGE C. SELLNER, defendant-appellee.
Wolfson, Wolfson & Schwarzkopf for appellant.
Williams & Ferrier for appellee.
ROMUALDEZ, J.:
The defendant, in conjunction with two other persons, signed the following note in favor of the plaintiff:
P12,000.00 MANILA, July 1, 1914.
Six months after date, for value received, we jointly and severally promise to pay to the order of
R. N. Clark at his office in the city of Manila, the sum of twelve thousand pesos, Philippine
currency, with interest thereon in like currency from date until paid at the rate of ten per cent per
annum, payable quarterly.
If suit is necessary to collect this note, we hereby agree to pay as attorney's fees ten per centum of
the amount found due.
(Sgd.)
W.
H.
CLARKE,
[INTERNAL REVENUE JOHN MAYE. STAMP.] By W. H. CLARKE, his attorney.
GEO. C. SELLNER."
The note matured, but its amount was not paid.
Counsel for the defendant allege that the latter did not receive in that transaction either the whole or any
part of the amount of the debt; that the instrument was not presented to the defendant for payment; and
that the defendant, being an accommodation party, is not liable unless the note is negotiated, which was
not done, as shown by the evidence.
With regard to the first point, the liability of the defendant, as one of the signers of the note, is not
dependent on whether he has, or has not, received any part of the amount of the debt. The defendant is
really and expressly one of the joint and several debtors on the note, and as such he is liable under the
provisions of section 60 of Act No. 2031, entitled The Negotiable Instruments Law, which provisions
should be applied in this case in view of the character of the instrument.
As to presentment for payment, such action is not necessary in order to charge the person primarily liable,
as is the defendant. (Sec. 70, Act No. 2031.)
And as to whether or not the defendant is an accommodation party, it should be taken into account that by
putting his signature to the note, he lent his name, not to the creditor, but to those who signed with him
placing himself with respect to the creditor in the same position and with the same liability as the said
signers. It should be noted that the phrase "without receiving value therefor," as used in section 29 of the
aforesaid Act, means "without receiving value by virtue of the instrument" and not, as it apparently is
supposed to mean, "without receiving payment for lending his name." If, as in the instant case, a sum of
money was received by virtue of the note, it is immaterial, so far as the creditor is concerned, whether one
of the singers has, or has not, received anything in payment of the use of his name. In reality the legal
situation of the defendant in this case may properly be regarded as that of a joint surety rather than that of
an accommodation party. The defendant, as a joint surety, may, upon the maturity of the note, pay the
debt, demand the collateral security and dispose of it to his benefit; but there is no proof whatever that
this was done. As to the plaintiff, he is the "holder for value," under the phrase of said section 29, for he
had paid the money to the signers at the time the note was executed and delivered to him. Who is the
"holder" is defined in section 191 of the said law thus:
"Holder" means the payee or indorsee of a bill or note, who is in possession of it, or the bearer
thereof.
And as such holder, he has the right to demand payment of the debt from the signer of the note, even
though he knows that said person is merely an accommodation party (section 29 above cited), assuming
the defendant to be such, which, as has been stated, is not the case.

The trial judge took into account the fact that at the time of the maturity of the note, the collateral security
given to guarantee the payment was worth more than what was due on the note, but it depreciated to such
an extent that, at the time of the institution of this action, it was entirely valueless. And taking this
circumstance, together with the fact that this case was not commenced until after the lapse of four years
from the date on which the payment fell due, and with the further fact that the defendant had not received
any part of the amount mentioned in the note, he was of the opinion, and so decided, that the defendant
could not be held liable. The theory of the judge a quo was that the plaintiff's failure to enforce the
guaranty for the payment of the debt, and his delay in instituting this action constitute laches, which had
the effect of extinguishing his right of action.
We see no sufficient ground for applying such a theory to the case before us. As stated, the defendant's
position being, as it is, that of a joint surety, he may, at any time after the maturity of the note, make
payment, thus subrogating himself in the place of the creditor with the right to enforce the guaranty
against the other signers of the note for the reimbursement of what he is entitled to recover from them.
The mere delay of the creditor in enforcing the guaranty has not by any means impaired his action against
the defendant. It should not be lost sight of that the defendant's signature on the note is an assurance to the
creditor that the collateral guaranty will remain good, and that otherwise, he, the defendant, will be
personally responsible for the payment.
True, that if the creditor had done any act whereby the guaranty was impaired in its value, or discharged,
such an act would have wholly or partially released the surety; but it must be born in mind that it is a
recognized doctrine in the matter of suretyship that with respect to the surety, the creditor is under no
obligation to display any diligence in the enforcement of his rights as a creditor. His mere inaction,
indulgence, passiveness, or delay in proceeding against the principal debtor, or the fact that he did not
enforce the guaranty or apply on the payment of such funds as were available, constitute no defense at all
for the surety, unless the contract expressly requires diligence and promptness on the part of the creditor,
which is not the case in the present action. There is in some decisions a tendency toward holding that the
creditor's laches may discharge the surety, meaning by laches a negligent forbearance. This theory,
however, is not generally accepted and the courts almost universally consider it essentially inconsistent
with the relation of the parties to the note. (21 R. C. L., 1032-1034.)
We find that in the judgment appealed from there were committed the errors assigned, and that the
defendant is under obligation to pay the plaintiff the amount of the debt, as prayed for in the
complaint.lawphil.net
The judgment appealed from must, therefore, be, as is hereby, reversed. Let an order be issued to the
effect that the plaintiff have and recover from the defendant the sum of twelve thousand pesos (P12,000),
as principal debt, plus one thousand two hundred pesos (P1,200), the sum agreed upon as attorney's fees,
and 10 per cent interest on the principal debt from July 1, 1914, until it is fully paid, deducting therefrom
the sum of three hundred pesos (P300) already paid on account, as stated in the complaint.
This decision is rendered without special pronouncement as to costs. So ordered.

DIGEST
FACTS:
Sellner with two other persons, signed a promissory note solidarily binding themselves to pay to the
order of R.N Clark. The note matured but the amount wasn't paid. The defendant alleges that
he didn't receive any amount of the debt; that the instrument wasn't presented to him for
payment and being an accommodation party, he is not liable unless the note is negotiated, which
wasn't done.
ISSUES
Whether or not Sellner is an accommodation party liable for the note
HELD:
The liability of Sellner as one of the signers of the note, is not dependent on whether he has or has not,
received any part of the debt. The defendant is really and expressly one of the joint and several
debtors of the note and as such he is liable under the provisions of Section 60 of the Negotiable
Instruments Law.
As to the presentment for payment, such action is not necessary in order to charge the person primarily
liable, as is the defendant Sellner.
As to whether or not Sellner is an accommodation party, it should be taken into account that by putting
his signature to the note, he lent his name, not to the creditor, but to those who signed with him placing
him in the same position and with the same liability as the said signers. It should be noted that the
phrasewithout receiving value therefore as used in section 29 means without receiving value by
virtue of the instrument and not, as it apparently is supposed to mean, without receiving payment for
lending his name. It is immaterial as far as the creditor is concerned, whether one of the signers has or
has not received anything in payment for the use of his name. In this case, the legal situation of Sellner is
that of a joint surety who upon the maturity of the note, pay the debt, demand the collateral
security and dispose of it to his benefit. As to the plaintiff, he is a holder for value.

G.R. No. L-36549 October 5, 1988

FAR EAST REALTY INVESTMENT INC., petitioner-appellant,
vs.
THE HONORABLE COURT OF APPEALS, DY HIAN TAT, SIY CHEE and GAW SUY
AN, respondents-appellees.
Crispino P. Reyes for petitioner-appellant.
Uy and Bacabac Law Offices for respondents-appellees.

PARAS, J.
This is a petition for review of the February 12, 1973 decision of the Court of Appeals * in CA-G.R. No.
01031-SP, "Dy Hian Tat, et al. v. Hon. Alberto Francisco, et als.", reversing the judgment of the Court of
First Instance of Manila, which ordered private respondents to pay, jointly and severally, the petitioner the
sum of P4,500.00 plus interest at the rate of 14% per annum, from September 13, 1960, until fully paid,
plus the sum of P1,000.00 as attorney's fees.
The dispositive portion of respondent appellate court's decision reads:
IN VIEW WHEREOF, this Court is constrained to grant as it now grants, the remedy
prayed for; the judgment sought to be reviewed is hereby reversed; complaint is
dismissed; but for lack of sufficient merit, the claim of defendants for attorney's fees and
damages is overruled; costs are however adjudged against plaintiff in all instances.
IT IS SO ORDERED. (Rollo P. 126)
The antecedent facts of this case are as follows:
In its complaint dated May 9,1968, filed with the City Court of Manila, (Civil Case No. 170859) against
the private respondents for the collection and payment of P4,500.00 representing the face value of an
unpaid and dishonored cheek, the petitioner alleged, among others, that on September 13, 1960, the
private respondents approached the petitioner at its office in Manila and asked the latter to extend to them
an accommodation loan in the sum of P4,500.00, Philippine Currency, which they needed in their
business, and which they promised to pay, jointly and severally, in one month time; that they proposed to
pay the petitioner interest thereon at the rate of 14% per annum, as in fact they delivered to the petitioner
the China Banking Corporation Check No. VN-915564, dated September 13, 1960, for P4,500.00, drawn
by Dy Hian Tat, and signed by them at the back of said check, with the assurance that after one month
from September 13, 1960, the said check would be redeemed by them by paying cash in the sum of
P4,500.00, or the said check can be presented for payment on or immediately after one month and said
bank would honor the same; that, in order to accomodate the private respondents, the petitioner agreed
and actually extended to the private respondents an accommodation loan in the sum of P4,500.00 under
the aforesaid conditions proposed by the private respondents, which amount was delivered to the later;
that on March 5, 1964, the aforesaid check was presented for payment to the China Banking Corporation,
but said check bounced and was not cashed by said bank, for the reason that the current account of the
drawer thereof had already been closed; and that subsequently, the petitioner demanded from the private

respondents the payment of their aforesaid loan obligation, but the latter failed and refused to pay
notwithstanding repeated demands therefor (Rollo, pp. 35-37).
Private respondent Gaw Suy An filed an answer with compulsory counterclaim dated July 8, 1968
denying the material allegations contained in the complaint and by way of special and affirmative
defenses alleged that the petitioner has no cause of action against him because as it appears on the
endorsement at the back of CBC Check No. VN-915564, he signed said endorsement for his principal, the
Victory Hardware and not for his own individual account, hence, could not be made personally liable
therefor and granting that he acted in his own capacity as the endorser, he has been wholly discharged by
delay in presentment of the check for payment. (Rollo, pp. 39-40).
Private respondent Dy Hian Tat likewise filed his answer with compulsory counterclaim, dated February
27, 1970, denying the material allegations contained in the complaint and by way of special and
affirmative defenses alleged that he never had any transaction or negotiation of any check with the
petitioner at anytime, so it could not be true that he and the other defendants approached the petitioner on
September 13, 1960, for an accommodation loan of P4,500.00 for which they delivered to the petitioner
CBC Check No. VN-915564 dated September 13, 1960 because as far as he could remember, said check
was delivered by him to Sin Chin Juat Grocery and not to the petitioner; that the manner the said check
was negotiated is clearly evident by the endorsement at its back which clearly belies the claim of the
petitioner that he (Dy Hian Tat) was one of those who approached the petitioner at its office on September
13, 1960 to deliver the check in exchange for an accommodation loan of P4,500.00; that according to the
immediate endorser, Gaw Suy An, who endorsed the check for his principal, Victory Hardware, this check
was delivered to the Asian Surety & Insurance Co., Inc., to be applied to the indebtedness of the Victory
Hardware with said Insurance Company; and that petitioner not being a holder of the check for value, has
no recourse against the immediate endorser, and neither with the drawer thereof, and considering that this
check in question was dated September 13, 1960 and deposited only for payment on March 5, 1964, this
unreasonable delay in presentment wholly discharged not only the endorser but also the drawer (Rollo,
pp. 43-44).
On March 31, 1970, private respondent Siy CHEE was declared in default
(Rollo, p. 45).
After hearing, the City Court of Manila ** rendered its decision in favor of the petitioner, the dispositive
portion of which reads:
After considering the evidence presented by the parties, judgment is hereby rendered,
ordering the three defendants to pay the plaintiff, jointly and severally, the sum of
P4,500.00 with interest thereon at the legal rate from September 13, 1960 until the said
amount is fully paid; plus the sum of P500.00 by way of attorney's fees, plus the costs of
suit.
The counterclaim filed by the defendants Gaw Suy An and Dy Hiat Tat are hereby
dismissed for lack of basis.
SO ORDERED. (Rollo, p. 45).
The decision of the city court was appealed by the private respondents to the Court of First Instance of
Manila, where the case was heard de novo for lack of transcript of stenographic notes taken in the city
court.

After trial, the Court of First Instance of Manila, Branch IX, *** rendered a decision in Civil Case No.
80583, dated October 15, 1971, affirming the decision of the city court, the dispositive portion of which
reads as follows:
WHEREFORE' in view of all the foregoing considerations, judgment is hereby rendered
in favor of the plaintiff and against defendants Dy Hian Tat, Gaw Suy An and Siy Chee
ordering the latter to pay, jointly and severally, the plaintiff the sum of P4,500.00, plus
interest at the rate of 14% per annum, from September 13, 1960, until fully paid, plus the
sum of Pl,000.00 in the concept of attorney's fees; and costs of suit.
SO ORDERED. (Rollo, p. 9).
The private respondents filed a petition for review of the foregoing decision with the Court of Appeals.
On February 12, 1973, the appellate court, finding that the questioned check was not given as collateral to
guarantee a loan secured by the three private respondents who allegedly came as a group to the Far East
Realty Investment, Inc., on September 13, 1960, but passed through other hands before reaching the
petitioner and the said check was not presented within a reasonable time and after its issuance, reversed
the decision of the Court of First Instance (Rollo, p. 126).
Its motion for reconsideration having been denied, petitioner filed the instant petition.
The main issue in this case is whether or not presentment for payment and notice of dishonor of the
questioned check were made within reasonable time.
The petitioner argues that presentment for payment may be dispensed with if it will be useless. Hence, the
drawer is liable upon a check although it has not been presented to the bank for payment and although
payment has not been refused, where such a presentment would be useless because of the conduct or
action of the drawer in the matter or where the check is drawn on insufficient funds or no funds.
Likewise, presentment for payment is not required in order to charge the drawer, and that notice of
dishonor is not required to be given to the drawer where he has no right to expect or require that the
drawee or acceptor wig pay or honor the instrument. Therefore, where presentment for payment and
notice of dishonor are not necessary as when funds are insufficient to meet a check, the drawer is liable,
whether such presentment and notice be totally omitted or merely delayed. However, in a situation where
the presentment and/or notice is required to be made without unreasonable delay, the drawer is discharged
"pro tanto" or only up to the degree of the loss suffered, by reason of delay. Since discharge is the
exception to the general rule, the loss must be proven by the drawer. The drawer in the instant case has
not presented in evidence any loss which he may have suffered by reason of the delay.
On the other hand, the private respondents maintain that the questioned check was in fact drawn by Dy
Bun Kim son of Dy Hiat Tat, and delivered to the Sin Chin Juat Grocery in payment of grocery goods for
the Goodyear Climber and not to the Far East with which private respondents have no transaction of any
kind. Such being the case, said check was not delivered directly to the Far East in exchange for the
alleged P4,500.00 as claimed by William Li Yao. Therefore, the alleged cash of P4,500.00 claimed to
have been delivered by Li Yao on September 13, 1960 could not in fact be considered as the consideration
for Far East as holder of the check because said delivery of the check in exchange for the alleged
P4,500.00 is contrary to the findings of fact by the Court of Appeals. Petitioner, therefore, cannot be
considered a holder of the check for value and in due course. Whether there was due presentment or not
of the check, or whether there was notice of dishonor or not to the drawer and endorsers, the petitioner

cannot recover the amount of P4,500.00 which was in fact not delivered to the private respondents nor the
amount of the check for lack of consideration.
It is further argued by the private respondents that in order to charge the persons secondarily liable, such
as drawer and endorsers, the instrument must be presented for payment on the date and period therein
mentioned in the instrument, if it is payable on a fixed date, or within a reasonable time after issue,
otherwise, the drawer and endorsers are discharged from liability. The questioned check was dated
September 13, 1960. Granting that it was agreed that it will only be deposited after one month from its
date, it should have been deposited for payment after one month and not only on March 5, 1964. This
delay in the presentment for payment of the check cannot be construed as a reasonable time.
The petition is devoid of merit.
Where the instrument is not payable on demand, presentment must be made on the day it fags due. Where
it is payable on demand, presentment must be made within a reasonable time after issue, except that in the
case of a bill of exchange, presentment for payment will be sufficient if made within a reasonable time
after the last negotiation thereof. (Section 71, Negotiable Instruments Law).
Notice may be given as soon as the instrument is dishonored; and unless delay is excused must be given
within the time fixed by the law (Section 102, Negotiable Instruments Law).
No hard and fast demarcation line can be drawn between what may be considered as a reasonable or an
unreasonable time, because "reasonable time" depends upon the peculiar facts and circumstances in each
case (Tolentino, Commentaries and Jurisprudence on Commercial Laws of the Philippines, Vol. I, Eighth
Edition, p. 327).
It is obvious in this case that presentment and notice of dishonor were not made within a reasonable time.
"Reasonable time" has been defined as so much time as is necessary under the circumstances for a
reasonable prudent and diligent man to do, conveniently, what the contract or duty requires should be
done, having a regard for the rights, and possibility of loss, if any, to the other party (Citizens' Bank Bldg.
v. L & E. Wertheirmer 189 S.W. 361, 362, 126 Ark, 38, Ann. Cas. 1917 E, 520).
In the instant case, the check in question was issued on September 13, 1960, but was presented to the
drawee bank only on March 5, 1964, and dishonored on the same date. After dishonor by the drawee
bank, a formal notice of dishonor was made by the petitioner through a letter dated April 27, 1968. Under
these circumstances, the petitioner undoubtedly failed to exercise prudence and diligence on what he
ought to do al. required by law. The petitioner likewise failed to show any justification for the
unreasonable delay.
PREMISES CONSIDERED, the petition is DENIED and the decision of the Court of Appeals is
AFFIRMED.
SO ORDERED.

DIGEST
Doctrine:
Where the instrument is not payable on demand, presentment must be made on the day it falls due.
Where it is payable on demand, presentment must be made within a reasonable time after issue, except
that in the case of a bill of exchange, presentment for payment will be sufficient if made within a
reasonable time after the last negotiation thereof.
Reasonable Time has been defined as so much time as is necessary under the circumstances for a
reasonable prudent and diligent man to do, conveniently, what the contract or duty requires should be
done, having a regard for the rights, and possibility of loss, if any, to the other party.
No hard and fast demarcation line can be drawn between what may be considered as a reasonable or an
unreasonable time, because reasonable time depends upon the peculiar facts and circumstances in each
case.
FACTS
Private respondents asked the petitioner to extend an accommodation loan in the sum of P4,500.00.
Respondents delivered to the petitioner a check for P4,500.00, drawn by Dy Hian Tat, and signed by them
at the back of said check, with the assurance that after one month from September 13, 1960, the said
check would be redeemed by them by paying cash in the sum of P4,500.00, or the said check can be
presented for payment on or immediately after one month. Petitioner agreed and extended an
accommodation loan
The aforesaid check was presented for payment to the China Banking Corporation, but said check
bounced and was not cashed by said bank, for the reason that the current account of the drawer thereof
had already been closed. Petitioner demanded payment from the private but the latter failed and refused to
pay notwithstanding repeated demands.
Both private respondents raised the defense that both have been wholly discharged by delay in
presentment of the check for payment.
The Lower Court ruled in favor of the petitioner. However, this was reversed by the CA upon appeal by
the respondents, ruling that the check was not given as collateral to guarantee a loan secured since the
check passed through other hands before reaching the petitioner and the said check was not presented
within a reasonable time. Hence this petition.
Petitioner argues that presentment for payment and notice of dishonor are not necessary as when funds are
insufficient to meet a check, thus the drawer is liable, whether such presentment and notice be totally
omitted or merely delayed.

ISSUES
1. Whether or not presentment for payment can be dispensed with

2. Whether or not presentment for payment and notice of dishonor of the questioned check were made
within reasonable time
HELD
1. No. Where the instrument is not payable on demand, presentment must be made on the day it falls due.
Where it is payable on demand, presentment must be made within a reasonable time after issue, except
that in the case of a bill of exchange, presentment for payment will be sufficient if made within a
reasonable time after the last negotiation thereof (Section 71, Negotiable Instruments Law).
2. No. It is obvious in this case that presentment and notice of dishonor were not made within a
reasonable time.
Reasonable time has been defined as so much time as is necessary under the circumstances for a
reasonable prudent and diligent man to do, conveniently, what the contract or duty requires should be
done, having a regard for the rights, and possibility of loss, if any, to the other party (Citizens Bank Bldg.
v. L & E. Wertheirmer 189 S.W. 361, 362, 126 Ark, 38, Ann. Cas. 1917 E, 520).
Notice may be given as soon as the instrument is dishonored; and unless delay is excused must be given
within the time fixed by the law (Section 102, Negotiable Instruments Law).
In the instant case, the check in question was issued on September 13, 1960, but was presented to the
drawee bank only on March 5, 1964, and dishonored on the same date. After dishonor by the drawee
bank, a formal notice of dishonor was made by the petitioner through a letter dated April 27, 1968. Under
these circumstances, the petitioner undoubtedly failed to exercise prudence and diligence on what he
ought to do al. required by law. The petitioner likewise failed to show any justification for the
unreasonable delay.
No hard and fast demarcation line can be drawn between what may be considered as a reasonable or an
unreasonable time, because reasonable time depends upon the peculiar facts and circumstances in each
case

[G.R. No. 141968. February 12, 2001]

THE INTERNATIONAL CORPORATE BANK (now UNION BANK OF THE

PHILIPPINES), petitioner, vs. SPS. FRANCIS S. GUECO and MA. LUZ E. GUECO, respondents.

DECISION

KAPUNAN, J.:
The respondents Gueco Spouses obtained a loan from petitioner International Corporate Bank (now
Union Bank of the Philippines) to purchase a car a Nissan Sentra 1600 4DR, 1989 Model. In
consideration thereof, the Spouses executed promissory notes which were payable in monthly
installments and chattel mortgage over the car to serve as security for the notes.
The Spouses defaulted in payment of installments. Consequently, the Bank filed on August 7, 1995 a
civil action docketed as Civil Case No. 658-95 for Sum of Money with Prayer for a Writ of
Replevin[1] before the Metropolitan Trial Court of Pasay City, Branch 45. [2] On August 25, 1995, Dr.
Francis Gueco was served summons and was fetched by the sheriff and representative of the bank for a
meeting in the bank premises. Desi Tomas, the Banks Assistant Vice President demanded payment of the
amount of P184,000.00 which represents the unpaid balance for the car loan. After some negotiations and
computation, the amount was lowered to P154,000.00, However, as a result of the non-payment of the
reduced amount on that date, the car was detained inside the banks compound.
On August 28, 1995, Dr. Gueco went to the bank and talked with its Administrative Support, Auto
Loans/Credit Card Collection Head, Jefferson Rivera. The negotiations resulted in the further reduction
of the outstanding loan to P150,000.00.
On August 29, 1995, Dr. Gueco delivered a managers check in the amount of P150,000.00 but the
car was not released because of his refusal to sign the Joint Motion to Dismiss. It is the contention of the
Gueco spouses and their counsel that Dr. Gueco need not sign the motion for joint dismissal considering
that they had not yet filed their Answer. Petitioner, however, insisted that the joint motion to dismiss is
standard operating procedure in their bank to effect a compromise and to preclude future filing of claims,
counterclaims or suits for damages.
After several demand letters and meetings with bank representatives, the respondents Gueco spouses
initiated a civil action for damages before the Metropolitan Trial Court of Quezon City, Branch 33. The
Metropolitan Trial Court dismissed the complaint for lack of merit. [3]
On appeal to the Regional Trial Court, Branch 227 of Quezon City, the decision of the Metropolitan
Trial Court was reversed. In its decision, the RTC held that there was a meeting of the minds between the
parties as to the reduction of the amount of indebtedness and the release of the car but said agreement did
not include the signing of the joint motion to dismiss as a condition sine qua non for the effectivity of the
compromise. The court further ordered the bank:
1. to return immediately the subject car to the appellants in good working condition; Appellee
may deposit the Managers check the proceeds of which have long been under the control
of the issuing bank in favor of the appellee since its issuance, whereas the funds have long

been paid by appellants to secure said Managers Check, over which appellants have no
control;
2. to pay the appellants the sum of P50,000.00 as moral damages; P25,000.00 as exemplary
damages, and P25,000.00 as attorneys fees, and
3. to pay the cost of suit.
In other respect, the decision of the Metropolitan Trial Court Branch 33 is hereby AFFIRMED. [4]
The case was elevated to the Court of Appeals, which on February 17, 2000, issued the assailed
decision, the decretal portion of which reads:
WHEREFORE, premises considered, the petition for review on certiorari is hereby DENIED and the
Decision of the Regional Trial Court of Quezon City, Branch 227, in Civil Case No. Q-97-31176, for lack
of any reversible error, is AFFIRMED in toto. Costs against petitioner.
SO ORDERED.[5]
The Court of Appeals essentially relied on the respect accorded to the finality of the findings of facts
by the lower court and on the latter's finding of the existence of fraud which constitutes the basis for the
award of damages.
The petitioner comes to this Court by way of petition for review on certiorari under Rule 45 of the
Rules of Court, raising the following assigned errors:
I
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO AGREEMENT WITH
RESPECT TO THE EXECUTION OF THE JOINT MOTION TO DISMISS AS A CONDITION FOR
THE COMPROMISE AGREEMENT.
II
THE COURT OF APPEALS ERRED IN GRANTING MORAL AND EXEMPLARY DAMAGES AND
ATTORNEYS FEES IN FAVOR OF THE RESPONDENTS.
III
THE COURT OF APPEALS ERRED IN HOLDING THAT THE PETITIONER RETURN THE
SUBJECT CAR TO THE RESPONDENTS, WITHOUT MAKING ANY PROVISION FOR THE
ISSUANCE OF THE NEW MANAGERS/CASHIERS CHECK BY THE RESPONDENTS IN FAVOR
OF THE PETITIONER IN LIEU OF THE ORIGINAL CASHIERS CHECK THAT ALREADY
BECAME STALE.[6]
As to the first issue, we find for the respondents. The issue as to what constitutes the terms of the
oral compromise or any subsequent novation is a question of fact that was resolved by the Regional Trial
Court and the Court of Appeals in favor of respondents. It is well settled that the findings of fact of the
lower court, especially when affirmed by the Court of Appeals, are binding upon this Court. [7] While there
are exceptions to this rule, [8] the present case does not fall under any one of them, the petitioners claim to
the contrary, notwithstanding.

Being an affirmative allegation, petitioner has the burden of evidence to prove his claim that the oral
compromise entered into by the parties on August 28, 1995 included the stipulation that the parties would
jointly file a motion to dismiss. This petitioner failed to do. Notably, even the Metropolitan Trial Court,
while ruling in favor of the petitioner and thereby dismissing the complaint, did not make a factual
finding that the compromise agreement included the condition of the signing of a joint motion to dismiss.
The Court of Appeals made the factual findings in this wise:
In support of its claim, petitioner presented the testimony of Mr. Jefferson Rivera who related that
respondent Dr. Gueco was aware that the signing of the draft of the Joint Motion to Dismiss was one of
the conditions set by the bank for the acceptance of the reduced amount of indebtedness and the release of
the car. (TSN, October 23, 1996, pp. 17-21, Rollo, pp. 18, 5). Respondents, however, maintained that no
such condition was ever discussed during their meeting of August 28, 1995 (Rollo, p. 32).
The trial court, whose factual findings are entitled to respect since it has the opportunity to directly
observe the witnesses and to determine by their demeanor on the stand the probative value of their
testimonies (People vs. Yadao, et al. 216 SCRA 1, 7 [1992]), failed to make a categorical finding on the
issue. In dismissing the claim of damages of the respondents, it merely observed that respondents are not
entitled to indemnity since it was their unjustified reluctance to sign of the Joint Motion to Dismiss that
delayed the release of the car. The trial court opined, thus:
As regards the third issue, plaintiffs claim for damages is unavailing. First, the plaintiffs could have
avoided the renting of another car and could have avoided this litigation had he signed the Joint Motion to
Dismiss. While it is true that herein defendant can unilaterally dismiss the case for collection of sum of
money with replevin, it is equally true that there is nothing wrong for the plaintiff to affix his signature in
the Joint Motion to Dismiss, for after all, the dismissal of the case against him is for his own good and
benefit. In fact, the signing of the Joint Motion to Dismiss gives the plaintiff three (3) advantages. First,
he will recover his car. Second, he will pay his obligation to the bank on its reduced amount of
P150,000.00 instead of its original claim of P184,985.09. And third, the case against him will be
dismissed. Plaintiffs, likewise, are not entitled to the award of moral damages and exemplary damages as
there is no showing that the defendant bank acted fraudulently or in bad faith. (Rollo, p. 15)
The Court has noted, however, that the trial court, in its findings of facts, clearly indicated that the
agreement of the parties on August 28, 1995 was merely for the lowering of the price, hence xxx On August 28, 1995, bank representative Jefferson Rivera and plaintiff entered into an oral
compromise agreement, whereby the original claim of the bank of P184,985.09 was reduced to
P150,000.00 and that upon payment of which, plaintiff was informed that the subject motor
vehicle would be released to him. (Rollo, p. 12)
The lower court, on the other hand, expressly made a finding that petitioner failed to include the aforesaid
signing of the Joint Motion to Dismiss as part of the agreement. In dismissing petitioners claim, the
lower court declared, thus:
If it is true, as the appellees allege, that the signing of the joint motion was a condition sine qua non for
the reduction of the appellants obligation, it is only reasonable and logical to assume that the joint motion
should have been shown to Dr. Gueco in the August 28, 1995 meeting. Why Dr. Gueco was not given a
copy of the joint motion that day of August 28, 1995, for his family or legal counsel to see to be brought
signed, together with the P150,000.00 in managers check form to be submitted on the following day on
August 29, 1995? (sic) [I]s a question whereby the answer up to now eludes this Courts

comprehension. The appellees would like this Court to believe that Dr. Gueco was informed by Mr.
Rivera of the bank requirement of signing the joint motion on August 28, 1995 but he did not bother to
show a copy thereof to his family or legal counsel that day August 28, 1995. This part of the theory of
appellee is too complicated for any simple oral agreement. The idea of a Joint Motion to Dismiss being
signed as a condition to the pushing through a deal surfaced only on August 29, 1995.
This Court is not convinced by the appellees posturing. Such claim rests on too slender a frame, being
inconsistent with human experience. Considering the effect of the signing of the Joint Motion to Dismiss
on the appellants substantive right, it is more in accord with human experience to expect Dr. Gueco, upon
being shown the Joint Motion to Dismiss, to refuse to pay the Managers Check and for the bank to refuse
to accept the manager's check. The only logical explanation for this inaction is that Dr. Gueco was not
shown the Joint Motion to Dismiss in the meeting of August 28, 1995, bolstering his claim that its signing
was never put into consideration in reaching a compromise. xxx. [9]
We see no reason to reverse.
Anent the issue of award of damages, we find the claim of petitioner meritorious. In finding the
petitioner liable for damages, both the Regional Trial Court and the Court of Appeals ruled that there was
fraud on the part of the petitioner. The CA thus declared:
The lower court's finding of fraud which became the basis of the award of damages was likewise
sufficiently proven. Fraud under Article 1170 of the Civil Code of the Philippines, as amended is the
deliberate and intentional evasion of the normal fulfillment of obligation When petitioner refused to
release the car despite respondent's tender of payment in the form of a manager's check, the former
intentionally evaded its obligation and thereby became liable for moral and exemplary damages, as well
as attorneys fees.[10]
We disagree.
Fraud has been defined as the deliberate intention to cause damage or prejudice. It is the voluntary
execution of a wrongful act, or a willful omission, knowing and intending the effects which naturally and
necessarily arise from such act or omission; the fraud referred to in Article 1170 of the Civil Code is the
deliberate and intentional evasion of the normal fulfillment of obligation. [11] We fail to see how the act of
the petitioner bank in requiring the respondent to sign the joint motion to dismiss could constitute as
fraud. True, petitioner may have been remiss in informing Dr. Gueco that the signing of a joint motion to
dismiss is a standard operating procedure of petitioner bank. However, this can not in anyway have
prejudiced Dr. Gueco. The motion to dismiss was in fact also for the benefit of Dr. Gueco, as the case
filed by petitioner against it before the lower court would be dismissed with prejudice. The whole point
of the parties entering into the compromise agreement was in order that Dr. Gueco would pay his
outstanding account and in return petitioner would return the car and drop the case for money and
replevin before the Metropolitan Trial Court. The joint motion to dismiss was but a natural consequence
of the compromise agreement and simply stated that Dr. Gueco had fully settled his obligation, hence, the
dismissal of the case. Petitioner's act of requiring Dr. Gueco to sign the joint motion to dismiss can not
be said to be a deliberate attempt on the part of petitioner to renege on the compromise agreement of the
parties. It should, likewise, be noted that in cases of breach of contract, moral damages may only be
awarded when the breach was attended by fraud or bad faith. [12] The law presumes good faith. Dr. Gueco
failed to present an iota of evidence to overcome this presumption. In fact, the act of petitioner bank in
lowering the debt of Dr. Gueco from P184,000.00 to P150,000.00 is indicative of its good faith and
sincere desire to settle the case. If respondent did suffer any damage, as a result of the withholding of his
car by petitioner, he has only himself to blame. Necessarily, the claim for exemplary damages must
fail. In no way, may the conduct of petitioner be characterized as wanton, fraudulent, reckless,
oppressive or malevolent.[13]

We, likewise, find for the petitioner with respect to the third assigned error. In the meeting of
August 29, 1995, respondent Dr. Gueco delivered a managers check representing the reduced amount
of P150,000.00. Said check was given to Mr. Rivera, a representative of respondent bank. However,
since Dr. Gueco refused to sign the joint motion to dismiss, he was made to execute a statement to the
effect that he was withholding the payment of the check. [14]Subsequently, in a letter addressed to Ms. Desi
Tomas, vice president of the bank, dated September 4, 1995, Dr. Gueco instructed the bank to disregard
the hold order letter and demanded the immediate release of his car, [15] to which the former replied that
the condition of signing the joint motion to dismiss must be satisfied and that they had kept the
check which could be claimed by Dr. Gueco anytime. [16] While there is controversy as to whether the
document evidencing the order to hold payment of the check was formally offered as evidence by
petitioners,[17] it appears from the pleadings that said check has not been encashed.
The decision of the Regional Trial Court, which was affirmed in toto by the Court of Appeals, orders
the petitioner:
1. to return immediately the subject car to the appellants in good working condition. Appellee may
deposit the Managers Check the proceeds of which have long been under the control of the issuing
bank in favor of the appellee since its issuance, whereas the funds have long been paid by appellants to
secure said Managers Check over which appellants have no control. [18]
Respondents would make us hold that petitioner should return the car or its value and that the latter,
because of its own negligence, should suffer the loss occasioned by the fact that the check had become
stale.[19] It is their position that delivery of the managers check produced the effect of payment [20] and,
thus, petitioner was negligent in opting not to deposit or use said check. Rudimentary sense of justice and
fair play would not countenance respondents position.
A stale check is one which has not been presented for payment within a reasonable time after its
issue. It is valueless and, therefore, should not be paid. Under the negotiable instruments law, an
instrument not payable on demand must be presented for payment on the day it falls due. When the
instrument is payable on demand, presentment must be made within a reasonable time after its issue. In
the case of a bill of exchange, presentment is sufficient if made within a reasonable time after the last
negotiation thereof.[21]
A check must be presented for payment within a reasonable time after its issue, [22] and in
determining what is a reasonable time, regard is to be had to the nature of the instrument, the usage of
trade or business with respect to such instruments, and the facts of the particular case. [23] The test is
whether the payee employed such diligence as a prudent man exercises in his own affairs. [24] This is
because the nature and theory behind the use of a check points to its immediate use and payability. In a
case, a check payable on demand which was long overdue by about two and a half (2-1/2) years was
considered a stale check.[25] Failure of a payee to encash a check for more than ten (10) years undoubtedly
resulted in the check becoming stale. [26] Thus, even a delay of one (1) week [27] or two (2) days, [28] under
the specific circumstances of the cited cases constituted unreasonable time as a matter of law.
In the case at bar, however, the check involved is not an ordinary bill of exchange but a managers
check. A managers check is one drawn by the banks manager upon the bank itself. It is similar to a
cashiers check both as to effect and use. A cashiers check is a check of the banks cashier on his own or
another check. In effect, it is a bill of exchange drawn by the cashier of a bank upon the bank itself,
and accepted in advance by the act of its issuance. [29] It is really the banks own check and may be treated
as a promissory note with the bank as a maker. [30] The check becomes the primary obligation of the bank
which issues it and constitutes its written promise to pay upon demand. The mere issuance of it is
considered an acceptance thereof. If treated as promissory note, the drawer would be the maker and in

which case the holder need not prove presentment for payment or present the bill to the drawee for
acceptance.[31]
Even assuming that presentment is needed, failure to present for payment within a reasonable time
will result to the discharge of the drawer only to the extent of the loss caused by the delay. [32] Failure to
present on time, thus, does not totally wipe out all liability. In fact, the legal situation amounts to an
acknowledgment of liability in the sum stated in the check. In this case, the Gueco spouses have not
alleged, much less shown that they or the bank which issued the managers check has suffered damage or
loss caused by the delay or non-presentment. Definitely, the original obligation to pay certainly has not
been erased.
It has been held that, if the check had become stale, it becomes imperative that the circumstances that
caused its non-presentment be determined. [33] In the case at bar, there is no doubt that the petitioner bank
held on the check and refused to encash the same because of the controversy surrounding the signing of
the joint motion to dismiss. We see no bad faith or negligence in this position taken by the Bank.
WHEREFORE, premises considered, the petition for review is given due course. The decision of the
Court of Appeals affirming the decision of the Regional Trial Court is SET ASIDE. Respondents are
further ordered to pay the original obligation amounting to P150,000.00 to the petitioner upon surrender
or cancellation of the managers check in the latters possession, afterwhich, petitioner is to return the
subject motor vehicle in good working condition.
SO ORDERED.

DIGEST
FACTS
Respondent Gueco spouses obtained a loan from petitioner International Corporate Bank (now Union
Bank of Philippines) to purchase a car Nissan Sentra 1989 model.
In consideration, spouses executed promissory note which were payable in monthly installment & chattel
mortgage over the car.
The spouses defaulted payment. Dr. Gueco had a meeting & the unpaid installment of P184k was reduced
to P150k. However, the car was detained by the bank.
When Dr. Gueco delivered the mangers check of P150k, the car was not released because of his refusal
to sign the Joint Motion to Dismiss.
The bank insisted that the JMD is a standard operating procedure to effect a compromise & to preclude
future filing of claims or suits for damages.
Gueco spouses filed an action against the bank for fraud, failing to inform them regarding JMD during the
meeting & for not releasing the car if they do not sign the said motion.
ISSUE
Whether or not the bank was guilty of fraud? NO
HELD
Fraud has been defined as the deliberate intention to cause damage or prejudice. It is the voluntary
execution of a wrongful act, or a willful omission, knowing and intending the effects which naturally and
necessarily arise from such act or omission. the fraud referred to in Article 1170 of the Civil Code is the
deliberate and intentional evasion of the normal fulfillment of obligation.
We fail to see how the act of the petitioner bank in requiring the respondent to sign the joint motion to
dismiss could constitute as fraud.

The JMD cannot in any way have prejudiced Dr. Gueco. The motion to dismiss was in fact also for the
benefit of Dr. Gueco, as the case filed by petitioner against it before the lower court would be dismissed
with prejudice. The whole point of the parties entering into the compromise agreement was in order that
Dr. Gueco would pay his outstanding account and in return petitioner would return the car and drop the
case for money and replevin before the Metropolitan Trial Court. The joint motion to dismiss was but a
natural consequence of the compromise agreement and simply stated that Dr. Gueco had fully settled his
obligation, hence, the dismissal of the case. Petitioners act of requiring Dr. Gueco to sign the joint
motion to dismiss cannot be said to be a deliberate attempt on the part of petitioner to renege on the
compromise agreement of the parties.
The law presumes good faith. Dr. Gueco failed to present an iota of evidence to overcome this
presumption. In fact, the act of petitioner bank in lowering the debt of Dr. Gueco from P184,000.00 to
P150,000.00 is indicative of its good faith and sincere desire to settle the case. If respondent did suffer
any damage, as a result of the withholding of his car by petitioner, he has only himself to blame.
Necessarily, the claim for exemplary damages must fail. In no way, may the conduct of petitioner be
characterized as wanton, fraudulent, reckless, oppressive or malevolent.

CHAPTER 6
G.R. No. 74886 December 8, 1992
PRUDENTIAL BANK, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and ANACLETO
R. CHI, respondents.

DAVIDE, JR., J.:

Petitioner seeks to review and set aside the decision 1 of public respondent; Intermediate Appellate Court
(now Court of Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which affirmed in toto the 15 June
1978 decision of Branch 9 (Quezon City) of the then Court of First Instance (now Regional Trial Court)
of Rizal in Civil Case No. Q-19312. The latter involved an action instituted by the petitioner for the
recovery of a sum of money representing the amount paid by it to the Nissho Company Ltd. of Japan for
textile machinery imported by the defendant, now private respondent, Philippine Rayon Mills, Inc.
(hereinafter Philippine Rayon), represented by co-defendant Anacleto R. Chi.
The facts which gave rise to the instant controversy are summarized by the public respondent as follows:
On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc. entered into a
contract with Nissho Co., Ltd. of Japan for the importation of textile machineries under a
five-year deferred payment plan (Exhibit B, Plaintiff's Folder of Exhibits, p 2). To effect
payment for said machineries, the defendant-appellant applied for a commercial letter of
credit with the Prudential Bank and Trust Company in favor of Nissho. By virtue of said
application, the Prudential Bank opened Letter of Credit No. DPP-63762 for $128,548.78
(Exhibit A, Ibid., p. 1). Against this letter of credit, drafts were drawn and issued by
Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65, 66 to 76), which were all paid by the
Prudential Bank through its correspondent in Japan, the Bank of Tokyo, Ltd. As indicated
on their faces, two of these drafts (Exhibit X and X-1, Ibid., pp. 65-66) were accepted by
the defendant-appellant through its president, Anacleto R. Chi, while the others were not
(Exhibits X-2 to X-11, Ibid., pp. 66 to 76).
Upon the arrival of the machineries, the Prudential Bank indorsed the shipping
documents to the defendant-appellant which accepted delivery of the same. To enable the
defendant-appellant to take delivery of the machineries, it executed, by prior arrangement
with the Prudential Bank, a trust receipt which was signed by Anacleto R. Chi in his
capacity as President (sic) of defendant-appellant company (Exhibit C, Ibid., p. 13).
At the back of the trust receipt is a printed form to be accomplished by two sureties who,
by the very terms and conditions thereof, were to be jointly and severally liable to the
Prudential Bank should the defendant-appellant fail to pay the total amount or any
portion of the drafts issued by Nissho and paid for by Prudential Bank. The defendantappellant was able to take delivery of the textile machineries and installed the same at its
factory site at 69 Obudan Street, Quezon City.

Sometime in 1967, the defendant-appellant ceased business operation (sic). On December

29, 1969, defendant-appellant's factory was leased by Yupangco Cotton Mills for an
annual rental of P200,000.00 (Exhibit I, Ibid., p. 22). The lease was renewed on January
3, 1973 (Exhibit J, Ibid., p. 26). On January 5, 1974, all the textile machineries in the
defendant-appellant's factory were sold to AIC Development Corporation for
P300,000.00 (Exhibit K, Ibid., p. 29).
The obligation of the defendant-appellant arising from the letter of credit and the trust
receipt remained unpaid and unliquidated. Repeated formal demands (Exhibits U, V, and
W, Ibid., pp. 62, 63, 64) for the payment of the said trust receipt yielded no result Hence,
the present action for the collection of the principal amount of P956,384.95 was filed on
October 3, 1974 against the defendant-appellant and Anacleto R. Chi. In their respective
answers, the defendants interposed identical special defenses, viz., the complaint states no
cause of action; if there is, the same has prescribed; and the plaintiff is guilty of laches. 2
On 15 June 1978, the trial court rendered its decision the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered sentencing the defendant Philippine Rayon
Mills, Inc. to pay plaintiff the sum of P153,645.22, the amounts due under Exhibits "X"
& "X-1", with interest at 6% per annum beginning September 15, 1974 until fully paid.
Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive, the same
not having been accepted by defendant Philippine Rayon Mills, Inc., plaintiff's cause of
action thereon has not accrued, hence, the instant case is premature.
Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed. Plaintiff is
ordered to pay defendant Anacleto R. Chi the sum of P20,000.00 as attorney's fees.
With costs against defendant Philippine Rayon Mills, Inc.
SO ORDERED. 3
Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the said court to
reverse or modify the decision, petitioner alleged in its Brief that the trial court erred in (a) disregarding
its right to reimbursement from the private respondents for the entire unpaid balance of the imported
machines, the total amount of which was paid to the Nissho Company Ltd., thereby violating the principle
of the third party payor's right to reimbursement provided for in the second paragraph of Article 1236 of
the Civil Code and under the rule against unjust enrichment; (b) refusing to hold Anacleto R. Chi, as the
responsible officer of defendant corporation, liable under Section 13 of P.D No 115 for the entire unpaid
balance of the imported machines covered by the bank's trust receipt (Exhibit "C"); (c) finding that the
solidary guaranty clause signed by Anacleto R. Chi is not a guaranty at all; (d) controverting the judicial
admissions of Anacleto R. Chi that he is at least a simple guarantor of the said trust receipt obligation; (e)
contravening, based on the assumption that Chi is a simple guarantor, Articles 2059, 2060 and 2062 of the
Civil Code and the related evidence and jurisprudence which provide that such liability had already
attached; (f) contravening the judicial admissions of Philippine Rayon with respect to its liability to pay
the petitioner the amounts involved in the drafts (Exhibits "X", "X-l" to "X-11''); and (g) interpreting
"sight" drafts as requiring acceptance by Philippine Rayon before the latter could be held liable thereon. 4
In its decision, public respondent sustained the trial court in all respects. As to the first and last assigned
errors, it ruled that the provision on unjust enrichment, Article 2142 of the Civil Code, applies only if

there is no express contract between the parties and there is a clear showing that the payment is justified.
In the instant case, the relationship existing between the petitioner and Philippine Rayon is governed by
specific contracts, namely the application for letters of credit, the promissory note, the drafts and the trust
receipt. With respect to the last ten (10) drafts (Exhibits "X-2" to "X-11") which had not been presented to
and were not accepted by Philippine Rayon, petitioner was not justified in unilaterally paying the amounts
stated therein. The public respondent did not agree with the petitioner's claim that the drafts were sight
drafts which did not require presentment for acceptance to Philippine Rayon because paragraph 8 of the
trust receipt presupposes prior acceptance of the drafts. Since the ten (10) drafts were not presented and
accepted, no valid demand for payment can be made.
Public respondent also disagreed with the petitioner's contention that private respondent Chi is solidarily
liable with Philippine Rayon pursuant to Section 13 of P.D. No. 115 and based on his signature on the
solidary guaranty clause at the dorsal side of the trust receipt. As to the first contention, the public
respondent ruled that the civil liability provided for in said Section 13 attaches only after conviction. As
to the second, it expressed misgivings as to whether Chi's signature on the trust receipt made the latter
automatically liable thereon because the so-called solidary guaranty clause at the dorsal portion of the
trust receipt is to be signed not by one (1) person alone, but by two (2) persons; the last sentence of the
same is incomplete and unsigned by witnesses; and it is not acknowledged before a notary public.
Besides, even granting that it was executed and acknowledged before a notary public, Chi cannot be held
liable therefor because the records fail to show that petitioner had either exhausted the properties of
Philippine Rayon or had resorted to all legal remedies as required in Article 2058 of the Civil Code. As
provided for under Articles 2052 and 2054 of the Civil Code, the obligation of a guarantor is merely
accessory and subsidiary, respectively. Chi's liability would therefore arise only when the principal debtor
fails to comply with his obligation. 5
Its motion to reconsider the decision having been denied by the public respondent in its Resolution of 11
June 1986, 6 petitioner filed the instant petition on 31 July 1986 submitting the following legal issues:
I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY
ERRED IN DENYING PETITIONER'S CLAIM FOR FULL REIMBURSEMENT
AGAINST THE PRIVATE RESPONDENTS FOR THE PAYMENT PETITIONER
MADE TO NISSHO CO. LTD. FOR THE BENEFIT OF PRIVATE RESPONDENT
UNDER ART. 1283 OF THE NEW CIVIL CODE OF THE PHILIPPINES AND UNDER
THE GENERAL PRINCIPLE AGAINST UNJUST ENRICHMENT;
II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE UNDER THE
TRUST RECEIPT (EXH. C);
III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS OF
RESPONDENT CHI HE IS LIABLE THEREON AND TO WHAT EXTENT;
IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE GUARANTOR;
AND IF SO; HAS HIS LIABILITY AS SUCH ALREADY ATTACHED;
V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE OFFICER OF
RESPONDENT PHIL. RAYON RESPONDENT CHI IS PERSONALLY LIABLE
PURSUANT TO THE PROVISION OF SECTION 13, P.D. 115;
VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO THE
PETITIONER UNDER THE TRUST RECEIPT (EXH. C);

VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS

RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE
DRAFTS (EXHS. X, X-1 TO X-11) AND TO WHAT EXTENT;
VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR ACCEPTANCE FROM
RESPONDENT PHIL. RAYON BEFORE THE LATTER BECOMES LIABLE TO
PETITIONER. 7
In the Resolution of 12 March 1990, 8 this Court gave due course to the petition after the filing of the
Comment thereto by private respondent Anacleto Chi and of the Reply to the latter by the petitioner; both
parties were also required to submit their respective memoranda which they subsequently complied with.
As We see it, the issues may be reduced as follows:
1. Whether presentment for acceptance of the drafts was indispensable to
make Philippine Rayon liable thereon;
2. Whether Philippine Rayon is liable on the basis of the trust receipt;
3. Whether private respondent Chi is jointly and severally liable with
Philippine Rayon for the obligation sought to be enforced and if not,
whether he may be considered a guarantor; in the latter situation, whether
the case should have been dismissed on the ground of lack of cause of
action as there was no prior exhaustion of Philippine Rayon's properties.
Both the trial court and the public respondent ruled that Philippine Rayon could be held liable for the two
(2) drafts, Exhibits "X" and "X-1", because only these appear to have been accepted by the latter after due
presentment. The liability for the remaining ten (10) drafts (Exhibits "X-2" to "X-11" inclusive) did not
arise because the same were not presented for acceptance. In short, both courts concluded that acceptance
of the drafts by Philippine Rayon was indispensable to make the latter liable thereon. We are unable to
agree with this proposition. The transaction in the case at bar stemmed from Philippine Rayon's
application for a commercial letter of credit with the petitioner in the amount of $128,548.78 to cover the
former's contract to purchase and import loom and textile machinery from Nissho Company, Ltd. of Japan
under a five-year deferred payment plan. Petitioner approved the application. As correctly ruled by the
trial court in its Order of 6 March 1975: 9
. . . By virtue of said Application and Agreement for Commercial Letter of Credit,
plaintiff bank 10 was under obligation to pay through its correspondent bank in Japan the
drafts that Nisso (sic) Company, Ltd., periodically drew against said letter of credit from
1963 to 1968, pursuant to plaintiff's contract with the defendant Philippine Rayon Mills,
Inc. In turn, defendant Philippine Rayon Mills, Inc., was obligated to pay plaintiff bank
the amounts of the drafts drawn by Nisso (sic) Company, Ltd. against said plaintiff bank
together with any accruing commercial charges, interest, etc. pursuant to the terms and
conditions stipulated in the Application and Agreement of Commercial Letter of Credit
Annex "A".
A letter of credit is defined as an engagement by a bank or other person made at the request of a customer
that the issuer will honor drafts or other demands for payment upon compliance with the conditions
specified in the credit. 11 Through a letter of credit, the bank merely substitutes its own promise to pay for
one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter

of credit plus credit or commitment fees mutually agreed upon. 12 In the instant case then, the drawee was
necessarily the herein petitioner. It was to the latter that the drafts were presented for payment. In fact,
there was no need for acceptance as the issued drafts are sight drafts. Presentment for acceptance is
necessary only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law
(NIL). 13 The said section reads:
Sec. 143. When presentment for acceptance must be made. Presentment for acceptance
must be made:
(a) Where the bill is payable after sight, or in any other
case, where presentment for acceptance is necessary in
order to fix the maturity of the instrument; or
(b) Where the bill expressly stipulates that it shall be
presented for acceptance; or
(c) Where the bill is drawn payable elsewhere than at the
residence or place of business of the drawee.
In no other case is presentment for acceptance necessary in order to render any party to
the bill liable.
Obviously then, sight drafts do not require presentment for acceptance.
The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer;
may be done in writing by the drawee in the bill itself, or in a separate instrument. 15

14

this

The parties herein agree, and the trial court explicitly ruled, that the subject, drafts are sight drafts. Said
the latter:
. . . In the instant case the drafts being at sight, they are supposed to be payable upon
acceptance unless plaintiff bank has given the Philippine Rayon Mills Inc. time within
which to pay the same. The first two drafts (Annexes C & D, Exh. X & X-1) were duly
accepted as indicated on their face (sic), and upon such acceptance should have been paid
forthwith. These two drafts were not paid and although Philippine Rayon Mills
ought to have paid the same, the fact remains that until now they are still unpaid. 16
Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7 provides:
Sec. 7. When payable on demand. An instrument is payable on demand
(a) When so it is expressed to be payable on demand, or
at sight, or on presentation; or
(b) In which no time for payment in expressed.
Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it, payable on demand. (emphasis supplied)

Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of any
accepted draft, bill of exchange or indebtedness shall not be extinguished or modified" 17 does
not, contrary to the holding of the public respondent, contemplate prior acceptance by Philippine
Rayon, but by the petitioner. Acceptance, however, was not even necessary in the first place
because the drafts which were eventually issued were sight drafts And even if these were not
sight drafts, thereby necessitating acceptance, it would be the petitioner and not Philippine
Rayon which had to accept the same for the latter was not the drawee. Presentment for
acceptance is defined an the production of a bill of exchange to a drawee for acceptance. 18 The
trial court and the public respondent, therefore, erred in ruling that presentment for acceptance
was an indispensable requisite for Philippine Rayon's liability on the drafts to attach. Contrary to
both courts' pronouncements, Philippine Rayon immediately became liable thereon upon
petitioner's payment thereof. Such is the essence of the letter of credit issued by the petitioner. A
different conclusion would violate the principle upon which commercial letters of credit are
founded because in such a case, both the beneficiary and the issuer, Nissho Company Ltd. and the
petitioner, respectively, would be placed at the mercy of Philippine Rayon even if the latter had
already received the imported machinery and the petitioner had fully paid for it. The typical
setting and purpose of a letter of credit are described in Hibernia Bank and Trust Co. vs. J. Aron
& Co., Inc., 19 thus:
Commercial letters of credit have come into general use in international sales transactions
where much time necessarily elapses between the sale and the receipt by a purchaser of
the merchandise, during which interval great price changes may occur. Buyers and sellers
struggle for the advantage of position. The seller is desirous of being paid as surely and
as soon as possible, realizing that the vendee at a distant point has it in his power to reject
on trivial grounds merchandise on arrival, and cause considerable hardship to the shipper.
Letters of credit meet this condition by affording celerity and certainty of payment. Their
purpose is to insure to a seller payment of a definite amount upon presentation of
documents. The bank deals only with documents. It has nothing to do with the quality of
the merchandise. Disputes as to the merchandise shipped may arise and be litigated later
between vendor and vendee, but they may not impede acceptance of drafts and payment
by the issuing bank when the proper documents are presented.
The trial court and the public respondent likewise erred in disregarding the trust receipt and in not holding
that Philippine Rayon was liable thereon. In People vs. Yu Chai Ho, 20 this Court explains the nature of a
trust receipt by quoting In re Dunlap Carpet Co., 21 thus:
By this arrangement a banker advances money to an intending importer, and thereby
lends the aid of capital, of credit, or of business facilities and agencies abroad, to the
enterprise of foreign commerce. Much of this trade could hardly be carried on by any
other means, and therefore it is of the first importance that the fundamental factor in the
transaction, the banker's advance of money and credit, should receive the amplest
protection. Accordingly, in order to secure that the banker shall be repaid at the critical
point that is, when the imported goods finally reach the hands of the intended vendee
the banker takes the full title to the goods at the very beginning; he takes it as soon as
the goods are bought and settled for by his payments or acceptances in the foreign
country, and he continues to hold that title as his indispensable security until the goods
are sold in the United States and the vendee is called upon to pay for them. This security
is not an ordinary pledge by the importer to the banker, for the importer has never owned
the goods, and moreover he is not able to deliver the possession; but the security is the
complete title vested originally in the bankers, and this characteristic of the transaction

has again and again been recognized and protected by the courts. Of course, the title is at
bottom a security title, as it has sometimes been called, and the banker is always under
the obligation to reconvey; but only after his advances have been fully repaid and after
the importer has fulfilled the other terms of the contract.
As further stated in National Bank vs. Viuda e Hijos de Angel Jose, 22 trust receipts:
. . . [I]n a certain manner, . . . partake of the nature of a conditional sale as provided by
the Chattel Mortgage Law, that is, the importer becomes absolute owner of the imported
merchandise as soon an he has paid its price. The ownership of the merchandise
continues to be vested in the owner thereof or in the person who has advanced payment,
until he has been paid in full, or if the merchandise has already been sold, the proceeds of
the sale should be turned over to him by the importer or by his representative or
successor in interest.
Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect on 29 January 1973, a
trust receipt transaction is defined as "any transaction by and between a person referred to in this Decree
as the entruster, and another person referred to in this Decree as the entrustee, whereby the entruster, who
owns or holds absolute title or security interests' over certain specified goods, documents or instruments,
releases the same to the possession of the entrustee upon the latter's execution and delivery to the
entruster of a signed document called the "trust receipt" wherein the entrustee binds himself to hold the
designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of
the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof
to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods,
instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and
conditions specified in the trusts receipt, or for other purposes substantially equivalent to any one of the
following: . . ."
It is alleged in the complaint that private respondents "not only have presumably put said machinery to
good use and have profited by its operation and/or disposition but very recent information that (sic)
reached plaintiff bank that defendants already sold the machinery covered by the trust receipt to Yupangco
Cotton Mills," and that "as trustees of the property covered by the trust receipt, . . . and therefore acting in
fiduciary (sic) capacity, defendants have willfully violated their duty to account for the whereabouts of
the machinery covered by the trust receipt or for the proceeds of any lease, sale or other disposition of the
same that they may have made, notwithstanding demands therefor; defendants have fraudulently
misapplied or converted to their own use any money realized from the lease, sale, and other disposition of
said machinery." 23 While there is no specific prayer for the delivery to the petitioner by Philippine Rayon
of the proceeds of the sale of the machinery covered by the trust receipt, such relief is covered by the
general prayer for "such further and other relief as may be just and equitable on the premises." 24 And
although it is true that the petitioner commenced a criminal action for the violation of the Trust Receipts
Law, no legal obstacle prevented it from enforcing the civil liability arising out of the trust, receipt in a
separate civil action. Under Section 13 of the Trust Receipts Law, the failure of an entrustee to turn over
the proceeds of the sale of goods, documents or instruments covered by a trust receipt to the extent of the
amount owing to the entruster or as appear in the trust receipt or to return said goods, documents or
instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall
constitute the crime of estafa, punishable under the provisions of Article 315, paragraph 1(b) of the
Revised Penal Code. 25 Under Article 33 of the Civil Code, a civil action for damages, entirely separate
and distinct from the criminal action, may be brought by the injured party in cases of defamation, fraud
and physical injuries. Estafa falls under fraud.

We also conclude, for the reason hereinafter discussed, and not for that adduced by the public respondent,
that private respondent Chi's signature in the dorsal portion of the trust receipt did not bind him solidarily
with Philippine Rayon. The statement at the dorsal portion of the said trust receipt, which petitioner
describes as a "solidary guaranty clause", reads:
In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying
with the foregoing, we jointly and severally agree and undertake to pay on demand to the
PRUDENTIAL BANK AND TRUST COMPANY all sums of money which the said
PRUDENTIAL BANK AND TRUST COMPANY may call upon us to pay arising out of
or pertaining to, and/or in any event connected with the default of and/or non-fulfillment
in any respect of the undertaking of the aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not
have to take any steps or exhaust its remedy against aforesaid:
before making demand on me/us.
Petitioner insists that by virtue of the clear wording of the statement, specifically the clause ". . . we
jointly and severally agree and undertake . . .," and the concluding sentence on exhaustion, Chi's liability
therein is solidary.
In holding otherwise, the public respondent ratiocinates as follows:
With respect to the second argument, we have our misgivings as to whether the mere
signature of defendant-appellee Chi of (sic) the guaranty agreement, Exhibit "C-1", will
make it an actionable document. It should be noted that Exhibit "C-1" was prepared and
printed by the plaintiff-appellant. A perusal of Exhibit "C-1" shows that it was to be
signed and executed by two persons. It was signed only by defendant-appellee Chi.
Exhibit "C-1" was to be witnessed by two persons, but no one signed in that capacity. The
last sentence of the guaranty clause is incomplete. Furthermore, the plaintiff-appellant
also failed to have the purported guarantee clause acknowledged before a notary public.
All these show that the alleged guaranty provision was disregarded and, therefore, not
consummated.
But granting arguendo that the guaranty provision in Exhibit "C-1" was fully executed
and acknowledged still defendant-appellee Chi cannot be held liable thereunder because
the records show that the plaintiff-appellant had neither exhausted the property of the
defendant-appellant nor had it resorted to all legal remedies against the said defendantappellant as provided in Article 2058 of the Civil Code. The obligation of a guarantor is
merely accessory under Article 2052 of the Civil Code and subsidiary under Article 2054
of the Civil Code. Therefore, the liability of the defendant-appellee arises only when the
principal debtor fails to comply with his obligation. 27
Our own reading of the questioned solidary guaranty clause yields no other conclusion than that the
obligation of Chi is only that of a guarantor. This is further bolstered by the last sentence which speaks of
waiver of exhaustion, which, nevertheless, is ineffective in this case because the space therein for the
party whose property may not be exhausted was not filled up. Under Article 2058 of the Civil Code, the
defense of exhaustion (excussion) may be raised by a guarantor before he may be held liable for the

obligation. Petitioner likewise admits that the questioned provision is a solidary guaranty clause, thereby
clearly distinguishing it from a contract of surety. It, however, described the guaranty as solidary between
the guarantors; this would have been correct if two (2) guarantors had signed it. The clause "we jointly
and severally agree and undertake" refers to the undertaking of the two (2) parties who are to sign it or to
the liability existing between themselves. It does not refer to the undertaking between either one or both
of them on the one hand and the petitioner on the other with respect to the liability described under the
trust receipt. Elsewise stated, their liability is not divisible as between them, i.e., it can be enforced to its
full extent against any one of them.
Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause should be resolved
against the petitioner. The trust receipt, together with the questioned solidary guaranty clause, is on a form
drafted and prepared solely by the petitioner; Chi's participation therein is limited to the affixing of his
signature thereon. It is, therefore, a contract of adhesion; 28 as such, it must be strictly construed against
the party responsible for its preparation. 29
Neither can We agree with the reasoning of the public respondent that this solidary guaranty clause was
effectively disregarded simply because it was not signed and witnessed by two (2) persons and
acknowledged before a notary public. While indeed, the clause ought to have been signed by two (2)
guarantors, the fact that it was only Chi who signed the same did not make his act an idle ceremony or
render the clause totally meaningless. By his signing, Chi became the sole guarantor. The attestation by
witnesses and the acknowledgement before a notary public are not required by law to make a party liable
on the instrument. The rule is that contracts shall be obligatory in whatever form they may have been
entered into, provided all the essential requisites for their validity are present; however, when the law
requires that a contract be in some form in order that it may be valid or enforceable, or that it be proved in
a certain way, that requirement is absolute and indispensable. 30 With respect to a guaranty, 31 which is a
promise to answer for the debt or default of another, the law merely requires that it, or some note or
memorandum thereof, be in writing. Otherwise, it would be unenforceable unless ratified. 32 While the
acknowledgement of a surety before a notary public is required to make the same a public document,
under Article 1358 of the Civil Code, a contract of guaranty does not have to appear in a public document.
And now to the other ground relied upon by the petitioner as basis for the solidary liability of Chi, namely
the criminal proceedings against the latter for the violation of P.D. No. 115. Petitioner claims that because
of the said criminal proceedings, Chi would be answerable for the civil liability arising therefrom
pursuant to Section 13 of P.D. No. 115. Public respondent rejected this claim because such civil liability
presupposes prior conviction as can be gleaned from the phrase "without prejudice to the civil liability
arising from the criminal offense." Both are wrong. The said section reads:
Sec. 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the
sale of the goods, documents or instruments covered by a trust receipt to the extent of the
amount owing to the entruster or as appears in the trust receipt or to return said goods,
documents or instruments if they were not sold or disposed of in accordance with the
terms of the trust receipt shall constitute the crime of estafa, punishable under the
provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered
Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised
Penal Code. If the violation or offense is committed by a corporation, partnership,
association or other juridical entities, the penalty provided for in this Decree shall be
imposed upon the directors, officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil liabilities arising from the
criminal offense.

A close examination of the quoted provision reveals that it is the last sentence which provides for the
correct solution. It is clear that if the violation or offense is committed by a corporation, partnership,
association or other juridical entities, the penalty shall be imposed upon the directors, officers, employees
or other officials or persons therein responsible for the offense. The penalty referred to is imprisonment,
the duration of which would depend on the amount of the fraud as provided for in Article 315 of the
Revised Penal Code. The reason for this is obvious: corporations, partnerships, associations and other
juridical entities cannot be put in jail. However, it is these entities which are made liable for the civil
liability arising from the criminal offense. This is the import of the clause "without prejudice to the civil
liabilities arising from the criminal offense." And, as We stated earlier, since that violation of a trust
receipt constitutes fraud under Article 33 of the Civil Code, petitioner was acting well within its rights in
filing an independent civil action to enforce the civil liability arising therefrom against Philippine Rayon.
The remaining issue to be resolved concerns the propriety of the dismissal of the case against private
respondent Chi. The trial court based the dismissal, and the respondent Court its affirmance thereof, on
the theory that Chi is not liable on the trust receipt in any capacity either as surety or as guarantor
because his signature at the dorsal portion thereof was useless; and even if he could be bound by such
signature as a simple guarantor, he cannot, pursuant to Article 2058 of the Civil Code, be compelled to
pay until
after petitioner has exhausted and resorted to all legal remedies against the principal debtor, Philippine
Rayon. The records fail to show that petitioner had done so 33 Reliance is thus placed on Article 2058 of
the Civil Code which provides:
Art. 2056. The guarantor cannot be compelled to pay the creditor unless the latter has
exhausted all the property of the debtor, and has resorted to all the legal remedies against
the debtor.
Simply stated, there is as yet no cause of action against Chi.
We are not persuaded. Excussion is not a condition sine qua non for the institution of an action against a
guarantor. In Southern Motors, Inc. vs. Barbosa, 34 this Court stated:
4. Although an ordinary personal guarantor not a mortgagor or pledgor may
demand the aforementioned exhaustion, the creditor may, prior thereto, secure a judgment
against said guarantor, who shall be entitled, however, to a deferment of the execution of
said judgment against him until after the properties of the principal debtor shall have been
exhausted to satisfy the obligation involved in the case.
There was then nothing procedurally objectionable in impleading private respondent Chi as a codefendant in Civil Case No. Q-19312 before the trial court. As a matter of fact, Section 6, Rule 3 of the
Rules of Court on permissive joinder of parties explicitly allows it. It reads:
Sec. 6. Permissive joinder of parties. All persons in whom or against whom any right
to relief in respect to or arising out of the same transaction or series of transactions is
alleged to exist, whether jointly, severally, or in the alternative, may, except as otherwise
provided in these rules, join as plaintiffs or be joined as defendants in one complaint,
where any question of law or fact common to all such plaintiffs or to all such defendants
may arise in the action; but the court may make such orders as may be just to prevent any
plaintiff or defendant from being embarrassed or put to expense in connection with any
proceedings in which he may have no interest.

This is the equity rule relating to multifariousness. It is based on trial convenience and is designed to
permit the joinder of plaintiffs or defendants whenever there is a common question of law or fact. It will
save the parties unnecessary work, trouble and expense. 35
However, Chi's liability is limited to the principal obligation in the trust receipt plus all the accessories
thereof including judicial costs; with respect to the latter, he shall only be liable for those costs incurred
after being judicially required to pay. 36 Interest and damages, being accessories of the principal
obligation, should also be paid; these, however, shall run only from the date of the filing of the complaint.
Attorney's fees may even be allowed in appropriate cases. 37
In the instant case, the attorney's fees to be paid by Chi cannot be the same as that to be paid by Philippine
Rayon since it is only the trust receipt that is covered by the guaranty and not the full extent of the latter's
liability. All things considered, he can be held liable for the sum of P10,000.00 as attorney's fees in favor
of the petitioner.
Thus, the trial court committed grave abuse of discretion in dismissing the complaint as against private
respondent Chi and condemning petitioner to pay him P20,000.00 as attorney's fees.
In the light of the foregoing, it would no longer necessary to discuss the other issues raised by the
petitioner
WHEREFORE, the instant Petition is hereby GRANTED.
The appealed Decision of 10 March 1986 of the public respondent in AC-G.R. CV No. 66733
and, necessarily, that of Branch 9 (Quezon City) of the then Court of First Instance of Rizal in
Civil Case No. Q-19312 are hereby REVERSED and SET ASIDE and another is hereby entered:
1. Declaring private respondent Philippine Rayon Mills, Inc. liable on the
twelve drafts in question (Exhibits "X", "X-1" to "X-11", inclusive) and
on the trust receipt (Exhibit "C"), and ordering it to pay petitioner: (a) the
amounts due thereon in the total sum of P956,384.95 as of 15 September
1974, with interest thereon at six percent (6%) per annum from 16
September 1974 until it is fully paid, less whatever may have been
applied thereto by virtue of foreclosure of mortgages, if any; (b) a sum
equal to ten percent (10%) of the aforesaid amount as attorney's fees; and
(c) the costs.
2. Declaring private respondent Anacleto R. Chi secondarily liable on the
trust receipt and ordering him to pay the face value thereof, with interest
at the legal rate, commencing from the date of the filing of the complaint
in Civil Case No. Q-19312 until the same is fully paid as well as the
costs and attorney's fees in the sum of P10,000.00 if the writ of execution
for the enforcement of the above awards against Philippine Rayon Mills,
Inc. is returned unsatisfied.
Costs against private respondents.
DIGEST

FACTS
Philippine Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd. of Japan for the importation of
textile machineries under a five-year deferred payment plan. To effect payment for said machineries,
Philippine Rayon Mills opened a commercial letter of credit with the Prudential Bank and Trust Company
in favor of Nissho. Against this letter of credit, drafts were drawn and issued by Nissho, which were all
paid by the Prudential Bank through its correspondent in Japan. Two of these drafts were accepted by
Philippine Rayon Mills while the others were not. Petitioner instituted an action for the recovery of the
sum of money it paid to Nissho as Philippine Rayon Mills was not able to pay its obligations arising from
the letter of credit. Respondent court ruled that with regard to the ten drafts which were not presented and
accepted, no valid demand for payment can be made. Petitioner however claims that the drafts were sight
drafts which did not require presentment for acceptance to Philippine Rayon.
ISSUE
Whether presentment for acceptance of the drafts was indispensable to make Philippine Rayon liable
thereon.
RULING
In the case at bar, the drawee was necessarily the herein petitioner. It was to the latter that the drafts were
presented for payment. There was in fact no need for acceptance as the issued drafts are sight
drafts. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143
of the Negotiable Instruments Law (NIL). The said section provides that presentment for acceptance
must be made:
(a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is
necessary in order to fix the maturity of the instrument; or
(b) Where the bill expressly stipulates that it shall be presented for acceptance; or
(c) Where the bill is drawn payable elsewhere than at the residence or place of business of the
drawee.
In no other case is presentment for acceptance necessary in order to render any party to the bill
liable. Obviously then, sight drafts do not require presentment for acceptance.

G.R. No. L-43596

October 31, 1936

PHILIPPINE NATIONAL BANK, plaintiff-appellee,

vs.
THE NATIONAL CITY BANK OF NEW YORK, and MOTOR SERVICE COMPANY,
INC., defendants.
MOTOR SERVICE COMPANY, INC., appellant.
L. D. Lockwood for appellant.
Camus and Delgado for appellee.

RECTO, J.:
This case was submitted for decision to the court below on the following stipulation of facts:
1. That plaintiff is a banking corporation organized and existing under and by virtue of a special
act of the Philippine Legislature, with office as principal place of business at the Masonic Temple
Bldg., Escolta, Manila, P. I.; that the defendant National City Bank of New York is a foreign
banking corporation with a branch office duly authorized and licensed to carry and engage in
banking business in the Philippine Islands, with branch office and place of business in the
National City Bank Bldg., City of Manila, P. I., and that the defendant Motor Service Company,
Inc., is a corporation organized and existing under and by virtue of the general corporation law of
the Philippine Islands, with office and principal place of business at 408 Rizal Avenue, City of
Manila, P. I., engaged in the purchase and sale of automobile spare parts and accessories.
2. That on April 7 and 9, 1933, an unknown person or persons negotiated with defendant Motor
Service Company, Inc., the checks marked as Exhibits A and A-1, respectively, which are made
parts of the stipulation, in payment for automobile tires purchased from said defendant's stores,
purporting to have been issued by the "Pangasinan Transportation Co., Inc. by J. L. Klar,
Manager and Treasurer", against the Philippine National Bank and in favor of the International
Auto Repair Shop, for P144.50 and P215.75; and said checks were indorsed by said unknown
persons in the manner indicated at the back thereof, the Motor Service Co., Inc., believing at the
time that the signature of J. L. Klar, Manager and Treasurer of the Pangasinan Transportation Co.,
Inc., on both checks were genuine.
3. The checks Exhibits A and A-1 were then indorsed for deposit by the defendant Motor Service
Company, Inc, at the National City Bank of New York and the former was accordingly credited
with the amounts thereof, or P144.50 and P215.75.
4. On April 8 and 10, 1933, the said checks were cleared at the clearing house and the Philippine
National Bank credited the National City Bank of New York for the amounts thereof, believing at
the time that the signatures of the drawer were genuine, that the payee is an existing entity and the
endorsement at the back thereof regular and genuine.
5. The Philippine National Bank then found out that the purported signatures of J. L. Klar, as
Manager and Treasurer of the Pangasinan Transportation Company, Inc., in said Exhibits A and
A-1 were forged when so informed by the said Company, and it accordingly demanded from the
defendants the reimbursement of the amounts for which it credited the National City Bank of
New York at the clearing house and for which the latter credited the Motor Service Co., but the
defendants refused, and continue to refuse, to make such reimbursements.

6. The Pangasinan Transportation Co., Inc., objected to have the proceeds of said check deducted
from their deposit.
7. Exhibits B, C, D, E, F, and G, which were introduced at the trial in the municipal court of
Manila and forming part of the record of the present case, are admitted by the parties as genuine
and are made part of this stipulation as well as Exhibit H hereto attached and made a part hereof.
Upon plaintiff's motion, the case was dismissed before trial as to the defendant National City Bank of
New York. a decision was thereafter rendered giving plaintiff judgment for the total amount of P360.25,
with interest and costs. From this decision the instant appeal was taken.
Before us is the preliminary question of whether the original appeal taken by the plaintiff from the
decision of the municipal court of Manila where this case originated, became perfected because of
plaintiff's failure to attach to the record within 15 days from receipt of notice of said decision, the
certificate of appeal bond required by section 76 of the Code of Civil Procedure. It is not disputed that
both the appeal docket fee and the appeal cash bond were paid and deposited within the prescribed time.
The issue is whether the mere failure to file the official receipt showing that such deposit was made
within the said period is a sufficient ground to dismiss plaintiff's appeal. This question was settled by our
decision in the case of Blanco vs. Bernabe and lawyers Cooperative Publishing Co. (page 124, ante), and
no further consideration. No error was committed in allowing said appeal.
We now pass on to consider and determine the main question presented by this appeal, namely, whether
the appellee has the right to recover from the appellant, under the circumstances of this case, the value of
the checks on which the signatures of the drawer were forged. The appellant maintains that the question
should be answered in the negative and in support of its contention appellant advanced various reasons
presently to be examined carefully.
I. It is contended, first of all, that the payment of the checks in question made by the drawee bank
constitutes an "acceptance", and, consequently, the case should be governed by the provisions of section
62 of the Negotiable Instruments Law, which says:
SEC. 62. Liability of acceptor. The acceptor by accepting the instrument engages that he will
pay it according to the tenor of his acceptance; and admits:
(a) The existence of the drawer, the genuineness of his signature, and his capacity and
authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
This contention is without merit. A check is a bill of exchange payable on demand and only the rules
governing bills of exchange payable on demand are applicable to it, according to section 185 of the
Negotiable Instruments Law. In view of the fact that acceptance is a step unnecessary, in so far as bills of
exchange payable on demand are concerned (sec. 143), it follows that the provisions relative to
"acceptance" are without application to checks. Acceptance implies, in effect, subsequent negotiation of
the instrument, which is not true in case of the payment of a check because from the moment a check is
paid it is withdrawn from circulation. The warranty established by section 62, is in favor of holders of the
instrument after its acceptance. When the drawee bank cashes or pays a check, the cycle of negotiation is
terminated, and it is illogical thereafter to speak of subsequent holders who can invoke the warranty
provided in section 62 against the drawee. Moreover, according to section 191, "acceptance" means "an
acceptance completed by delivery or notification" and this concept is entirely incompatible with payment,

because when payment is made the check is retained by the bank, and there is no such thing as delivery or
notification to the party receiving the payment. Checks are not to be accepted, but presented at once for
payment. (1 Bouvier's Law Dictionary, 476.) There can be no such thing as "acceptance" in the ordinary
sense of the term. A check being payable immediately and on demand, the bank can fulfill its duty to the
depositor only by paying the amount demanded. The holder has no right to demand from the bank
anything but payment of the check, and the bank has no right, as against the drawer, to do anything but
pay it. (5 R. C. L., p. 516, par. 38.) A check is not an instrument which in the ordinary course of business
calls for acceptance. The holder can never claim acceptance as his legal right. He can present for
payment, and only for payment. (1 Morse on Banks and Banking, 6th ed., pp. 898, 899.)
There is, however, nothing in the law or in, business practice against the presentation of checks for
acceptance, before they are paid, in which case we have a "certification" equivalent to "acceptance"
according to section 187, which provides that "where a check is certified by the bank on which it is
drawn, the certification is equivalent to an acceptance", and it is then that the warranty under section 62
exists. This certification or acceptance consists in the signification by the drawee of his assent to the order
of the drawer, which must not express that the drawee will perform his promise by any other means than
the payment of money. (Sec. 132.) When the holder of a check procures it to be accepted or certified, the
drawer and all indorsers are discharged from liability thereon (sec. 188), and then the check operates as an
assignment of a part of the funds to the credit of the drawer with the bank. (Sec. 189.) There is nothing in
the nature of the check which intrinsically precludes its acceptance, in like manner and with like effect as
a bill of exchange or draft may be accepted. The bank may accept if it chooses; and it is frequently
induced by convenience, by the exigencies of business, or by the desire to oblige customers, voluntarily to
incur the obligation. The act by which the bank places itself under obligation to pay to the holder the sum
called for by a check must be the expressed promise or undertaking of the bank signifying its intent to
assume the obligation, or some act from which the law will imperatively imply such valid promise or
undertaking. The most ordinary form which such an act assumes is the acceptance by the bank of the
check, or, as it is perhaps more often called, the certifying of the check. (1 Morse on Banks and Banking,
pp. 898, 899; 5 R. C. L., p. 520.)
No doubt a bank may by an unequivocal promise in writing make itself liable in any event to pay the
check upon demand, but this is not an "acceptance" of the check in the true sense of that term. Although a
check does not call for acceptance, and the holder can present it only for payment, the certification of
checks is a means in constant and extensive use in the business of banking, and its effects and
consequences are regulated by the law merchant. Checks drawn upon banks or bankers, thus marked and
certified, enter largely into the commercial and financial transactions of the country; they pass from hand
to hand, in the payment of debts, the purchase of property, and in the transfer of balances from one house
and one bank to another. In the great commercial centers, they make up no inconsiderable portion of the
circulation, and thus perform a useful, valuable, and an almost indispensable office. The purpose of
procuring a check to be certified is to impart strength and credit to the paper by obtaining an
acknowledgment from the certifying bank that the drawer has funds therein sufficient to cover the check
and securing the engagement of the bank that the check will be paid upon presentation. A certified check
has a distinctive character as a species of commercial paper, and performs important functions in banking
and commercial business. When a check is certified, it ceases to possess the character, or to perform the
functions, of a check, and represents so much money on deposit, payable to the holder on demand. The
check becomes a basis of credit an easy mode of passing money from hand to hand, and answers the
purposes of money. (5 R. C. L., pp. 516, 517.)lwphi1.nt
All the authorities, both English and American, hold that a check may be accepted, though acceptance is
not usual. By the law merchant, the certificate of the bank that a check is good is equivalent to
acceptance. It implies that the check is drawn upon sufficient funds in the hands of the drawee, that they

have been set apart for its satisfaction, and that they shall be so applied whenever the check is presented
for payment. It is an undertaking that the check is good then, and shall continue good, and this agreement
is as binding on the bank as its notes of circulation, a certificate of deposit payable to the order of the
depositor, or any other obligation it can assume. The object of certifying a check, as regards both parties
is to enable the holder to use it as money. The transferee takes it with the same readiness and sense of
security that he would take the notes of the bank. It is available also to him for all the purposes of money.
Thus it continues to perform its important functions until in the course of business it goes back to the
bank for redemption, and is extinguished by payment. It cannot be doubted that the certifying bank
intended these consequences, and it is liable accordingly. To hold otherwise would render these important
securities only a snare and a delusion. A bank incurs no greater risk in certifying a check than in giving a
certificate of deposit. In well-regulated banks the practice is at once to charge the check to the account of
the drawer, to credit it in a certified check account, and, when the check is paid, to debit that account with
the amount. Nothing can be simpler or safer than this process. (Merchants' Bank vs. States Bank, 10
Wall., 604, at p. 647; 19 Law. ed., 1008, 1019.)
Ordinarily the acceptance or certification of a check is performed and evidenced by some word or mark,
usually the words "good", "certified" or "accepted" written upon the check by the banker or bank officer.
(1 Morse, Banks and Banking, 915; 1 Bouvier's Law Dictionary, 476.) The bank virtually says, that check
is good; we have the money of the drawer here ready to pay it. We will pay it now if you will receive it.
The holder says, No, I will not take the money; you may certify the check and retain the money for me
until this check is presented. The law will not permit a check, when due, to be thus presented, and the
money to be left with the bank for the accommodation of the holder without discharging the drawer. The
money being due and the check presented, it is his own fault if the holder declines to receive the pay, and
for his own convenience has the money appropriated to that check subject to its future presentment at any
time within the statute of limitations. (1 Morse on Banks and Banking, p. 920.)
The theory of the appellant and of the decisions on which it relies to support its view is vitiated by the fact
that they take the word "acceptance" in its ordinary meaning and not in the technical sense in which it is
used in the Negotiable Instruments Law. Appellant says that when payment is made, such payment
amounts to an acceptance, because he who pays accepts. This is true in common parlance but
"acceptance" in legal contemplation. The word "acceptance" has a peculiar meaning in the Negotiable
Instruments Law, and, as has been above stated, in the instant case there was payment but no
acceptatance, or what is equivalent to acceptance, certification.
With few exceptions, the weight of authority is to the effect that "payment" neither includes nor implies
"acceptance".
In National Bank vs. First National Bank ([19101, 141 Mo. App., 719; 125 S. W., 513), the court asks, if a
mere promise to pay a check is binding on a bank, why should not the absolute payment of the check have
the same effect? In response, it is submitted that the two things, that is acceptance and payment, are
entirely different. If the drawee accepts the paper after seeing it, and then permits it to go into circulation
as genuine, on all the principles of estoppel, he ought to be prevented from setting up forgery to defeat
liability to one who has taken the paper on the faith of the acceptance, or certification. On the other hand,
mere payment of the paper at the termination of its course does not act as an estoppel. The attempt to state
a general rule covering both acceptance and payment is responsible for a large part of the conflicting
arguments which have been advanced by the courts with respect to the rule. (Annotation at 12 A. L. R.,
1090 1921].)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the court said:

We are of the opinion that "payment is not acceptance". Acceptance, as defined by section 131,
cannot be confounded with payment. . . .
Acceptance, certification, or payment of a check, by the express language of the statute,
discharges the liability only of the persons named in the statute, to wit, the drawer and all
indorsers, and the contract of indorsement by the negotiator if the check is discharged by
acceptance, certification, or payment. But clearly the statute does not say that the contract of
warranty of the negotiator, created by section 65, is discharged by these acts.
The rule supported by the majority of the cases (14 A. L. R. 764), that payment of a check on a forged or
unauthorized indorsement of the payee's name, and charging the same to the drawer's account, do not
amount to an acceptance so as to make the bank liable to the payee, is supported by all of the recent cases
in which the question is considered. (Cases cited, Annotation at 69 A. L. R., 1076, 1077 [1930].)
Merely stamping a check "Paid" upon its payment on a forged or unauthorized indorsement is not an
acceptance thereof so as to render the drawee bank liable to the true payee. (Anderson vs. Tacoma
National Bank [1928], 146 Wash., 520; 264 Pac., 8; Annotation at 69 A. L. R., 1077, [1930].)
In State Bank of Chicago vs. Mid-City Trust & Savings Bank (12 A. L. R., 989, 991, 992), the court said:
The defendant in error contends that the payment of the check shows acceptance by the bank, urging that
there can be no more definite act by the bank upon which a check has been drawn, showing acceptance
than the payment of the check. Section 184 of the Negotiable Instruments Act (sec. 202) provides that the
provisions of the act applicable to bills of exchange apply to a check, and section 131 (sec. 149), that the
acceptance of a bill must be in writing signed by the drawee. Payment is the final act which extinguishes
a bill. Acceptance is a promise to pay in the future and continues the life of the bill. It was held in the First
National Bank vs. Whitman (94 U. S., 343; 24 L. ed., 229), that payment of a check upon a forged
indorsement did not operate as an acceptance in favor of the true owner. The contrary was held in
Pickle vs. Muse (Fickle vs. People's Nat. Bank, 88 Tenn., 380; 7 L.R.A., 93; 17 Am. St. Rep., 900; 12 S.
W., 919), and Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751) at a time when the
Negotiable Instruments Act was not in force in those states. The opinion of the Supreme Court of the
United States seems more logical, and the provision of the Negotiable Instruments Act now require an
acceptance to be in writing. Under this statute the payment of a check on a forged indorsement, stamping
it "paid," and charging it to the account of the drawer, do not constitute an acceptance of the check or
create a liability of the bank to the true holder or the payee. (Elyria Sav. & Bkg. Co. vs. Walker Bin Co.,
92 Ohio St., 406; L. R. A., 1916D, 433; 111 N. E., 147; Ann. Cas. 1917D, 1055; Baltimore & O. R.
Co. vs. First National Bank, 102 Va., 753; 47 S. E., 837; State Bank of Chicago vs. Mid-City Trust &
Savings Bank 12 A. L. R., pp. 989, 991, 992.)
Before drawee's acceptance of check there is no privity of contract between drawee and payee. Drawee's
payment of check on unauthorized indorsement does not constitute "acceptance" of check. (Sinclair
Refining Co.vs. Moultrie Banking Co., 165 S. E., 860 [1932].)
The great weight of authority is to the effect that the payment of a check upon a forged or unauthorized
indorsement and the stamping of it "paid" does not constitute an acceptance. (Dakota Radio Apparatus
Co. vs.First Nat. Bank of Rapid City, 244 N. W., 351, 352 [1932].)
Payment of the check, cashing it on presentment is not acceptance. (South Boston Trust Co. vs. Levin,
249 Mass., 45, 48, 49; 143 N. E., 816; Blocker, Shepard Co. vs. Granite Trust Company, 187 Me., 53, 54
[1933].)

In Rauch vs. Bankers National Bank of Chicago (143 Ill. App., 625, 636, 637 [1908]), the language of the
decision was as follows:
. . . The plaintiffs say that this acceptance was made by the very unauthorized payments of which
they complain. This suggestion does not seem forceful to us. It is the contention which was made
before the Supreme Court of the United States in First National Bank vs. Whitman (94 U. S.,
343), and repudiated by that court. The language of the opinion in that case is so apt in the present
case that we quote it:
"It is further contended that such an acceptance of a check as creates a privity between the payee
and the bank is established by the payment of the amount of this check in the manner described.
This argument is based upon the erroneous assumption that the bank has paid this check. If this
were true, it would have discharged all of its duty, and there would be an end to the claim against
it. The bank supposed that it had paid the check, but this was an error. The money it paid was
upon a pretended and not a real indorsement of the name of the payee. . . . We cannot recognize
the argument that payment of the amount of the check or sight draft under such circumstances
amounts to an acceptance creating a privity of contract with the real owner.
"It is difficult to construe a payment as an acceptance under any circumstances. . . . A banker or
individual may be ready to make actual payment of a check or draft when presented, while
unwilling to make a promise to pay at a future time. Many, on the other hand, are more ready to
promise to pay than to meet the promise when required. The difference between the transactions
is essential and inherent."
And in Wharf vs. Seattle National Bank (24 Pac. [2d]), 120, 123 [1933]):
It is the rule that payment of a check on unauthorized or forged indorsement does not operate as
an acceptance of the check so as to authorize an action by the real owner to recover its amount
from the drawee bank. (Michie on Banks and Banking, vol. 5, sec. 278, p. 521.) A full list of the
authorities supporting the rule will be found in a footnote to the foregoing citation. (See also,
Federal Land Bank vs. Collins, 156 Miss., 893; 127 So., 570; 69 A. L. R., 1068.)
In a very recent case, Federal Land Bank vs. Collins (69 A. L. R., 1068, 1072-1074), this question was
discussed at considerable length. The court said:
In the light of the first of these statutes, counsel for appellant is forced to stand upon the narrow ledge that
the payment of the check by the two banks will constitute an acceptance. The drawee bank simply marked
it "paid" and did not write anything else except the date. The bank first paying the check, the Commercial
National Bank and Trust Company, simply wrote its name as indorser and passed the check on to the
drawee bank; does this constitute an acceptance? The precise question has not been presented to this court
for decision. Without reference to authorities in other jurisdictions it would appear that the drawee bank
had never written its name across the paper and therefore, under the strict terms of the statute, could not
be bound as an acceptor; in the second place, it does not appear to us to be illogical and unsound to say
that the payment of a check by the drawee, and the stamping of it "paid", is equivalent to the same thing
as the acceptance of a check; however, there is a variety of opinions in the various jurisdictions on this
question. Counsel correctly states that the theory upon which the numerous courts hold that the payment
of a check creates privity between the holder of the check and the drawee bank is tantamount to a pro
tanto assignment of that part of the funds. It is most easily understood how the payment of the check,
when not authorized to be done by the drawee bank, might under such circumstances create liability on
the part of the drawee to the drawer. Counsel cites the case of Pickle vs. Muse (88 Tenn, 380; 12 S. W.,

919; 7 L. R. A., 93; 17 Am. St. Rep., 900), wherein Judge Lurton held that the acceptance of a check was
necessary in order to give the holder thereof a right of action thereon against the bank, and further held in
a case similar to this, so far as this question is concerned, that the acceptance of a check so as to give a
right of action to the payee is inferred from the retention of the check by the bank and its subsequent
charge of the amount to the drawer, although it was presented by, and payment made, an unauthorized
person. Judge Lurton cited the case of National Bank of the Republic vs. Millard (10 Wall., 152; 19 L. ed.,
897), wherein the Supreme Court of the United States, not having such a case before it, threw out the
suggestion that, if it was shown that a bank had charged the check on its books against the drawer and
made settlement with the drawee that the holder could recover on account of money had and received,
invoking the rule of justice and fairness, it might be said there was an implied promise to the holder to
pay it on demand. (SeeNational Bank of the Republic vs. Millard, 10 Wall. [77 U. S.], 152; 19 L. ed.,
899.) The Tennessee court then argued that it would be inequitable and unconscionable for the owner and
payee of the check to be limited to an action against an insolvent drawer and might thereby lose the debt.
They recognized the legal principle that there is no privity between the drawer bank and the holder, or
payee, of the check, and proceeded to hold that no particular kind of writing was necessary to constitute
an acceptance and that it became a question of fact, and the bank became liable when it stamped it "paid"
and charged it to the account of the drawer, and cites, in support of its opinion, Seventh National
Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751); Saylor vs. Bushong (100 Pa., 23; 45 Am. Rep., 353); and
Dodge vs. Bank (20 Ohio St., 234; 5 Am. Rep., 648).
This decision was in 1890, prior to the enactment of the Negotiable Instruments Law by the State
of Tennessee. However, in this case Judge Snodgrass points out that the Millard case, supra, was
dicta. The Dodge case, from the Ohio court, held exactly as the Tennessee court, but subsequently
in the case of Elyria Bank vs. Walker Bin Co. (92 Ohio St., 406; 111 N. E., 147; L. R. A. 1916D,
433; Ann. Cas. 1917D, 1055), the court held to the contrary, called attention to the fact that the
Dodge case was no longer the law, and proceeded to announce that, whatever might have been the
law before the passage of the Negotiable Instrument Act in that state, it was no longer the law;
that the rule announced in the Dodge case had been "discarded." The court, in the latter case,
expressed its doubts that the courts of Tennessee and Pennsylvania would adhere to the rule
announced in the Pickle case, quoted supra, in the face of the Negotiable Instrument Law.
Subsequent to the Millard case, the Supreme Court of the United States, in the case of First
National Bank of Washington vs. Whitman (94 U. S., 343, 347; 24 L. ed., 229), where the bank,
without any knowledge that the indorsement of the payee was unauthorized, paid the check, and it
was contended that by the payment the privity of contract existing between the drawer and
drawee was imparted to the payee, said:
"It is further contended that such an acceptance of the check as creates a privity between the
payee and the bank is established by the payment of the amount of this check in the manner
described. This argument is based upon the erroneous assumption that the bank has paid this
check. If this were true, it would have discharged all of its duty, and there would be an end of the
claim against it. The bank supposed that it had paid the check; but this was an error. The money it
paid was upon a pretended and not a real indorsement of the name of the payee. The real
indorsement of the payee was as necessary to a valid payment as the real signature of the drawer;
and in law the check remains unpaid. Its pretended payment did not diminish the funds of the
drawer in the bank, or put money in the pocket of the person entitled to the payment. The state of
the account was the same after the pretended payment as it was before.
"We cannot recognize the argument that a payment of the amount of a check or sight draft under
such circumstances amounts to an acceptance, creating a privity of contract with the real owner. It
is difficult to construe a payment as an acceptance under any circumstances. The two things are

essentially different. One is a promise to perform an act, the other an actual performance. A
banker or an individual may be ready to make actual payment of a check or draft when presented,
while unwilling to make a promise to pay at a future time. Many, on the other hand, are more
ready to promise to pay than to meet the promise when required. The difference between the
transactions is essential and inherent."
Counsel for the appellant cite other cases holding that the stamping of the check "paid" and the
charging of the amount thereof to the drawer constituted an acceptance, but we are of opinion that
none of these cases cited hold that it is in compliance with the Negotiable Instruments Act;
paying the check and stamping same is not the equivalent of accepting the check in writing
signed by the drawee. The cases holding that payment as indicated above constituted acceptance
were rendered prior to the adoption of the Negotiable Instruments Act in the particular state, and
these decisions are divided into two classes: the one holding that the check delivered by the
drawer to the holder and presented to the bank or drawee constitutes an assignment pro tanto; the
other holding that the payment of the check and the charging of same to the drawee although paid
to an unauthorized person creates privity of contract between the holder and the drawee bank.
We have already seen that our own court has repudiated the assignment pro tanto theory, and
since the adoption of the Negotiable Instrument Act by this state we are compelled to say that
payment of a check is not equivalent to accepting a check in writing and signing the name of the
acceptor thereon. Payment of the check and the charging of same to the drawer does not
constitute an acceptance. Payment of the check is the end of the voyage; acceptance of the check
is to fuel the vessel and strengthen it for continued operation on the commercial sea. What we
have said applies to the holder and not to the drawer of the check. On this question we conclude
that the general rule is that an action cannot be maintained by a payee of the check against the
bank on which is draw unless the check has been certified or accepted by the bank in compliance
with the statute, even though at the time the check is that an action cannot be maintained by a
payee of the drawer of the check out of which the check is legally payable; and that the payment
of the check by the bank on which it is drawn, even though paid on the unauthorized indorsement
of the name of the holder (without notice of the defect by the bank), does not constitute a
certification thereof, neither is it an acceptance thereof; and without acceptance or certification, as
provided by statute, there is no privity of contract between the drawee bank and the payee, or
holder of the check. Neither is there an assignmentpro tanto of the funds where the check is not
drawn on a particular fund, or does not show on its face that it is an assignment of a particular
fund. The above rule as stated seems to have been the rule in the majority of the states even
before the passage of the uniform Negotiable Instruments Act in the several states.
The decision in the case of First National Bank vs. Bank of Cottage Grove (59 Or., 388), which appellant
cites in its brief (pp. 12, 13 ) has been expressly overruled by the Supreme Court of Massachusetts in
South Boston Trust Co. vs. Levin (143 N. E., 816, 817), in the following language:
In First National Bank vs. Bank of Cottage Grove (59 Or., 388; 117 Pac., 293, 296, at page 396),
it was said: "The payment of a bill or check by the drawee amounts to more than an acceptance.
The rule, holding that such a payment has all the efficacy of an acceptance, is founded upon the
principle that the greater includes the less." We are unable to agree with this statement as there is
no similarity between acceptance and payment; payment discharges the instrument, and no one
else is expected to advance anything on the faith of it; acceptance, contemplates further
circulation, induced by the fact of acceptance. The rule that the acceptor made certain admissions
which will inure to the benefit of subsequent holders, has no applicability to payment of the
instrument where subsequent holders can never exist.

II. The old doctrine that a bank was bound to know its correspondent's signature and that a drawee could
not recover money paid upon a forgery of the drawer's name, because it was said, the drawee was
negligent not to know the forgery and it must bear the consequence of its negligence, is fast fading into
the misty past, where it belongs. It was founded in misconception of the fundamental principles of law
and common sense. (2 Morse, Banks and Banking, p. 1031.)
Some of the cases carried the rule to its furthest limit and held that under no circumstances (except, of
course, where the purchaser of the bill has participated in the fraud upon the drawee) would the drawee be
allowed to recover bank money paid under a mistake of fact upon a bill of exchange to which the name of
the drawer had been forged. This doctrine has been freely criticized by the eminent authorities, as a rule
too favorable to the holder, not the most fair, nor best calculated to effectuate justice between the drawee
and the drawer. (5 R.C.L., p. 556.)
The old rule which was originally announced by Lord Mansfield in the leading case of Price vs. Neal (3
Burr., 1354), elicited the following comment from Justice Holmes, then Chief Justice of the Supreme
Court of Massachusetts, in the case of Dedham National Bank vs. Everett National Bank (177 Mass.,
392). "Probably the rule was adopted from an impression of convenience rather than for any more
academic reason; or perhaps we may say that Lord Mansfield took the case out of the doctrine as to
payments under a mistake of fact by the assumption that a holder who simply presents negotiable paper
for payment makes no representation as to the signature, and that the drawee pays at his peril."
Such was the reaction that followed Lord Mansfield's rule which Justice Story of the United States
Supreme adopted in the case of Bank of United States vs. Georgia (10 Wheat., 333), that in B. B. Ford &
Co. vs. People's Bank of Orangeburg (74 S. C., 180), it was held that "an unrestricted indorsement of a
draft and presentation to the drawee is a representation that the signature of the drawer is genuine", and in
Lisbon First National Bank vs.Wyndmere Bank (15 N. D., 299), it was also held that "the drawee of a
forged check who has paid the same without detecting the forgery, may upon discovery of the forgery,
recover the money paid from the party who received the money, even though the latter was a good faith
holder, provided the latter has not been misled or prejudiced by the drawee's failure to detect the forgery."
Daniel, in his treatise on Negotiable Instruments, has the following to say:
In all the cases which hold the drawee absolutely estoppel by acceptance or payment from denying
genuineness of the drawer's name, the loss is thrown upon him on the ground of negligence on his part in
accepting or paying, until he has ascertained the bill to be genuine. But the holder has preceded him in
negligence, by himself not ascertaining the true character of the paper before he received it, or presented
it for acceptance or payment. And although, as a general rule, the drawee is more likely to know the
drawer's handwriting than a stranger is, if he is in fact deceived as to its genuineness, we do not perceive
that he should suffer more deeply by mistake than a stranger, who, without knowing the handwriting, has
taken the paper without previously ascertaining its genuineness. And the mistake of the drawee should
always be allowed to be corrected, unless the holder, acting upon faith and confidence induced by his
honoring the draft, would be placed in a worse position by according such privilege to him. This view has
been applied in a well considered case, and is intimidated in another; and is forcibly presented by Mr.
Chitty, who says it is going a great way to charge the acceptor with knowledge of his correspondent's
handwriting, "unless some bona fide holder has purchased the paper on the faith of such an act."
Negligence in making payment under a mistake of fact is not now deemed a bar to recovery of it, and we
do not see why any exception should be made to the principle, which would apply as well as to release an
obligation not consummated by payment. ( Vol. 2, 6th edition, pp. 1537-1539.)

III. But now the rule is perfectly well settled that in determining the relative rights of a drawee who, under
a mistake of fact, has paid, and a holder who has received such payment, upon a check to which the name
of the drawer has been forged, it is only fair to consider the question of diligence or negligence of the
parties in respect thereto. (Woods and Malone vs. Colony Bank [1902], 56 L. R. A., 929, 932.) The
responsibility of the drawee who pays a forged check, for the genuineness of the drawer's signature, is
absolute only in favor of one who has not, by his own fault or negligence, contributed to the success of
the fraud or to mislead the drawee. (National Bank of America vs. Bangs, 106 Mass., 441; 8 Am. Rep.,
349; Woods and Malone vs. Colony Bank, supra; De Feriet vs.Bank of America, 23 La. Ann., 310; B. B.
Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 10 L. R. A. [N. S.], 63.) If it appears that the
one to whom payment was made was not an innocent sufferer, but was guilty of negligence in not doing
something, which plain duty demanded, and which, if it had been done, would have avoided entailing loss
on any one, he is not entitled to retain the moneys paid through a mistake on the part of the drawee bank.
(First Nat. Bank of Danvers vs. First Nat. Bank of Salem, 151 Mass., 280; 24 N. E., 44; 21 A. S. R., 450;
First Nat. Bank of Orleans vs. State Bank of Alma, 22 Neb., 769; 36 N. W., 289; 3 A. S. R., 294;
American Exp. Co. vs. State Nat. Bank, 27 Okla., 824; 113 Pac., 711; 33 L. R. A. [N. S.], 188; B. B. Ford
& Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 54 S. E., 204; 114 A. S. R., 986; 7 Ann. Cas., 744;
10 L. R. A. [N. S.], 63; People's Bank vs. Franklin Bank, 88 Tenn. 299; 12 S. W., 716; 17 A. S. R.) 884; 6
L. R. A., 724; Canadian Bank of Commerce vs. Bingham, 30 Wash., 484; 71 Pac., 43; 60 L. R. A., 955.)
In other words, to entitle the holder of a forged check to retain the money obtained he must be able to
show that the whole responsibility of determining the validity of the signature was upon the drawee, and
that the negligence of such drawee was not lessened by any failure of any precaution which, from his
implied assertion in presenting the check as a sufficient voucher, the drawee had the right to believe he
had taken. (Ellis vs. Ohio Life Insurance & Trust Co., 4 Ohio St., 628; Rouvantvs. Bank, 63 Tex., 610;
Bank vs. Ricker, 71 Ill., 429; First National Bank of Danvers vs. First Nat. Bank of Salem, 24 N. E., 44,
45; B. B. Ford & Co. vs. People's Bank of Orangeburg, supra.) The recovery is permitted in such case,
because, although the drawee was constructively negligent in failing to detect the forgery, yet if the
purchaser had performed his duty, the forgery would in all probability have been detected and the fraud
defeated. (First National Bank of Lisbon vs. Bank of Wyndmere, 15 N. D., 209; 10 L. R. A. [N. S.], 49.)
In the absence of actual fault on the part of the drawee, his constructive fault in not knowing the signature
of the drawer and detecting the forgery will not preclude his recovery from one who took the check under
circumstances of suspicion without proper precaution, or whose conduct has been such as to mislead the
drawee or induce him to pay the check without the usual scrutiny or other precautions against mistake or
fraud. (National Bank of America vs. Bangs, supra; First National Bank vs. Indiana National Bank, 30 N.
E., 808-810; Woods and Malone vs. Colony Bank, supra; First National Bank of Danvers vs. First Nat.
Bank of Salem, 151 Mass., 280.) Where a loss, which must be borne by one of two parties alike innocent
of forgery, can be traced to the neglect or fault of either, it is unreasonable that it would be borne by him,
even if innocent of any intentional fraud, through whose means it has succeeded. (Gloucester
Bank vs. Salem Bank, 17 Mass., 33; First Nat. Bank of Danvers vs. First National Bank of Salem,supra;
B. B. Ford & Co. vs. People's Bank of Orangeburg, supra.) Again if the indorser is guilty of negligence in
receiving and paying the check or draft, or has reason to believe that the instrument is not genuine, but
fails to inform the drawee of his suspicions the indorser according to the reasoning of some courts will be
held liable to the drawee upon his implied warranty that the instrument is genuine. (B. B. Ford &
Co. vs. People's Bank of Orangeburg, supra; Newberry Sav. Bank vs. Bank of Columbia, 93 S. C., 294;
38 L. R. A. [N. S], 1200.) Most of the courts now agree that one who purchases a check or draft is bound
to satisfy himself that the paper is genuine; and that by indorsing it or presenting it for payment or putting
it into circulation before presentation he impliedly asserts that he has performed his duty, the drawee, who
has, without actual negligence on his part, paid the forged demand, may recover the money paid from
such negligent purchaser. (Lisbon First National Bank vs.Wyndmere Bank, supra.) Of course, the drawee
must, in order to recover back the holder, show that he himself was free from fault. (See also 5 R. C. L.,
pp. 556-558.)

So, if a collecting bank is alone culpable, and, on account of its negligence only, the loss has occurred, the
drawee may recover the amount it paid on the forged draft or check. (Security Commercial & Sav.
Bank vs.Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)
But we are aware of no case in which the principle that the drawee is bound to know the signature of the
drawer of a bill or check which he undertakes to pay has been held to be decisive in favor of a payee of a
forged bill or check to which he has himself given credit by his indorsement. (Secalso,
Mckleroy vs. Bank, 14 La. Ann., 458; Canal Bank vs. Bank of Albany, 1 Hill, 287;
Rouvant vs. Bank, supra, First Nat. Bank vs. Indiana National Bank; 30 N. E., 808-810.)
In First Nat. Bank vs. United States National Bank ([1921], 100 Or., 264; 14 A. L. R., 479; 197 Pac., 547),
the court declared: "A holder cannot profit by a mistake which his negligent disregard of duty has
contributed to induce the drawee to commit. . . . The holder must refund, if by his negligence he has
contributed to the consummation of the mistake on the part of the drawee by misleading him. . . . If the
only fault attributable to the drawee is the constructive fault which the law raises from the bald fact that
he has failed to detect the forgery, and if he is not chargeable with actual fault in addition to such
constructive fault, then he is not precluded from recovery from a holder whose conduct has been such as
to mislead the drawee or induce him to pay the check or bill of exchange without the usual security
against fraud. The holder must refund to a drawee who is not guilty of actual fault if the holder was
negligent in not making due inquiry concerning the validity of the check before he took it, and if the
drawee can be said to have been excused from making inquiry before taking the check because of having
had a right to, presume that the holder had made such inquiry."
The rule that one who first negotiates forged paper without taking some precaution to learn whether or not
it is genuine should not be allowed to retain the proceeds of the draft or check from the drawee, whose
sole fault was that he did not discover the forgery before he paid the draft or check, has been followed by
the later cases. (Security Commercial & Savings Bank vs. Southern Trust & C. Bank [1925], 74 Cal.
App., 734; 241 Pac., 945; Hutcheson Hardware Co. vs. Planters State Bank [1921], 26 Ga. App., 321; 105
S. E., 854; [Annotation at 71 A. L. R., 337].)
Where a bank, without inquiry or identification of the person presenting a forged check, purchases it,
indorses it, generally, and presents it to the drawee bank, which pays it, the latter may recover if its only
negligence was its mistake in having failed to detect the forgery, since its mistake, did not mislead the
purchaser or bring about a change in position. (Security Commercial & Savings Bank vs. Southern Trust
& C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)
Also, a drawee could recover from another bank the portion of the proceeds of a forged check cashed by
the latter and deposited by the forger in the second bank and never withdrawn, upon the discovery of the
forgery three months later, after the drawee had paid the check and returned the voucher to the purported
drawer, where the purchasing bank was negligent in taking the check, and was not injured by the drawee's
negligence in discovering and reporting the forgery as to the amount left on deposit, since it was not a
purchaser for value. (First State Bank & T. Co. vs. First Nat. Bank [1924], 314 Ill., 269; 145 N. E., 382.)
Similarly, it has been held that the drawee of a check could recover the amount paid on the check, after
discovery of the forgery, from another bank, which put the check into circulation by cashing it for the one
who had forged the signature of both drawer and payee without making any inquiry as to who he was
although he was a stranger, after which the check reached, and was paid by, the drawee, after going
through the hands of several intermediate indorsees. (71 A. L. R., p. 340.)

In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the following statement
was made:
We are clearly of opinion, therefore that the warranty of genuineness, arising upon the act of the Brule
National Bank in putting the check in circulation, was not discharged by payment of the check by the
drawee (First National Bank), nor was the Brule National Bank deceived or misled to its prejudice by
such payment. The Brule National Bank by its indorsement and delivery warranted its own identification
of Kost and the genuineness of his signature. The indorsement of the check by the Brule National Bank
was such as to assign the title to the check to its assignee, the Whitbeck National Bank, and the amount
was credited to the indorser. The check bore no indication that it was deposited for collection, and was not
in any manner restricted so as to constitute the indorsee the agent of the indorser, nor did it prohibit
farther negotiation of the instrument, nor did it appear to be in trust for, or to the use of, any other person,
nor was it conditional. Certainly the Pukwana Bank was justified in relying upon the warrant of
genuineness, which implied the full identification of Kost, and his signature by the defendant bank. This
view of the statute is in accord with the decisions of many courts. (First National Bank vs. State Bank, 22
Neb., 769; 3 Am. St. Rep., 294; 36 N. W., 289; First National Bank vs. First National Bank, 151 Mass.,
280; 21 Am. St. Rep., 450; 24 N. E., 44; People's Bank vs. Franklin Bank, 88 Tenn., 299; 6 L. R. A., 727;
17 Am. St. Rep., 884; 12 S. W., 716.)"
The appellant leans heavily on the case of Fidelity & Co. vs. Planenscheck (71 A. L. R., 331), decided in
1929. We have carefully examined this decision and we do not feel justified in accepting its conclusions.
It is but a restatement of the long abandoned rule of Neal vs. Price, and it predicated on the wrong
premise that the payment includes acceptance, and that a bank drawee paying a check drawn on it
becomes ipso facto an acceptor within the meaning of section 62 of the Negotiable Instruments Act.
Moreover in a more recent decision, that of Louisa National Bank vs. Kentucky National Bank (39 S. W.
[2nd] 497, 501) decided in 1931, the Court of Appeals of Kentucky held the following:
The appellee, on presentation for payment of $600 check, failed to discover it was a forgery. It
was bound to know the signature of its customer, Armstrong, and it was derelict in failing to give
his signature to the check sufficient attention and examination to enable it to discover instantly
the forgery. The appellant, when the check was presented to it by Banfield, failed to make an
inquiry of or about him and did not cause or have him to be identified. Its act in so paying to him
the check is a degree of negligence on its part equivalent to positive negligence. It indorsed the
check, and, while such indorsement may not be regarded within the meaning of the Negotiable
Instrument Law as amounting to a warranty to appellant of that which it indorsed, it at least
substantially served as a representation to it that it had exercised ordinary care and had complied
with the rules and customs of prudent banking. Its indorsement was calculated, if it did not in fact
do so, to lull the drawee bank into indifference as to the drawer's signature to it when paying the
check and charging it to its customer's account and remitting its proceeds to appellant's
correspondent.
If in such a transaction between the drawee and the holder of a check both are without fault, no
recovery may be had of the money so paid. (Deposit Bank of Georgetown vs. Fayette National
Bank, supra, and cases cited.) Or the rule may be more accurately stated that, where the drawee
pays the money, he cannot recover it back from a holder in good faith, for value and without fault.
If, on the other hand, the holder acts in bad faith, or is guilty of culpable negligence, a recovery
may be had by the drawee of such holder. The negligence of the Bank of Louisa in failing to
inquire of and about Banfield, and to cause or to have him identified before it parted with its
money on the forged check, may be regarded as the primary and proximate cause of the loss. Its

negligence in this respect reached in its effect the appellee, and induced incaution on its part. In
comparison of the degrees of the negligence of the two, it is apparent that of the appellant excels
in culpability. Both appellant and appellee inadvertently made a mistake, doubtless due to a hurry
incident to business. The first and most grievous one was made by the appellant , amounting to its
disregard of the duty, it owed itself as well as the duty it owed to the appellee, and it cannot on
account thereof retain as against the appellee the money which it so received. It cannot shift the
loss to the appellee, for such disregard of its duty inevitably contributed to induce the appellee to
omit its duty critically to examine the signature of Armstrong, even if it did not know it instantly
at the time it paid the check. (Farmers' Bank of Augusta vs. Farmer's Bank of Maysville, supra,
and cases cited.)
IV. The question now is to determine whether the appellant's negligence in purchasing the checks in
question is such as to give the appellee the right to recover upon said checks, and on the other hand,
whether the drawee bank was not itself negligent, except for its constructive fault in not knowing the
signature of the drawer and detecting the forgery.
We quote with approval the following conclusions of the court a quo:
Check Exhibit A bears number 637023-D and is dated April 6, 1933, whereas check Exhibit A-1
bears number 637020-D and is dated April 7, 1933. Therefore, the latter check, which is prior in
number to the former check, is however, issued on a later date. This circumstance must have
aroused at least the curiosity of the Motor Service Co., Inc.
The Motor Service Co., Inc., accepted the two checks from unknown persons. And not only this;
check Exhibit A is indorsed by a subagent of the agent of the payee, International Auto Repair
Shop. The Motor Service Co., Inc., made no inquiry whatsoever as to the extent of the authority
of these unknown persons. Our Supreme Court said once that "any person taking checks made
payable to a corporation, which can act only by agents, does so at his peril, and must abide by the
consequences if the agent who indorses the same is without authority" (Insular Drug
Co. vs. National Bank, 58, Phil., 684).
xxx

xxx

xxx

Check Exhibit A-1, aside from having been indorsed by a supposed agent of the international
Auto Repair Shop is crossed generally. The existence of two parallel lines transversally drawn on
the face of this check was a warning that the check could only be collected through a banking
institution (Jacobs, Law of Bills of Exchange, etc., pp., 179, 180; Bills of Exchange Act of
England, secs. 76 and 79). Yet the Motor Service Co., Inc., accepted the check in payment for
merchandise.
. . . In Exhibit H attached to the stipulation of facts as an integral part thereof, the Motor Service
Co., Inc., stated the following:
"The Pangasinan Transportation Co. is a good customer of this firm and we received checks from
them every month in payment of their account. The two checks in question seem to be exactly
similar to the checks which we received from the Pangasinan Transportation Co. every month."
If the failure of the Motor Service Co., Inc., to detect the forgery of the drawer's signature in the
two checks, may be considered as an omission in good faith because of the similarity stated in the
letter, then the same consideration applies to the Philippine National Bank, for the drawer is a

customer of both the Motor Service Co., Inc., and the Philippine National Bank. (B. of E., pp. 25,
28, 35.)
We are of opinion that the facts of the present case do not make it one between two equally innocent
persons, the drawee bank and the holder, and that they are governed by the authorities already cited and
also the following:
The point in issue has sometimes been said to be that of negligence. The drawee who has paid
upon the forged signature is held to bear the loss, because he has been negligent in failing to
recognize that the handwriting is not that of his customer. But it follows obviously that if the
payee, holder, or presenter of the forged paper has himself been in default, if he has himself been
guilty of a negligence prior to that of the banker, or if by any act of his own he has at all
contributed to induce the banker's negligence, then he may lose his right to cast the loss upon the
banker. The courts have shown a steadily increasing disposition to extend the application of this
rule over the new conditions of fact which from time to time arise, until it can now rarely happen
that the holder, payee, or presenter can escape the imputation of having been in some degree
contributory towards the mistake. Without any actual change in the abstract doctrines of the law,
which are clear, just, and simple enough, the gradual but sure tendency and effect of the decisions
have been to put as heavy a burden of responsibility upon the payee as upon the drawee, contrary
to the original custom. . . . (2 Morse on Banks and Banking, 5th ed., secs. 464 and 466, pp. 82-85
and 86, 87.)
In First National Bank vs. Brule National Bank (12 A. L. R., 1079, 1088, 1089), the following statement
appears in the concurring opinion:
What, then, should be the rule? The drawee asks to recover for money had and received. If his
claim did not rest upon a transaction relating to a negotiable instrument plaintiff could recover as
for money paid under mistake, unless defendant could show some equitable reason, such as
changed condition since, and relying upon, payment by plaintiff. In the Wyndmere Case, the
North Dakota court holds that this rule giving right to recover money paid under mistake should
extend to negotiable paper, and it rejects in its entirety the theory of estoppel and puts a case of
this kind on exactly the same basis as the ordinary case of payment under mistake. But the great
weight of authority, and that based on the better reasoning, holds that the exigencies of business
demand a different rule in relation to negotiable paper. What is that rule? Is it an absolute estoppel
against the drawee in favor of a holder, no matter how negligent such holder has been? It surely is
not. The correct rule recognizes the fact that, in case of payment without a prior acceptance or
certification, the holder takes the paper upon the of the prior indorsers and the credit of the
drawer, and not upon the credit of the drawee, in making payment, has a right to rely upon the
assumption that the payee used due diligence, especially where such payee negotiated the bill or
check to a holder, thus representing that it had so fully satisfied itself as to the identity and
signature of the maker that it was willing to warrant as relates thereto to all subsequent holders.
(Uniform Act, secs. 65 and 66.) Such correct rule denies the drawee the right to recover when the
holder was without fault or when there has been some change of position calling for equitable
relief. When a holder of a bill of exchange uses all due care in the taking of bill or check and the
drawee thereafter pays same, the transaction is absolutely closed modern business could not be
done on any other basis. While the correct rule promotes the fluidity of two recognized mediums
of exchange, those mediums by which the great bulk of business is carried on, checks and drafts,
upon the other hand it encourages and demands prudent business methods upon the part of those
receiving such mediums of exchange. (Pennington County Bank vs. First State Bank, 110 Minn.,
263; 26 L. R. A. [N. S.], 849; 136 Am. St. Rep., 496; 125 N. W., 119; First National

Bank vs. State Bank, 22 Neb., 769; 3 Am. St. Rep., 294; 36 N. W., 289; Bank of
Williamson, vs. McDowell County Bank, 66 W. Va., 545; 36 L. R. A. [N. S.], 605; 66 S. E., 761;
Germania Bank vs. Boutell, 60 Minn., 189; 27 L. R. A., 635; 51 Am. St. Rep., 519; 62 N. W., 327;
American Express Co. vs. State National Bank, 27 Okla., 824; 33 L. R. A. [N. S.], 188; 113 Pac.,
711; Farmers' National Bank vs. Farmers' & Traders Bank, L. R. A., 1915A, 77, and note (159
Ky., 141; 166 S. W., 986].)
That the defendant bank did not use reasonable business prudence is clear. It took this check from
a stranger without other identification than that given by another stranger; its cashier witnessed
the mark of such stranger thus vouching for the identity and signature of the maker; and it
indorsed the check as "Paid," thus further throwing plaintiff off guard. Defendant could not but
have known, when negotiating such check and putting it into the channel through which it would
finally be presented to plaintiff for payment, that plaintiff, if it paid such check, as defendant was
asking it to do, would have to rely solely upon the apparent faith and credit that defendant had
placed in the drawer. From the very circumstances of this case plaintiff had to act on the facts as
presented to it by defendant, upon such facts only.
But appellant argues that it so changed its position, after payment by plaintiff, that in "equity and
good conscience" plaintiff should not recover it says it did not pay over any money to the
forger until after plaintiff had paid the check. There would be merit in such contention if
defendant had indorsed the check for "collection," thus advising plaintiff that it was relying on
plaintiff and not on the drawer. It stands in court where it would have been if it had done as it
represented.
In Woods and Malone vs. Colony Bank (56 L. R. A., 929, 932), the court said:
. . . If the holder has been negligent in paying the forged paper, or has by his conduct, however
innocent, misled or deceived the drawee to his damage, it would be unjust for him to be allowed
to shield himself from the results of his own carelessness by asserting that the drawee was bound
in law to know his drawer's signature.
V. Section 23 of the Negotiable Instruments Act provides that "when a signature is forged or made
without the authority of the person whose signature it purports to be, is wholly inoperative, and no right to
retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party
thereto, can be acquired through or under such signature, unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery or want of authority.
It not appearing that the appellee bank did not warrant to the appellant the genuineness of the checks in
question, by its acceptance thereof, nor did it perform any act which would have induced the appellant to
believe in the genuineness of said instruments before appellant purchased them for value, it can not be
said that the appellee is precluded from setting up the forgery and, therefore, the appellant is not entitled
to retain the amount of the forged check paid to it by the appellee.
VI. It has been held by many courts that a drawee of a check, who is deceived by a forgery of the drawer's
signature may recover the payment back, unless his mistake has placed an innocent holder of the paper in
a worse position than he would have been in if the discovery of the forgery had been made on
presentation. (5 R. C. L., p. 559; 2 Daniel on Negotiable Instruments, 1538.) Forgeries often deceived the
eye of the most cautious experts; and when a bank has been deceived, it is a harsh rule which compels it
to suffer although no one has suffered by its being deceived. (17 A. L. R. 891; 5 R. C. L., 559.)

In the instant case should the drawee bank be allowed recovery, the appellant's position would not become
worse than if the drawee had refused the payment of these checks upon their presentation. The appellant
has lost nothing by anything which the drawee has done. It had in its hands some forged worthless papers.
It did not purchase or acquire these papers because of any representation made to it by the drawee. It
purchased them from unknown persons and under suspicious circumstances. It had no valid title to them,
because the persons from whom it received them did not have such title. The appellant could not have
compelled the drawee to pay them, and the drawee could have refused payment had it been able to detect
the forgery. By making a refund, the appellant would only returning what it had received without any title
or right. And when appellant pays back the money it had received it will be entitled to have restored to it
the forged papers it parted with. There is no good reason why the accidental payment made by the
appellant should inure to the benefit of the appellant. If there were injury to the appellant said injury was
caused not by the failure of the appellee to detect the forgery but by the very negligence of the appellant
in purchasing commercial papers from unknown persons without making inquiry as to their genuineness.
In the light of the foregoing discussion, we conclude:
1. That where a check is accepted or certified by the bank on which it is drawn, the bank is
estopped to deny the genuineness of the drawer's signature and his capacity to issue the
instrument;
2. That if a drawee bank pays a forged check which was previously accepted or certified by the
said bank it cannot recover from a holder who did not participate in the forgery and did not have
actual notice thereof;
3. That the payment of a check does not include or imply its acceptance in the sense that this
word is used in section 62 of the Negotiable Instruments Law;
4. That in the case of the payment of a forged check, even without former acceptance, the drawee
can not recover from a holder in due course not chargeable with any act of negligence or
disregard of duty;
5. That to entitle the holder of a forged check to retain the money obtained thereon, there must be
a showing that the duty to ascertain the genuineness of the signature rested entirely upon the
drawee, and that the constructive negligence of such drawee in failing to detect the forgery was
not affected by any disregard of duty on the part of the holder, or by failure of any precaution
which, from his implied assertion in presenting the check as a sufficient voucher, the drawee had
the right to believe he had taken;
6. That in the absence of actual fault on the part of the drawee, his constructive fault in not
knowing the signature of the drawer and detecting the forgery will nor preclude his recovery from
one who took the check under circumstances of suspicion and without proper precaution, or
whose conduct has been such as to mislead the drawee or induce him to pay the check without the
usual scrutiny or other precautions against mistake or fraud;
7. That on who purchases a check or draft is bound to satisfy himself that the paper is genuine,
and that by indorsing it or presenting it for payment or putting it into circulation before
presentation he impliedly asserts that he performed his duty;
8. That while the foregoing rule, chosen from a welter of decisions on the issue as the correct one,
will not hinder the circulation of two recognized mediums of exchange by which the great bulk of

business is carried on, namely, drafts and checks, on the other hand, it will encourage and demand
prudent business methods on the part of those receiving such mediums of exchange;
9. That it being a matter of record in the present case, that the appellee bank in no more
chargeable with the knowledge of the drawer's signature than the appellant is, as the drawer was
as much the customer of the appellant as of the appellee, the presumption that a drawee bank is
bound to know more than any indorser the signature of its depositor does not hold;
10. That according to the undisputed facts of the case the appellant in purchasing the papers in
question from unknown persons without making any inquiry as to the identity and authority of the
said persons negotiating and indorsing them, acted negligently and contributed to the appellee's
constructive negligence in failing to detect the forgery;
11. That under the circumstances of the case, if the appellee bank is allowed to recover, there will
be no change of position as to the injury or prejudice of the appellant.
Wherefore, the assignments of error are overruled, and the judgment appealed from must be, as it is
hereby, affirmed, with costs against the appellant. So ordered.

DIGEST
FACTS

April 7 & 9, 1933: unknown person or persons purchased tires and paid Motor Service Company,
Inc.(MSCI) checks purporting to have been issued by the "Pangasinan Transportation Co., Inc.

(Pantranco) by J. L. Klar, Manager and Treasurer" against PNB and in favor of International Auto
Repair Shop.
MSCI indorsed for deposit at the National City Bank of New York and MSCI was accordingly
credited with the amounts thereof, or P144.50 and P215.75
April 8 & 10, 1933: Checks were cleared and PNB credited the National City Bank
PNB found out that the signatures of J. L. Klar, Manager and Treasurer were forged and
demanded from MSCI and National City Bank New York
PNB filed the case in the municipal court of Manila against National City Bank and MSCI.
Pantranco objected to have the proceeds of said check deducted from their deposit.
RTC: Favored PNB
MSCI appealed

ISSUES
1.
W/N acceptance = payment
2.
W/N law or business practice prevents the presentation of checks for acceptance before they are
paid.
3.
W/N MSCI was negligent and therefore PNB should recover
4.
W/N the drawee bank should be allowed recovery, as MSCI's position would not become worse
than if the drawee had refused the payment of these checks upon their presentation.
HELD
Affirmed
1.
NO.

A check is a bill of exchange payable on demand and only the rules governing bills of exchange

payable on demand are applicable to it, according to section 185 of the Negotiable Instruments Law
Acceptance is a step unnecessary for bills of exchange payable on demand (sec. 143)
Acceptance implies, subsequent negotiation of the instrument
From the moment a check is paid it is withdrawn from circulation.
That the payment of a check does not include or imply its acceptance in the sense that this word is
used in section 62 of the Negotiable Instruments Law
Payment (in checks) - final act which extinguishes a bill.
Acceptance (in certified checks) - a promise to pay in the future and continues the life of

the bill.
2. NO

section 187, which provides that "where a check is certified by the bank on which it is drawn, the

certification is equivalent to an acceptance", and it is then that the warranty under section 62 exists
That if a drawee bank pays a forged check which was previously accepted or certified by the said
bank it cannot recover from a holder who did not participate in the forgery and did not have actual
notice thereof

3. YES.

Circumstances:

check number 637023-D was dated April 6, 1933, whereas check number 637020-D and

is dated April 7, 1933. (later check had prior number)

accepted the 2 checks from unknown persons
check 637023-D was indorsed by a subagent of the agent of the payee, International Auto

Repair Shop and cross generally

Section 23 of the Negotiable Instruments Act provides that "when a signature is forged or

made without the authority of the person whose signature it purports to be, it is wholly inoperative,
and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof
against any party thereto, can be acquired through or under such signature, unless the party against
whom it is sought to enforce such right is precluded from setting up the forgery or want of authority.
PNB did not warrant to MCSI the genuineness of the checks in question, by its

acceptance thereof, nor did it perform any act which would have induced MSCI to believe in the
genuineness
PNB is NOT precluded from setting up the forgery

4. NO.

A drawee of a check, who is deceived by a forgery of the drawer's signature may recover the

payment back, unless his mistake has placed an innocent holder of the paper in a worse position than
he would have been in if the discover of the forgery had been made on presentation.
MSCI has lost nothing by anything which the drawee has done. It had in its hands some forged

worthless papers. It did not purchase or acquire these papers because of any representation made to it
by the drawee
Court concluded:
1. That where a check is accepted or certified by the bank on which it is drawn, the bank is estopped to
deny the genuineness of the drawer's signature and his capacity to issue the instrument;
2. That if a drawee bank pays a forged check which was previously accepted or certified by the said bank
it cannot recover from a holder who did not participate in the forgery and did not have actual notice
thereof;
3. That the payment of a check does not include or imply its acceptance in the sense that this word is used
in section 62 of the Negotiable Instruments Law;
4. That in the case of the payment of a forged check, even without former acceptance, the drawee can not
recover from a holder in due course not chargeable with any act of negligence or disregard of duty;
5. That to entitle the holder of a forged check to retain the money obtained thereon, there must be a
showing that the duty to ascertain the genuineness of the signature rested entirely upon the drawee, and
that the constructive negligence of such drawee in failing to detect the forgery was not affected by any
disregard of duty on the part of the holder, or by failure of any precaution which, from his implied
assertion in presenting the check as a sufficient voucher, the drawee had the right to believe he had taken;

6. That in the absence of actual fault on the part of the drawee, his constructive fault in not knowing the
signature of the drawer and detecting the forgery will nor preclude his recovery from one who took the
check under circumstances of suspicion and without proper precaution, or whose conduct has been such
as to mislead the drawee or induce him to pay the check without the usual scrutiny or other precautions
against mistake or fraud;
7. That on who purchases a check or draft is bound to satisfy himself that the paper is genuine, and that by
indorsing it or presenting it for payment or putting it into circulation before presentation he impliedly
asserts that he performed his duty;
8. That while the foregoing rule, chosen from a welter of decisions on the issue as the correct one, will not
hinder the circulation of two recognized mediums of exchange by which the great bulk of business is
carried on, namely, drafts and checks, on the other hand, it will encourage and demand prudent business
methods on the part of those receiving such mediums of exchange;
9. That it being a matter of record in the present case, that the appellee bank in no more chargeable with
the knowledge of the drawer's signature than the appellant is, as the drawer was as much the customer of
the appellant as of the appellee, the presumption that a drawee bank is bound to know more than any
indorser the signature of its depositor does not hold;
10. That according to the undisputed facts of the case the appellant in purchasing the papers in question
from unknown persons without making any inquiry as to the identity and authority of the said persons
negotiating and indorsing them, acted negligently and contributed to the appellee's constructive
negligence in failing to detect the forgery;
11. That under the circumstances of the case, if the appellee bank is allowed to recover, there will be no
change of position as to the injury or prejudice of the appellant.

FAR EAST BANK & TRUST COMPANY, Petitioner,

- versus -

GOLD PALACE JEWELLERY CO., as represented by Judy L. Yang, Julie Yang-Go and Kho Soon
Huat, Respondent.
G.R. No. 168274 August 20, 2008
DECISION
NACHURA, J.:
For the review of the Court through a Rule 45 petition are the following issuances of the Court of
Appeals (CA) in CA-G.R. CV No. 71858: (1) the March 15, 2005 Decision [1] which reversed the trial
courts ruling, and (2) the May 26, 2005 Resolution [2] which denied the motion for reconsideration of the
said CA decision.
The instant controversy traces its roots to a transaction consummated sometime in June 1998, when
a foreigner, identified as Samuel Tagoe, purchased from the respondent Gold Palace Jewellery Co.s
(Gold Palaces) store at SM-North EDSA several pieces of jewelry valued at P258,000.00.[3] In payment
of the same, he offered Foreign Draft No. M-069670 issued by the United Overseas Bank (Malaysia)
BHD Medan Pasar, Kuala Lumpur Branch (UOB), addressed to the Land Bank of the Philippines, Manila
(LBP), and payable to the respondent company for P380,000.00.[4]
Before receiving the draft, respondent Judy Yang, the assistant general manager of Gold Palace,
inquired from petitioner Far East Bank & Trust Companys (Far Easts) SM North EDSA Branch, its
neighbor mall tenant, the nature of the draft. The teller informed her that the same was similar to a
managers check, but advised her not to release the pieces of jewelry until the draft had been cleared.
[5]

Following the banks advice, Yang issued Cash Invoice No. 1609[6] to the foreigner, asked him to come

back, and informed him that the pieces of jewelry would be released when the draft had already been
cleared.[7] Respondent Julie Yang-Go, the manager of Gold Palace, consequently deposited the draft in the
companys account with the aforementioned Far East branch on June 2, 1998.[8]
When Far East, the collecting bank, presented the draft for clearing to LBP, the drawee bank, the
latter cleared the same [9]UOBs account with LBP was debited, [10] and Gold Palaces account with Far
East was credited with the amount stated in the draft. [11]
The foreigner eventually returned to respondents store on June 6, 1998 to claim the purchased
goods. After ascertaining that the draft had been cleared, respondent Yang released the pieces of jewelry
to Samuel Tagoe; and because the amount in the draft was more than the value of the goods purchased,

she issued, as his change, Far East Check No. 1730881 [12] for P122,000.00.[13] This check was later
presented for encashment and was, in fact, paid by the said bank. [14]
On June 26, 1998, or after around three weeks, LBP informed Far East that the amount in Foreign
Draft No. M-069670 had been materially altered from P300.00 to P380,000.00 and that it was returning
the same. Attached to its official correspondence were Special Clearing Receipt No. 002593 and the duly
notarized and consul-authenticated affidavit of a corporate officer of the drawer, UOB. [15] It is noted at
this point that the material alteration was discovered by UOB after LBP had informed it that its funds
were being depleted following the encashment of the subject draft. [16] Intending to debit the amount from
respondents account, Far East subsequently refunded the P380,000.00 earlier paid by LBP.
Gold Palace, in the meantime, had already utilized portions of the amount. Thus, on July 20,
1998, as the outstanding balance of its account was already inadequate, Far East was able to debit
only P168,053.36,[17] but this was done without a prior written notice to the account holder. [18] Far
East only notified by phone the representatives of the respondent company. [19]
On August 12, 1998, petitioner demanded from respondents the payment of P211,946.64 or the
difference between the amount in the materially altered draft and the amount debited from the respondent
companys account.[20] Because GoldPalace did not heed the demand, Far East consequently instituted
Civil Case No. 99-296 for sum of money and damages before the Regional Trial Court (RTC), Branch 64
of Makati City.[21]
In their Answer, respondents specifically denied the material allegations in the complaint and
interposed as a defense that the complaint states no cause of actionthe subject foreign draft having been
cleared and the respondent not being the party who made the material alteration. Respondents further
counterclaimed for actual damages, moral and exemplary damages, and attorneys fees considering,
among others, that the petitioner had confiscated without basis Gold Palaces balance in its account
resulting in operational loss, and had maliciously imputed to the latter the act of alteration. [22]
After trial on the merits, the RTC rendered its July 30, 2001 Decision [23] in favor of Far East,
ordering Gold Palace to pay the former P211,946.64 as actual damages and P50,000.00 as attorneys fees.
[24]

The trial court ruled that, on the basis of its warranties as a general indorser, Gold Palace was liable

to Far East.[25]
On appeal, the CA, in the assailed March 15, 2005 Decision,[26] reversed the ruling of the trial
court and awarded respondents counterclaim. It ruled in the main that Far East failed to undergo the

proceedings on the protest of the foreign draft or to notify Gold Palace of the drafts dishonor; thus, Far
East could not charge Gold Palace on its secondary liability as an indorser.[27] The appellate court further
ruled that the drawee bank had cleared the check, and its remedy should be against the party responsible
for the alteration. Considering that, in this case, Gold Palace neither altered the draft nor knew of the
alteration, it could not be held liable.[28] The dispositive portion of the CA decision reads:
WHEREFORE, premises considered, the appeal is GRANTED; the assailed
Decision dated 30 July 2001 of the Regional Trial Court of Makati City, Branch 64 is
hereby REVERSED and SET ASIDE; the Complaint dated January 1999 is DISMISSED;
and appellee Far East Bank and Trust Company is hereby ordered to pay appellant Gold
Palace Jewellery Company the amount of Php168,053.36 for actual damages plus legal
interest of 12% per annum from 20 July 1998, Php50,000.00 for exemplary damages, and
Php50,000.00 for attorneys fees. Costs against appellee Far East Bank and Trust
Company.[29]

The appellate court, in the further challenged May 26, 2005 Resolution, [30] denied petitioners
Motion for Reconsideration,[31] which prompted the petitioner to institute before the Court the instant
Petition for Review on Certiorari.[32]
We deny the petition.
Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the acceptor, by
accepting the instrument, engages that he will pay it according to the tenor of his acceptance.[33] This
provision applies with equal force in case the drawee pays a bill without having previously accepted
it. His actual payment of the amount in the check implies not only his assent to the order of the drawer
and a recognition of his corresponding obligation to pay the aforementioned sum, but also, his clear
compliance with that obligation.[34] Actual payment by the drawee is greater than his acceptance, which is
merely a promise in writing to pay. The payment of a check includes its acceptance. [35]
Unmistakable herein is the fact that the drawee bank cleared and paid the subject foreign draft
and forwarded the amount thereof to the collecting bank. The latter then credited to Gold Palaces account
the payment it received. Following the plain language of the law, the drawee, by the said payment,
recognized and complied with its obligation to pay in accordance with the tenor of his acceptance.
The tenor of the acceptance is determined by the terms of the bill as it is when the drawee accepts.
[36]

Stated simply, LBP was liable on its payment of the check according to the tenor of the check at the

time of payment, which was the raised amount.

Because of that engagement, LBP could no longer repudiate the payment it erroneously made to a
due course holder. We note at this point that Gold Palace was not a participant in the alteration of the
draft, was not negligent, and was a holder in due courseit received the draft complete and regular on its
face, before it became overdue and without notice of any dishonor, in good faith and for value, and absent
any knowledge of any infirmity in the instrument or defect in the title of the person negotiating it.
[37]

Having relied on the drawee banks clearance and payment of the draft and not being negligent (it

delivered the purchased jewelry only when the draft was cleared and paid), respondent is amply protected
by the said Section 62. Commercial policy favors the protection of any one who, in due course, changes
his position on the faith of the drawee banks clearance and payment of a check or draft. [38]
This construction and application of the law gives effect to the plain language of the NIL [39] and is
in line with the sound principle that where one of two innocent parties must suffer a loss, the law will
leave the loss where it finds it.[40] It further reasserts the usefulness, stability and currency of negotiable
paper without seriously endangering accepted banking practices. Indeed, banking institutions can readily
protect themselves against liability on altered instruments either by qualifying their acceptance or
certification, or by relying on forgery insurance and special paper which will make alterations obvious.
[41]

This is not to mention, but we state nevertheless for emphasis, that the drawee bank, in most cases, is

in a better position, compared to the holder, to verify with the drawer the matters stated in the instrument.
As we have observed in this case, were it not for LBPs communication with the drawer that its account in
the Philippines was being depleted after the subject foreign draft had been encashed, then, the alteration
would not have been discovered. What we cannot understand is why LBP, having the most convenient
means to correspond with UOB, did not first verify the amount of the draft before it cleared and paid the
same.Gold Palace, on the other hand, had no facility to ascertain with the drawer, UOB Malaysia, the true
amount in the draft. It was left with no option but to rely on the representations of LBP that the draft was
good.
In arriving at this conclusion, the Court is not closing its eyes to the other view espoused in
common law jurisdictions that a drawee bank, having paid to an innocent holder the amount of an
uncertified, altered check in good faith and without negligence which contributed to the loss, could
recover from the person to whom payment was made as for money paid by mistake.[42] However, given the
foregoing discussion, we find no compelling reason to apply the principle to the instant case.
The Court is also aware that under the Uniform Commercial Code in the United States of
America, if an unaccepted draft is presented to a drawee for payment or acceptance and the drawee pays
or accepts the draft, the person obtaining payment or acceptance, at the time of presentment, and a
previous transferor of the draft, at the time of transfer, warrant to the drawee making payment or

accepting the draft in good faith that the draft has not been altered.[43] Nonetheless, absent any similar
provision in our law, we cannot extend the same preferential treatment to the paying bank.
Thus, considering that, in this case, Gold Palace is protected by Section 62 of the NIL, its
collecting agent, Far East, should not have debited the money paid by the drawee bank from respondent
companys account. When Gold Palace deposited the check with Far East, the latter, under the terms of
the deposit and the provisions of the NIL, became an agent of the former for the collection of the amount
in the draft.[44] The subsequent payment by the drawee bank and the collection of the amount by the
collecting bank closed the transaction insofar as the drawee and the holder of the check or his agent are
concerned, converted the check into a mere voucher,[45] and, as already discussed, foreclosed the recovery
by the drawee of the amount paid. This closure of the transaction is a matter of course; otherwise,
uncertainty in commercial transactions, delay and annoyance will arise if a bank at some future time will
call on the payee for the return of the money paid to him on the check. [46]
As the transaction in this case had been closed and the principal-agent relationship between the
payee and the collecting bank had already ceased, the latter in returning the amount to the drawee bank
was already acting on its own and should now be responsible for its own actions. Neither can petitioner be
considered to have acted as the representative of the drawee bank when it debited respondents account,
because, as already explained, the drawee bank had no right to recover what it paid. Likewise, Far
East cannot invoke the warranty of the payee/depositor who indorsed the instrument for collection to shift
the burden it brought upon itself. This is precisely because the said indorsement is only for purposes of
collection which, under Section 36 of the NIL, is a restrictive indorsement. [47] It did not in any way
transfer the title of the instrument to the collecting bank. Far East did not own the draft, it merely
presented it for payment. Considering that the warranties of a general indorser as provided in Section 66
of the NIL are based upon a transfer of title and are available only to holders in due course, [48] these
warranties did not attach to the indorsement for deposit and collection made by Gold Palace to Far East.
Without any legal right to do so, the collecting bank, therefore, could not debit respondents account for
the amount it refunded to the drawee bank.
The foregoing considered, we affirm the ruling of the appellate court to the extent that Far
East could not debit the account of Gold Palace, and for doing so, it must return what it had erroneously
taken. Far Easts remedy under the law is not against Gold Palace but against the drawee-bank or the
person responsible for the alteration. That, however, is another issue which we do not find necessary to
discuss in this case.

However, we delete the exemplary damages awarded by the appellate court. Respondents have
not shown that they are entitled to moral, temperate or compensatory damages. [49] Neither was petitioner
impelled by malice or bad faith in debiting the account of the respondent company and in pursuing its
cause.[50] On the contrary, petitioner was honestly convinced of the propriety of the debit. We also delete
the award of attorneys fees for, in a plethora of cases, we have ruled that it is not a sound public policy to
place a premium on the right to litigate. No damages can be charged to those who exercise such
precious right in good faith, even if done erroneously.[51]
WHEREFORE, premises considered, the March 15, 2005 Decision and the May 26, 2005
Resolution of the Court of Appeals in CA-G.R. CV No. 71858 are AFFIRMED WITH THE
MODIFICATION that the award of exemplary damages and attorneys fees is DELETED.
SO ORDERED.

DIGEST
FACTS

June 1998: Samuel Tagoe, a foreigner, purchased from Gold Palace Jewellery Co.'s (Gold
Palace's) store at SM-North EDSA several pieces of jewelry valued at P258,000
paid w/ Foreign Draft issued by the United Overseas Bank (Malaysia) to Land Bank of

the Philippines, Manila (LBP) for P380,000

Teller of Far East Bank, next door tenant, informed Julie Yang-Go (manager of Gold Palace) that
a foreign draft has similar nature to a manager's check, but advised her not to release the pieces of
jewelry until the draft had been cleared

Yang issued Cash Invoice so the jewelries can be released

Yang deposited the draft in the company's account with the Far East on June 2, 1998

When Far East, the collecting bank, presented the draft for clearing to LBP, the drawee bank,
cleared the it and Gold Palace's account with Far East was credited

June 6, 1998: The foreigner eventually returned to claim the purchased goods.
After ascertaining that the draft had been cleared, Yang released the pieces of jewelry and

his change, Far East Check of P122,000 paid by the bank

June 26, 1998: LBP informed Far East that the Foreign Draft had been materially altered from
P300 to P300,000and that it was returning the same
Far East refunded the amount to LBP and debit only P168,053.36 of the amount left in

Gold Palace' account without a prior written notice to the account holder
Far East only notified by phone the representatives of the Gold Palace

August 12, 1998: Far East demanded from Gold Palace the payment of balance and upon refusal
filed in the RTC

RTC: in favor of Far East on the basis that Gold Palace was liable under the liabilities of a general
indorser

CA: reversed since Far East failed to undergo the proceedings on the protest of the foreign draft
or to notify Gold Palace of the draft's dishonor; thus, Far East could not charge Gold Palace on its
secondary liability as an indorser

ISSUE
W/N Gold Palace should be liable for the altered Foreign Draft
HELD
NO. AFFIRMED WITH THE MODIFICATION that the award of exemplary damages and attorney's
fees is DELETED

Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the acceptor, by
accepting the instrument, engages that he will pay it according to the tenor of his acceptance.

This provision applies with equal force in case the drawee pays a bill without having previously
accepted it.
Actual payment by the drawee is greater than his acceptance, which is merely a promise

in writing to pay
The payment of a check includes its acceptance

The tenor of the acceptance is determined by the terms of the bill as it is when the drawee
accepts.

LBP was liable on its payment of the check according to the tenor of the check at the time
of payment, which was the raised amount.

Gold Palace was not a participant in the alteration of the draft, was not negligent, and was a
holder in due course

LBP, having the most convenient means to correspond with UOB, did not first verify the amount
of the draft before it cleared and paid the same

Gold Palace had no facility to ascertain with the drawer, UOB Malaysia, the true amount
inthe draft. It was left with no option but to rely on the representations of LBP that the draftwas good

Principle that the drawee bank, having paid to an innocent holder the amount of an uncertified,
altered check in good faith and without negligence which contributed to the loss, could recover from
the person to whom payment was made as for money paid by mistake - NOT applicable

The Court is also aware that under the Uniform Commercial Code in the United States of
America, if an unaccepted draft is presented to a drawee for payment or acceptance and the drawee
pays or accepts the draft, the person obtaining payment or acceptance, at the time of presentment,
and a previous transferor of the draft, at the time of transfer, warrant to the drawee making payment
or accepting the draft in good faith that the drafthas not been altered - absent any similar provision in
our law, cannot extend the same preferential treatment to the paying bank

Gold Palace is protected by Section 62 of the NIL, its collecting agent, Far East, should not have
debited the money paid by the drawee bank from respondent company's account. When Gold Palace
deposited the check with Far East, it, under the terms of the deposit and the provisions of the NIL,
became an agent of the Gold Palace for the collection of the amount in the draft

The subsequent payment by the drawee bank and the collection of the amount by the collecting
bank closed the transaction insofar as the drawee and the holder of the check or his agent are
concerned, converted the check into a mere voucher, and, as already discussed, foreclosed the
recovery by the drawee of the amount paid. This closure of the transaction is a matter of course;
otherwise, uncertainty in commercial transactions, delay and annoyance will arise if a bank at some
future time will call on the payee for the return of the money paid to him on the check
As the transaction in this case had been closed and the principal-agent relationship

between the payee and the collecting bank had already ceased, the latter in returning the amount to
the drawee bank was already acting on its own and should now be responsible for its own actions.
Neither can petitioner be considered to have acted as the representative of the drawee bank when it
debited respondent's account, because, as already explained, the drawee bank had no right to recover
what it paid. Likewise, Far East cannot invoke the warranty of the payee/depositor who indorsed the
instrument for collection to shift the burden it brought upon itself. This is precisely because the said
indorsement is only for purposes of collection which, under Section 36 of the NIL, is a restrictive
indorsement. It did not in any way transfer the title of the instrument to the collecting bank. Far
East did not own the draft, it merely presented it for payment. Considering that the warranties of a
general indorser as provided in Section 66 of the NIL are based upon a transfer of title and are
available only to holders in due course, these warranties did not attach to the indorsement for deposit
and collection made by Gold Palace to Far East. Without any legal right to do so, the collecting bank,
therefore, could not debit respondent's account for the amount it refunded to the drawee bank.

CHAPTER 7

G.R. No. 136202

January 25, 2007

BANK OF THE PHILIPPINE ISLANDS, Petitioner,

vs.
COURT OF APPEALS, ANNABELLE A. SALAZAR, and JULIO R.
TEMPLONUEVO, Respondents
DECISION
AZCUNA, J.:
This is a petition for review under Rule 45 of the Rules of Court seeking the reversal of the
Decision1 dated April 3, 1998, and the Resolution2 dated November 9, 1998, of the Court of Appeals in
CA-G.R. CV No. 42241.
The facts3 are as follows:
A.A. Salazar Construction and Engineering Services filed an action for a sum of money with damages
against herein petitioner Bank of the Philippine Islands (BPI) on December 5, 1991 before Branch 156 of
the Regional Trial Court (RTC) of Pasig City. The complaint was later amended by substituting the name
of Annabelle A. Salazar as the real party in interest in place of A.A. Salazar Construction and Engineering
Services. Private respondent Salazar prayed for the recovery of the amount of Two Hundred Sixty-Seven
Thousand, Seven Hundred Seven Pesos and Seventy Centavos (P267,707.70) debited by petitioner BPI
from her account. She likewise prayed for damages and attorneys fees.
Petitioner BPI, in its answer, alleged that on August 31, 1991, Julio R. Templonuevo, third-party
defendant and herein also a private respondent, demanded from the former payment of the amount of Two
Hundred Sixty-Seven Thousand, Six Hundred Ninety-Two Pesos and Fifty Centavos (P267,692.50)
representing the aggregate value of three (3) checks, which were allegedly payable to him, but which
were deposited with the petitioner bank to private respondent Salazars account (Account No. 0203-118767) without his knowledge and corresponding endorsement.
Accepting that Templonuevos claim was a valid one, petitioner BPI froze Account No. 0201-0588-48 of
A.A. Salazar and Construction and Engineering Services, instead of Account No. 0203-1187-67 where the
checks were deposited, since this account was already closed by private respondent Salazar or had an
insufficient balance.
Private respondent Salazar was advised to settle the matter with Templonuevo but they did not arrive at
any settlement. As it appeared that private respondent Salazar was not entitled to the funds represented by
the checks which were deposited and accepted for deposit, petitioner BPI decided to debit the amount
of P267,707.70 from her Account No. 0201-0588-48 and the sum of P267,692.50 was paid to
Templonuevo by means of a cashiers check. The difference between the value of the checks
(P267,692.50) and the amount actually debited from her account (P267,707.70) represented bank charges
in connection with the issuance of a cashiers check to Templonuevo.
In the answer to the third-party complaint, private respondent Templonuevo admitted the payment to him
ofP267,692.50 and argued that said payment was to correct the malicious deposit made by private
respondent Salazar to her private account, and that petitioner banks negligence and tolerance regarding
the matter was violative of the primary and ordinary rules of banking. He likewise contended that the
debiting or taking of the reimbursed amount from the account of private respondent Salazar by petitioner
BPI was a matter exclusively between said parties and may be pursuant to banking rules and regulations,

but did not in any way affect him. The debiting from another account of private respondent Salazar,
considering that her other account was effectively closed, was not his concern.
After trial, the RTC rendered a decision, the dispositive portion of which reads thus:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff [private
respondent Salazar] and against the defendant [petitioner BPI] and ordering the latter to pay as follows:
1. The amount of P267,707.70 with 12% interest thereon from September 16, 1991 until the said
amount is fully paid;
2. The amount of P30,000.00 as and for actual damages;
3. The amount of P50,000.00 as and for moral damages;
4. The amount of P50,000.00 as and for exemplary damages;
5. The amount of P30,000.00 as and for attorneys fees; and
6. Costs of suit.
The counterclaim is hereby ordered DISMISSED for lack of factual basis.
The third-party complaint [filed by petitioner] is hereby likewise ordered DISMISSED for lack of merit.
Third-party defendants [i.e., private respondent Templonuevos] counterclaim is hereby likewise
DISMISSED for lack of factual basis.
SO ORDERED.4
On appeal, the Court of Appeals (CA) affirmed the decision of the RTC and held that respondent Salazar
was entitled to the proceeds of the three (3) checks notwithstanding the lack of endorsement thereon by
the payee. The CA concluded that Salazar and Templonuevo had previously agreed that the checks
payable to JRT Construction and Trading5 actually belonged to Salazar and would be deposited to her
account, with petitioner acquiescing to the arrangement. 6
Petitioner therefore filed this petition on these grounds:
I.
The Court of Appeals committed reversible error in misinterpreting Section 49 of the Negotiable
Instruments Law and Section 3 (r and s) of Rule 131 of the New Rules on Evidence.
II.
The Court of Appeals committed reversible error in NOT applying the provisions of Articles 22, 1278 and
1290 of the Civil Code in favor of BPI.
III.

The Court of Appeals committed a reversible error in holding, based on a misapprehension of facts, that
the account from which BPI debited the amount of P267,707.70 belonged to a corporation with a separate
and distinct personality.
IV.
The Court of Appeals committed a reversible error in holding, based entirely on speculations, surmises or
conjectures, that there was an agreement between SALAZAR and TEMPLONUEVO that checks payable
to TEMPLONUEVO may be deposited by SALAZAR to her personal account and that BPI was privy to
this agreement.
V.
The Court of Appeals committed reversible error in holding, based entirely on speculation, surmises or
conjectures, that SALAZAR suffered great damage and prejudice and that her business standing was
eroded.
VI.
The Court of Appeals erred in affirming instead of reversing the decision of the lower court against BPI
and dismissing SALAZARs complaint.
VII.
The Honorable Court erred in affirming the decision of the lower court dismissing the third-party
complaint of BPI.7
The issues center on the propriety of the deductions made by petitioner from private respondent Salazars
account. Stated otherwise, does a collecting bank, over the objections of its depositor, have the authority
to withdraw unilaterally from such depositors account the amount it had previously paid upon certain
unendorsed order instruments deposited by the depositor to another account that she later closed?
Petitioner argues thus:
1. There is no presumption in law that a check payable to order, when found in the possession of a
person who is neither a payee nor the indorsee thereof, has been lawfully transferred for value.
Hence, the CA should not have presumed that Salazar was a transferee for value within the
contemplation of Section 49 of the Negotiable Instruments Law,8 as the latter applies only to a
holder defined under Section 191of the same. 9
2. Salazar failed to adduce sufficient evidence to prove that her possession of the three checks
was lawful despite her allegations that these checks were deposited pursuant to a prior internal
arrangement with Templonuevo and that petitioner was privy to the arrangement.
3. The CA should have applied the Civil Code provisions on legal compensation because in
deducting the subject amount from Salazars account, petitioner was merely rectifying the undue
payment it made upon the checks and exercising its prerogative to alter or modify an erroneous
credit entry in the regular course of its business.

4. The debit of the amount from the account of A.A. Salazar Construction and Engineering
Services was proper even though the value of the checks had been originally credited to the
personal account of Salazar because A.A. Salazar Construction and Engineering Services, an
unincorporated single proprietorship, had no separate and distinct personality from Salazar.
5. Assuming the deduction from Salazars account was improper, the CA should not have
dismissed petitioners third-party complaint against Templonuevo because the latter would have
the legal duty to return to petitioner the proceeds of the checks which he previously received from
it.
6. There was no factual basis for the award of damages to Salazar.
The petition is partly meritorious.
First, the issue raised by petitioner requires an inquiry into the factual findings made by the CA. The CAs
conclusion that the deductions from the bank account of A.A. Salazar Construction and Engineering
Services were improper stemmed from its finding that there was no ineffective payment to Salazar which
would call for the exercise of petitioners right to set off against the formers bank deposits. This finding,
in turn, was drawn from the pleadings of the parties, the evidence adduced during trial and upon the
admissions and stipulations of fact made during the pre-trial, most significantly the following:
(a) That Salazar previously had in her possession the following checks:
(1) Solid Bank Check No. CB766556 dated January 30, 1990 in the amount
of P57,712.50;
(2) Solid Bank Check No. CB898978 dated July 31, 1990 in the amount of P55,180.00;
and,
(3) Equitable Banking Corporation Check No. 32380638 dated August 28, 1990 for the
amount ofP154,800.00;
(b) That these checks which had an aggregate amount of P267,692.50 were payable to the order
of JRT Construction and Trading, the name and style under which Templonuevo does business;
(c) That despite the lack of endorsement of the designated payee upon such checks, Salazar was
able to deposit the checks in her personal savings account with petitioner and encash the same;
(d) That petitioner accepted and paid the checks on three (3) separate occasions over a span of
eight months in 1990; and
(e) That Templonuevo only protested the purportedly unauthorized encashment of the checks
after the lapse of one year from the date of the last check. 10
Petitioner concedes that when it credited the value of the checks to the account of private respondent
Salazar, it made a mistake because it failed to notice the lack of endorsement thereon by the designated
payee. The CA, however, did not lend credence to this claim and concluded that petitioners actions were
deliberate, in view of its admission that the "mistake" was committed three times on three separate

occasions, indicating acquiescence to the internal arrangement between Salazar and Templonuevo. The
CA explained thus:
It was quite apparent that the three checks which appellee Salazar deposited were not indorsed. Three
times she deposited them to her account and three times the amounts borne by these checks were credited
to the same. And in those separate occasions, the bank did not return the checks to her so that she could
have them indorsed. Neither did the bank question her as to why she was depositing the checks to her
account considering that she was not the payee thereof, thus allowing us to come to the conclusion that
defendant-appellant BPI was fully aware that the proceeds of the three checks belong to appellee.
For if the bank was not privy to the agreement between Salazar and Templonuevo, it is most unlikely that
appellant BPI (or any bank for that matter) would have accepted the checks for deposit on three separate
times nary any question. Banks are most finicky over accepting checks for deposit without the
corresponding indorsement by their payee. In fact, they hesitate to accept indorsed checks for deposit if
the depositor is not one they know very well.11
The CA likewise sustained Salazars position that she received the checks from Templonuevo pursuant to
an internal arrangement between them, ratiocinating as follows:
If there was indeed no arrangement between Templonuevo and the plaintiff over the three questioned
checks, it baffles us why it was only on August 31, 1991 or more than a year after the third and last check
was deposited that he demanded for the refund of the total amount of P267,692.50.
A prudent man knowing that payment is due him would have demanded payment by his debtor from the
moment the same became due and demandable. More so if the sum involved runs in hundreds of thousand
of pesos. By and large, every person, at the very moment he learns that he was deprived of a thing which
rightfully belongs to him, would have created a big fuss. He would not have waited for a year within
which to do so. It is most inconceivable that Templonuevo did not do this. 12
Generally, only questions of law may be raised in an appeal by certiorari under Rule 45 of the Rules of
Court.13Factual findings of the CA are entitled to great weight and respect, especially when the CA
affirms the factual findings of the trial court. 14 Such questions on whether certain items of evidence
should be accorded probative value or weight, or rejected as feeble or spurious, or whether or not the
proofs on one side or the other are clear and convincing and adequate to establish a proposition in issue,
are questions of fact. The same holds true for questions on whether or not the body of proofs presented by
a party, weighed and analyzed in relation to contrary evidence submitted by the adverse party may be said
to be strong, clear and convincing, or whether or not inconsistencies in the body of proofs of a party are
of such gravity as to justify refusing to give said proofs weight all these are issues of fact which are not
reviewable by the Court.15
This rule, however, is not absolute and admits of certain exceptions, namely: a) when the conclusion is a
finding grounded entirely on speculations, surmises, or conjectures; b) when the inference made is
manifestly mistaken, absurd, or impossible; c) when there is a grave abuse of discretion; d) when the
judgment is based on a misapprehension of facts; e) when the findings of fact are conflicting; f) when the
CA, in making its findings, went beyond the issues of the case and the same are contrary to the
admissions of both appellant and appellee; g) when the findings of the CA are contrary to those of the trial
court; h) when the findings of fact are conclusions without citation of specific evidence on which they are
based; i) when the finding of fact of the CA is premised on the supposed absence of evidence but is
contradicted by the evidence on record; and j) when the CA manifestly overlooked certain relevant facts
not disputed by the parties and which, if properly considered, would justify a different conclusion. 16

In the present case, the records do not support the finding made by the CA and the trial court that a prior
arrangement existed between Salazar and Templonuevo regarding the transfer of ownership of the checks.
This fact is crucial as Salazars entitlement to the value of the instruments is based on the assumption that
she is a transferee within the contemplation of Section 49 of the Negotiable Instruments Law.
Section 49 of the Negotiable Instruments Law contemplates a situation whereby the payee or indorsee
delivers a negotiable instrument for value without indorsing it, thus:
Transfer without indorsement; effect of- Where the holder of an instrument payable to his order transfers
it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein,
and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the
purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of
the time when the indorsement is actually made. 17
It bears stressing that the above transaction is an equitable assignment and the transferee acquires the
instrument subject to defenses and equities available among prior parties. Thus, if the transferor had legal
title, the transferee acquires such title and, in addition, the right to have the indorsement of the transferor
and also the right, as holder of the legal title, to maintain legal action against the maker or acceptor or
other party liable to the transferor. The underlying premise of this provision, however, is that a valid
transfer of ownership of the negotiable instrument in question has taken place.
Transferees in this situation do not enjoy the presumption of ownership in favor of holders since they are
neither payees nor indorsees of such instruments. The weight of authority is that the mere possession of a
negotiable instrument does not in itself conclusively establish either the right of the possessor to receive
payment, or of the right of one who has made payment to be discharged from liability. Thus, something
more than mere possession by persons who are not payees or indorsers of the instrument is necessary to
authorize payment to them in the absence of any other facts from which the authority to receive payment
may be inferred.18
The CA and the trial court surmised that the subject checks belonged to private respondent Salazar based
on the pre-trial stipulation that Templonuevo incurred a one-year delay in demanding reimbursement for
the proceeds of the same. To the Courts mind, however, such period of delay is not of such unreasonable
length as to estop Templonuevo from asserting ownership over the checks especially considering that it
was readily apparent on the face of the instruments 19 that these were crossed checks.
In State Investment House v. IAC,20 the Court enumerated the effects of crossing a check, thus: (1) that the
check may not be encashed but only deposited in the bank; (2) that the check may be negotiated only once
- to one who has an account with a bank; and (3) that the act of crossing the check serves as a warning to
the holder that the check has been issued for a definite purpose so that such holder must inquire if the
check has been received pursuant to that purpose.
Thus, even if the delay in the demand for reimbursement is taken in conjunction with Salazars possession
of the checks, it cannot be said that the presumption of ownership in Templonuevos favor as the
designated payee therein was sufficiently overcome. This is consistent with the principle that if
instruments payable to named payees or to their order have not been indorsed in blank, only such payees
or their indorsees can be holders and entitled to receive payment in their own right. 21
The presumption under Section 131(s) of the Rules of Court stating that a negotiable instrument was
given for a sufficient consideration will not inure to the benefit of Salazar because the term "given" does
not pertain merely to a transfer of physical possession of the instrument. The phrase "given or indorsed"

in the context of a negotiable instrument refers to the manner in which such instrument may be
negotiated. Negotiable instruments are negotiated by "transfer to one person or another in such a manner
as to constitute the transferee the holderthereof. If payable to bearer it is negotiated by delivery. If
payable to order it is negotiated by the indorsement completed by delivery." 22 The present case involves
checks payable to order. Not being a payee or indorsee of the checks, private respondent Salazar could
not be a holder thereof.
It is an exception to the general rule for a payee of an order instrument to transfer the instrument without
indorsement. Precisely because the situation is abnormal, it is but fair to the maker and to prior holders to
require possessors to prove without the aid of an initial presumption in their favor, that they came into
possession by virtue of a legitimate transaction with the last holder.23 Salazar failed to discharge this
burden, and the return of the check proceeds to Templonuevo was therefore warranted under the
circumstances despite the fact that Templonuevo may not have clearly demonstrated that he never
authorized Salazar to deposit the checks or to encash the same. Noteworthy also is the fact that petitioner
stamped on the back of the checks the words: "All prior endorsements and/or lack of endorsements
guaranteed," thereby making the assurance that it had ascertained the genuineness of all prior
endorsements. Having assumed the liability of a general indorser, petitioners liability to the designated
payee cannot be denied.
Consequently, petitioner, as the collecting bank, had the right to debit Salazars account for the value of
the checks it previously credited in her favor. It is of no moment that the account debited by petitioner
was different from the original account to which the proceeds of the check were credited because both
admittedly belonged to Salazar, the former being the account of the sole proprietorship which had no
separate and distinct personality from her, and the latter being her personal account.
The right of set-off was explained in Associated Bank v. Tan:24
A bank generally has a right of set-off over the deposits therein for the payment of any withdrawals on the
part of a depositor. The right of a collecting bank to debit a client's account for the value of a dishonored
check that has previously been credited has fairly been established by jurisprudence. To begin with,
Article 1980 of the Civil Code provides that "[f]ixed, savings, and current deposits of money in banks and
similar institutions shall be governed by the provisions concerning simple loan."
Hence, the relationship between banks and depositors has been held to be that of creditor and debtor.
Thus, legal compensation under Article 1278 of the Civil Code may take place "when all the requisites
mentioned in Article 1279 are present," as follows:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons
and communicated in due time to the debtor.

While, however, it is conceded that petitioner had the right of set-off over the amount it paid to
Templonuevo against the deposit of Salazar, the issue of whether it acted judiciously is an entirely
different matter.25 As businesses affected with public interest, and because of the nature of their functions,
banks are under obligation to treat the accounts of their depositors with meticulous care, always having in
mind the fiduciary nature of their relationship. 26 In this regard, petitioner was clearly remiss in its duty to
private respondent Salazar as its depositor.
To begin with, the irregularity appeared plainly on the face of the checks. Despite the obvious lack of
indorsement thereon, petitioner permitted the encashment of these checks three times on three separate
occasions. This negates petitioners claim that it merely made a mistake in crediting the value of the
checks to Salazars account and instead bolsters the conclusion of the CA that petitioner recognized
Salazars claim of ownership of checks and acted deliberately in paying the same, contrary to ordinary
banking policy and practice. It must be emphasized that the law imposes a duty of diligence on the
collecting bank to scrutinize checks deposited with it, for the purpose of determining their genuineness
and regularity. The collecting bank, being primarily engaged in banking, holds itself out to the public as
the expert on this field, and the law thus holds it to a high standard of conduct. 27The taking and collection
of a check without the proper indorsement amount to a conversion of the check by the bank. 28
More importantly, however, solely upon the prompting of Templonuevo, and with full knowledge of the
brewing dispute between Salazar and Templonuevo, petitioner debited the account held in the name of the
sole proprietorship of Salazar without even serving due notice upon her. This ran contrary to petitioners
assurances to private respondent Salazar that the account would remain untouched, pending the resolution
of the controversy between her and Templonuevo. 29 In this connection, the CA cited the letter dated
September 5, 1991 of Mr. Manuel Ablan, Senior Manager of petitioner banks Pasig/Ortigas branch, to
private respondent Salazar informing her that her account had been frozen, thus:
From the tenor of the letter of Manuel Ablan, it is safe to conclude that Account No. 0201-0588-48 will
remain frozen or untouched until herein [Salazar] has settled matters with Templonuevo. But, in an
unexpected move, in less than two weeks (eleven days to be precise) from the time that letter was written,
[petitioner] bank issued a cashiers check in the name of Julio R. Templonuevo of the J.R.T. Construction
and Trading for the sum ofP267,692.50 (Exhibit "8") and debited said amount from Ms. Arcillas account
No. 0201-0588-48 which was supposed to be frozen or controlled. Such a move by BPI is, to Our minds,
a clear case of negligence, if not a fraudulent, wanton and reckless disregard of the right of its depositor.
The records further bear out the fact that respondent Salazar had issued several checks drawn against the
account of A.A. Salazar Construction and Engineering Services prior to any notice of deduction being
served. The CA sustained private respondent Salazars claim of damages in this regard:
The act of the bank in freezing and later debiting the amount of P267,692.50 from the account of A.A.
Salazar Construction and Engineering Services caused plaintiff-appellee great damage and prejudice
particularly when she had already issued checks drawn against the said account. As can be expected, the
said checks bounced. To prove this, plaintiff-appellee presented as exhibits photocopies of checks dated
September 8, 1991, October 28, 1991, and November 14, 1991 (Exhibits "D", "E" and "F" respectively) 30
These checks, it must be emphasized, were subsequently dishonored, thereby causing private respondent
Salazar undue embarrassment and inflicting damage to her standing in the business community. Under the
circumstances, she was clearly not given the opportunity to protect her interest when petitioner
unilaterally withdrew the above amount from her account without informing her that it had already done
so.

For the above reasons, the Court finds no reason to disturb the award of damages granted by the CA
against petitioner. This whole incident would have been avoided had petitioner adhered to the standard of
diligence expected of one engaged in the banking business. A depositor has the right to recover reasonable
moral damages even if the banks negligence may not have been attended with malice and bad faith, if the
former suffered mental anguish, serious anxiety, embarrassment and humiliation. 31 Moral damages are not
meant to enrich a complainant at the expense of defendant. It is only intended to alleviate the moral
suffering she has undergone. The award of exemplary damages is justified, on the other hand, when the
acts of the bank are attended by malice, bad faith or gross negligence. The award of reasonable attorneys
fees is proper where exemplary damages are awarded. It is proper where depositors are compelled to
litigate to protect their interest.32
WHEREFORE, the petition is partially GRANTED. The assailed Decision dated April 3, 1998 and
Resolution dated April 3, 1998 rendered by the Court of Appeals in CA-G.R. CV No. 42241
are MODIFIED insofar as it ordered petitioner Bank of the Philippine Islands to return the amount of
Two Hundred Sixty-seven Thousand Seven Hundred and Seven and 70/100 Pesos (P267,707.70) to
respondent Annabelle A. Salazar, which portion isREVERSED and SET ASIDE. In all other respects,
the same are AFFIRMED.
No costs.
SO ORDERED.

DIGEST
FACTS
Benjamin Napiza maintains an account with the Bank of the Philippine Islands (BPI). In 1987, Napiza
was approached by Henry Chan and the latter gave him a $2,500 Continental Bank Managers check.
Chan asked if Napiza can deposit the check to his (Napizas BPI account) by way of accommodation and
for the purpose of clearing the said check. Napiza agreed and so he deposited the check on September 3,
1987. Napiza then delivered a signed blank withdrawal slip to Chan with the condition that the $2,500.00
may only be withdrawn if the check cleared. For some reason, the withdrawal slip ended up in the hands

of one Ruben Gayon who went to BPI and successfully withdrew the $2,500.00. At the time of the
withdrawal, the check was not yet cleared. Then days later, BPI was notified by the drawee bank named
in the check that the check is actually a counterfeit.
ISSUE:
Whether or not Napiza may be held liable to refund the amount of the check.
HELD:
No. The Supreme Court ruled that ordinarily, Napiza would have been liable because he is an
accommodation indorser. But due to the attendant circumstances, Napiza is discharged from liability.
The withdrawal slip indicates as well as the rules promulgated by BPI that withdrawal from the bank
should be accompanied by the presentment of the account holders (Napizas) savings bankbook. This
was not done so in the case at bar because Gayon was able to withdraw without it. Further, BPI allowed
the withdrawal even before the check cleared. BPI already credited the $2,500.00 to Napizas account
even without the drawee bank clearing the check. This is contrary to common banking practices and
because of such negligence and lack of diligence, BPI, as the collecting bank, shall suffer the loss.

G.R. No. 101163 January 11, 1993

STATE INVESTMENT HOUSE, INC., petitioner,
vs.
COURT OF APPEALS and NORA B. MOULIC, respondents.
Escober, Alon & Associates for petitioner.
Martin D. Pantaleon for private respondents.

BELLOSILLO, J.:
The liability to a holder in due course of the drawer of checks issued to another merely as security, and
the right of a real estate mortgagee after extrajudicial foreclosure to recover the balance of the obligation,
are the issues in this Petition for Review of the Decision of respondent Court of Appeals.
Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for pieces of jewelry to be
sold on commission, two (2) post-dated Equitable Banking Corporation checks in the amount of Fifty
Thousand Pesos (P50,000.00) each, one dated 30 August 1979 and the other, 30 September 1979.
Thereafter, the payee negotiated the checks to petitioner State Investment House. Inc. (STATE).
MOULIC failed to sell the pieces of jewelry, so she returned them to the payee before maturity of the
checks. The checks, however, could no longer be retrieved as they had already been negotiated.
Consequently, before their maturity dates, MOULIC withdrew her funds from the drawee bank.
Upon presentment for payment, the checks were dishonored for insufficiency of funds. On 20 December
1979, STATE allegedly notified MOULIC of the dishonor of the checks and requested that it be paid in
cash instead, although MOULIC avers that no such notice was given her.
On 6 October 1983, STATE sued to recover the value of the checks plus attorney's fees and expenses of
litigation.
In her Answer, MOULIC contends that she incurred no obligation on the checks because the jewelry was
never sold and the checks were negotiated without her knowledge and consent. She also instituted a
Third-Party Complaint against Corazon Victoriano, who later assumed full responsibility for the checks.
On 26 May 1988, the trial court dismissed the Complaint as well as the Third-Party Complaint, and
ordered STATE to pay MOULIC P3,000.00 for attorney's fees.
STATE elevated the order of dismissal to the Court of Appeals, but the appellate court affirmed the trial
court on the ground that the Notice of Dishonor to MOULIC was made beyond the period prescribed by
the Negotiable Instruments Law and that even if STATE did serve such notice on MOULIC within the
reglementary period it would be of no consequence as the checks should never have been presented for
payment. The sale of the jewelry was never effected; the checks, therefore, ceased to serve their purpose
as security for the jewelry.
We are not persuaded.
The negotiability of the checks is not in dispute. Indubitably, they were negotiable. After all, at the pretrial, the parties agreed to limit the issue to whether or not STATE was a holder of the checks in due
course. 1
In this regard, Sec. 52 of the Negotiable Instruments Law provides
Sec. 52. What constitutes a holder in due course. A holder in due course is a holder
who has taken the instrument under the following conditions: (a) That it is complete and
regular upon its face; (b) That he became the holder of it before it was overdue, and

without notice that it was previously dishonored, if such was the fact; (c) That he took it
in good faith and for value; (d) That at the time it was negotiated to him he had no notice
of any infirmity in the instrument or defect in the title of the person negotiating it.
Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable instrument is a
holder in due course. 2 Consequently, the burden of proving that STATE is not a holder in due course lies
in the person who disputes the presumption. In this regard, MOULIC failed.
The evidence clearly shows that: (a) on their faces the post-dated checks were complete and regular: (b)
petitioner bought these checks from the payee, Corazon Victoriano, before their due dates; 3 (c) petitioner
took these checks in good faith and for value, albeit at a discounted price; and, (d) petitioner was never
informed nor made aware that these checks were merely issued to payee as security and not for value.
Consequently, STATE is indeed a holder in due course. As such, it holds the instruments free from any
defect of title of prior parties, and from defenses available to prior parties among themselves; STATE
may, therefore, enforce full payment of the checks. 4
MOULIC cannot set up against STATE the defense that there was failure or absence of consideration.
MOULIC can only invoke this defense against STATE if it was privy to the purpose for which they were
issued and therefore is not a holder in due course.
That the post-dated checks were merely issued as security is not a ground for the discharge of the
instrument as against a holder in due course. For the only grounds are those outlined in Sec. 119 of the
Negotiable Instruments Law:
Sec. 119. Instrument; how discharged. A negotiable instrument is discharged: (a) By
payment in due course by or on behalf of the principal debtor; (b) By payment in due
course by the party accommodated, where the instrument is made or accepted for his
accommodation; (c) By the intentional cancellation thereof by the holder; (d) By any
other act which will discharge a simple contract for the payment of money; (e) When the
principal debtor becomes the holder of the instrument at or after maturity in his own
right.
Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the discharge of the
instrument. But, the intentional cancellation contemplated under paragraph (c) is that cancellation effected
by destroying the instrument either by tearing it up, 5 burning it, 6 or writing the word "cancelled" on the
instrument. The act of destroying the instrument must also be made by the holder of the instrument
intentionally. Since MOULIC failed to get back possession of the post-dated checks, the intentional
cancellation of the said checks is altogether impossible.
On the other hand, the acts which will discharge a simple contract for the payment of money under
paragraph (d) are determined by other existing legislations since Sec. 119 does not specify what these acts
are, e.g., Art. 1231 of the Civil Code 7 which enumerates the modes of extinguishing obligations. Again,
none of the modes outlined therein is applicable in the instant case as Sec. 119 contemplates of a situation
where the holder of the instrument is the creditor while its drawer is the debtor. In the present action, the
payee, Corazon Victoriano, was no longer MOULIC's creditor at the time the jewelry was returned.
Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the mere
expediency of withdrawing her funds from the drawee bank. She is thus liable as she has no legal basis to
excuse herself from liability on her checks to a holder in due course.

Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment. The need
for such notice is not absolute; there are exceptions under Sec. 114 of the Negotiable Instruments Law:
Sec. 114. When notice need not be given to drawer. Notice of dishonor is not required
to be given to the drawer in the following cases: (a) Where the drawer and the drawee are
the same person; (b) When the drawee is a fictitious person or a person not having
capacity to contract; (c) When the drawer is the person to whom the instrument is
presented for payment: (d) Where the drawer has no right to expect or require that the
drawee or acceptor will honor the instrument; (e) Where the drawer had countermanded
payment.
Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the checks when she
returned the jewelry. She simply withdrew her funds from her drawee bank and transferred them to
another to protect herself. After withdrawing her funds, she could not have expected her checks to be
honored. In other words, she was responsible for the dishonor of her checks, hence, there was no need to
serve her Notice of Dishonor, which is simply bringing to the knowledge of the drawer or indorser of the
instrument, either verbally or by writing, the fact that a specified instrument, upon proper proceedings
taken, has not been accepted or has not been paid, and that the party notified is expected to pay it. 8
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. 9
The drawing and negotiation of a check have certain effects aside from the transfer of title or the incurring
of liability in regard to the instrument by the transferor. The holder who takes the negotiated paper makes
a contract with the parties on the face of the instrument. There is an implied representation that funds or
credit are available for the payment of the instrument in the bank upon which it is drawn. 10 Consequently,
the withdrawal of the money from the drawee bank to avoid liability on the checks cannot prejudice the
rights of holders in due course. In the instant case, such withdrawal renders the drawer, Nora B. Moulic,
liable to STATE, a holder in due course of the checks.
Under the facts of this case, STATE could not expect payment as MOULIC left no funds with the drawee
bank to meet her obligation on the checks, 11 so that Notice of Dishonor would be futile.
The Court of Appeals also held that allowing recovery on the checks would constitute unjust enrichment
on the part of STATE Investment House, Inc. This is error.
The record shows that Mr. Romelito Caoili, an Account Assistant, testified that the obligation of Corazon
Victoriano and her husband at the time their property mortgaged to STATE was extrajudicially foreclosed
amounted to P1.9 million; the bid price at public auction was only P1 million. 12 Thus, the value of the
property foreclosed was not even enough to pay the debt in full.
Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of
mortgage, the mortgagee is entitled to claim the deficiency from the debtor. 13 The step thus taken by the
mortgagee-bank in resorting to an extra-judicial foreclosure was merely to find a proceeding for the sale
of the property and its action cannot be taken to mean a waiver of its right to demand payment for the
whole debt. 14 For, while Act 3135, as amended, does not discuss the mortgagee's right to recover such
deficiency, it does not contain any provision either, expressly or impliedly, prohibiting recovery. In this
jurisdiction, when the legislature intends to foreclose the right of a creditor to sue for any deficiency
resulting from foreclosure of a security given to guarantee an obligation, it so expressly provides. For

instance, with respect to pledges, Art. 2115 of the Civil Code 15 does not allow the creditor to recover the
deficiency from the sale of the thing pledged. Likewise, in the case of a chattel mortgage, or a thing sold
on installment basis, in the event of foreclosure, the vendor "shall have no further action against the
purchaser to recover any unpaid balance of the price. Any agreement to the contrary will be void". 16
It is clear then that in the absence of a similar provision in Act No. 3135, as amended, it cannot be
concluded that the creditor loses his right recognized by the Rules of Court to take action for the recovery
of any unpaid balance on the principal obligation simply because he has chosen to extrajudicially
foreclose the real estate mortgage pursuant to a Special Power of Attorney given him by the mortgagor in
the contract of mortgage. 17
The filing of the Complaint and the Third-Party Complaint to enforce the checks against MOULIC and
the VICTORIANO spouses, respectively, is just another means of recovering the unpaid balance of the
debt of the VICTORIANOs.
In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the holder in due course,
STATE, without prejudice to any action for recompense she may pursue against the VICTORIANOs as
Third-Party Defendants who had already been declared as in default.
WHEREFORE, the petition is GRANTED. The decision appealed from is REVERSED and a new one
entered declaring private respondent NORA B. MOULIC liable to petitioner STATE INVESTMENT
HOUSE, INC., for the value of EBC Checks Nos. 30089658 and 30089660 in the total amount of
P100,000.00, P3,000.00 as attorney's fees, and the costs of suit, without prejudice to any action for
recompense she may pursue against the VICTORIANOs as Third-Party Defendants.
Costs against private respondent.
SO ORDERED.

DIGEST
FACTS
Nora Moulic issued to Corazon Victoriano, as security for pieces of jewellery to be sold on commission,
two postdated checks in the amount of fifty thousand each. Thereafter, Victoriano negotiated the checks to
State Investment House, Inc. When Moulic failed to sell the jewellry, she returned it to Victoriano before
the maturity of the checks. However, the checks cannot be retrieved as they have been negotiated. Before
the maturity date Moulic withdrew her funds from the bank contesting that she incurred no obligation on
the checks because the jewellery was never sold and the checks are negotiated without her knowledge and
consent. Upon presentment of for payment, the checks were dishonoured for insufficiency of funds.

ISSUES
1. Whether or not State Investment House inc. was a holder of the check in due course
2. Whether or not Moulic can set up against the petitioner the defense that there was failure or absence of
consideration
HELD
Yes, Section 52 of the NIL provides what constitutes a holder in due course. The evidence shows that: on
the faces of the post dated checks were complete and regular; that State Investment House Inc. bought the
checks from Victoriano before the due dates; that it was taken in good faith and for value; and there was
no knowledge with regard that the checks were issued as security and not for value. A prima facie
presumption exists that a holder of a negotiable instrument is a holder in due course. Moulic failed to
prove the contrary.
No, Moulic can only invoke this defense against the petitioner if it was a privy to the purpose for which
they were issued and therefore is not a holder in due course.
No, Section 119 of NIL provides how an instruments be discharged. Moulic can only invoke paragraphs c
and d as possible grounds for the discharge of the instruments. Since Moulic failed to get back the
possession of the checks as provided by paragraph c, intentional cancellation of instrument is impossible.
As provided by paragraph d, the acts which will discharge a simple contract of payment of money will
discharge the instrument. Correlating Article 1231 of the Civil Code which enumerates the modes of
extinguishing obligation, none of those modes outlined therein is applicable in the instant case. Thus,
Moulic may not unilaterally discharge herself from her liability by mere expediency of withdrawing her
funds from the drawee bank. She is thus liable as she has no legal basis to excuse herself from liability on
her check to a holder in due course. Moreover, the fact that the petitioner failed to give notice of dishonor
is of no moment. The need for such notice is not absolute; there are exceptions provided by Sec 114 of
NIL.

CHAPTER 8
G.R. No. 71694 August 16, 1991
NYCO SALES CORPORATION, petitioner,
vs.
BA FINANCE CORPORATION, JUDGE ROSALIO A. DE LEONREGIONAL TRIAL COURT,
BR. II, INTERMEDIATE APPELLATE COURT, FIRST CIVIL CASES DIVISION, respondents.
ABC Law Offices for petitioner.

Valera, Urmeneta & Associates for private respondent.

PARAS, J.:p
In this petition for review on certiorari, petitioner challenges the April 22, 1985 decision * and the July
16, 1985 resolution *of the then Intermediate Appellate Court in AC-G.R. CV No. 02553 entitled "BA
Finance Corporation v. Nyco Sales Corporation, et al." which affirmed with modification the July 20,
1983 decision ** of the Regional Trial Court, National Capital Region, Manila, Branch II in the same
case docketed as Civil Case No. 125909 ordering petitioner to pay respondent the amount of P60,000.00
as principal obligation plus corresponding interest, the sum of P10,000.00 as and for, attomey's fees and
1/3 of the costs of suit.
It appears on record that petitioner Nyco Sales Corporation (hereinafter referred to as Nyco) whose
president and general manager is Rufino Yao, is engaged in the business of selling construction materials
with principal office in Davao City. Sometime in 1978, the brothers Santiago and Renato Fernandez
(hereinafter referred to as the Fernandezes), both acting in behalf of Sanshell Corporation, approached
Rufino Yao for credit accommodation. They requested Nyco, thru Yao, to grant Sanshell discounting
privileges which Nyco had with BA Finance Corporation (hereinafter referred to as BA Finance). Yao
apparently acquiesced, hence on or about November 15, 1978, the Fernandezes went to Yao for the
purpose of discounting Sanshell's post-dated check which was a BPI-Davao Branch Check No. 499648
dated February 17, 1979 for the amount of P60,000.00. The said check was payable to Nyco. Following
the discounting process agreed upon, Nyco, thru Yao, endorsed the check in favor of BA Finance.
Thereafter, BA Finance issued a check payable to Nyco which endorsed it in favor of Sanshell. Sanshell
then made use of and/or negotiated the check. Accompanying the exchange of checks was a Deed of
Assignment executed by Nyco in favor of BA Finance with the conformity of Sanshell. Nyco was
represented by Rufino Yao, while Sanshell was represented by the Fernandez brothers. Under the said
Deed, the subject of the discounting was the aforecited check (Rollo, pp- 26-28). At the back thereof and
of every deed of assignment was the Continuing Suretyship Agreement whereby the Fernandezes
unconditionally guaranteed to BA Finance the full, faithful and prompt payment and discharge of any and
all indebtedness of Nyco (Ibid., pp. 36, 46). The BPI check, however, was dishonored by the drawee bank
upon presentment for payment. BA Finance immediately reported the matter to the Fernandezes who
thereupon issued a substitute check dated February 19,1979 for the same amount in favor of BA Finance.
It was a Security Bank and Trust Company check bearing the number 183157, which was again
dishonored when it was presented for payment. Despite repeated demands, Nyco and the Fernandezes
failed to settle the obligation with BA Finance, thus prompting the latter to institute an action in court
(Ibid., p 28). Nyco and the Fernandezes, despite having been served with summons and copies of the
complaint, failed to file their answer and were consequently declared in default. On May 16, 1980, the
lower court ruled in favor of BA Finance ordering them to pay the former jointly and severally, the sum of
P65,536.67 plus 14% interest per annum from July 1, 1979 and attorney's fees in the amount of P3, 000.
00 as well as the costs of suit (Rollo, pp. 51-52). Nyco, however, moved to set aside the order of default,
to have its answer admitted and to be able to implead Sanshell. The prayer was granted through an order
dated June 23, 1980, wherein the decision of the court was set aside only as regards Nyco. Trial ensued
once more until the court reached a second decision which states:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendant Nyco Sales Corporation by ordering the latter to pay the former the following:

1) P60,000.00 as principal obligation, plus interest thereon at the rate of 14% per annum
from February 1, 1979 until fully paid;
2) The amount of P100,000.00 as and for attorney's fees; and
3) One-third (1/3) of the costs of this suit.
With respect to defendants Santiago and Renato Fernandez, the decision of May 16, 1980
stands.
The cross-claim of defendant Nyco Sales Corporation against codefendants Santiago B.
Fernandez and Renato B. Fernandez is hereby denied, as there is no showing that Nyco's
Answer with cross-claim dated May 29, 1980 was ever received by said Fernandez
brothers, even as it is noted that the latter have not been declared in default with respect
to said cross-claim, nor were evidence adduced in connection therewith.
As to the would-be litigant Sanshell Construction and Development Corporation,
defendant Nyco Sales Corporation did not properly implead said corporation which
should have been by way of a third-party complaint instead of a mere cross-claim. The
same observations are noted as regard this cross-claim against Sanshell as those made
with respect to the Fernandez brothers.
SO ORDERED.
On appeal, the appellate court also upheld BA Finance but modified the lower court's decision by ordering
that the interest should run from February 19, 1979 until paid and not from February 1, 1979. Nyco's
subsequent motion for reconsideration was denied (Ibid., pp. 33, 62). Hence, the present recourse.
The crux of the controversy is whether or not the assignor is liable to its assignee for its dishonored
checks.
For its defense, Nyco anchors its arguments on the following premises: a) that the appellate court erred in
affirming its liability for the BPI check despite a similar finding of liability for the SBTC check rendered
by the same lower court; b) that it was actually discharged of its liability over the SBTC check when BA
Finance failed to give it a notice of dishonor; c) that there was novation when BA Finance accepted the
SBTC check in replacement of the BPI check; and d) that it cannot be held liable for its Presidents
unauthorized acts.
The petition is devoid of merit.
An assignment of credit is the process of transferring the right of the assignor to the assignee, who would
then be allowed to proceed against the debtor. It may be done either gratuitously or generously, in which
case, the assignment has an effect similar to that of a sale.
According to Article 1628 of the Civil Code, the assignor-vendor warrants both the credit itself (its
existence and legality) and the person of the debtor (his solvency), if so stipulated, as in the case at bar.
Consequently, if there be any breach of the above warranties, the assignor-vendor should be held
answerable therefor. There is no question then that the assignor-vendor is indeed liable for the invalidity
of whatever he as signed to the assignee-vendee.

Considering now the facts of the case at bar, it is beyond dispute that Nyco executed a deed of assignment
in favor of BA Finance with Sanshell Corporation as the debtor-obligor. BA Finance is actually enforcing
said deed and the check covered thereby is merely an incidental or collateral matter. This particular check
merely evidenced the credit which was actually assigned to BA Finance. Thus, the designation is
immaterial as it could be any other check. Both the lower and the appellate courts recognized this and so
it is utterly misplaced to say that Nyco is being held liable for both the BPI and the SBTC checks. It is
only what is represented by the said checks that Nyco is being asked to pay. Indeed, nowhere in the
dispositive parts of the decisions of the courts can it be gleaned that BA Finance may recover from the
two checks.
Nyco's pretension that it had not been notified of the fact of dishonor is belied not only by the formal
demand letter but also by the findings of the trial court that Rufino Yao of Nyco and the Fernandez
Brothers of Sanshell had frequent contacts before, during and after the dishonor (Rollo, p. 40). More
importantly, it fails to realize that for as long as the credit remains outstanding, it shall continue to be
liable to BA Finance as its assignor. The dishonor of an assigned check simply stresses its liability and the
failure to give a notice of dishonor will not discharge it from such liability. This is because the cause of
action stems from the breach of the warranties embodied in the Deed of Assignment, and not from the
dishonoring of the check alone (See Art. 1628, Civil Code).
Novation is the third defense set up by petitioner Nyco. It insists that novation took place when BA
Finance accepted the SBTC check in replacement of the BPI cheek. Such is manifestly untenable.
There are only two ways which indicate the presence of novation and thereby produce the effect of
extinguishing an obligation by another which substitutes the same. First, novation must be explicitly
stated and declared in unequivocal terms as novation is never presumed (Mondragon v. Intermediate
Appellate Court, G.R. No. 71889, April 17, 1990; Caneda Jr. v. Court of Appeals, G.R. No. 81322,
February 5, 1990). Secondly, the old and the new obligations must be incompatible on every point. The
test of incompatibility is whether or not the two obligations can stand together, each one having its
independent existence If they cannot, they are incompatible and the latter obligation novates the first
(Mondragon v. Intermediate Appellate Court, supra; Caneda Jr. v. Court of Appeals,supra). In the instant
case, there was no express agreement that BA Finance's acceptance of the SBTC check will discharge
Nyco from liability. Neither is there incompatibility because both checks were given precisely to
terminate a single obligation arising from Nyco's sale of credit to BA Finance. As novation speaks of two
distinct obligations, such is inapplicable to this case.
Finally, Nyco disowns its President's acts claiming that it never authorized Rufino Yao (Nyco's President)
to even apply to BA Finance for credit accommodation. It supports its argument with the fact that it did
not issue a Board resolution giving Yao such authority. However, the very evidence on record readily
belies Nyco's contention. Its corporate By-Laws clearly provide for the powers of its President, which
include, inter alia, executing contracts and agreements, borrowing money, signing, indorsing and
delivering checks, all in behalf of the corporation. Furthermore, the appellate court correctly adopted the
lower court's observation that there was already a previous transaction of discounting of checks involving
the same personalities wherein any enabling resolution from Nyco was dispensed with and yet BA
Finance was able to collect from Nyco and Sanshell was able to discharge its own undertakings. Such
effectively places Nyco under estoppel in pais which arises when one, by his acts, representations or
admissions, or by his silence when he ought to speak out, intentionally or through culpable negligence,
induces another to believe certain facts to exist and such other rightfully relies and acts on such belief, so
that he will be prejudiced if the former is permitted to deny the existence of such facts (Panay Electric
Co., Inc. v. Court of Appeals, G.R. No. 81939, June 29,1989). Nyco remained silent in the course of the

transaction and spoke out only later to escape liability. This cannot be countenanced. Nyco is estopped
from denying Rufino Yao's authority as far as the latter's transactions with BA Finance are concerned.
PREMISES CONSIDERED, the decision appealed from is AFFIRMED.
SO ORDERED.

DIGEST
FACTS
Nyco Sales has discounting privileges with BA Finance. In 1978, brothers Renato Fernandez and
Santiago Renato (officers of Sanshell Corporation) approached Nyco Sales Corporation for a credit
accommodation in order for the brothers make use of Nycos discounting privileges. Nyco Sales agreed
and so on November 15, 1978, Sanshell issued a post-dated (November 17, 1978) BPI check to Nyco
Sales in the amount of P60,000.00. Following the discounting process agreed upon, Nyco Sales, thru its
president Rufino Yao, endorsed the check in favor of BA Finance. Thereafter, BA Finance issued a check
payable to Nyco Sales which endorsed it in favor of Sanshell. Sanshell then made use of and/or
negotiated the check. Accompanying the exchange of checks was a Deed of Assignment executed by

Nyco Sales (assignor) in favor of BA Finance (assignee) with the conformity of Sanshell. Under the said
Deed, the subject of the discounting was P60k BPI check.
The check bounced. BA Finance notified Sanshell. Sanshell substituted the BPI check with a Security
Bank and Trust Company check for P60k. This check again bounced. BA Finance made repeated
demands to Nyco Sales and Sanshell but neither of the two settled the obligation. Hence, BA Finance
sued Nyco Sales. Nyco Sales averred that it received no notice of dishonor when the second check was
dishonored.
ISSUE
Whether or not Nyco Sales is liable to pay BA Finance.
HELD
Yes. The relationship between Nyco Sales and BA Finance is one of assignor-assignee. The assignorvendor warrants both the credit itself (its existence and legality) and the person of the debtor (his
solvency), if so stipulated, as in the case at bar. Consequently, if there be any breach of the above
warranties, the assignor-vendor should be held answerable therefor. There is no question then that the
assignor-vendor is indeed liable for the invalidity of whatever he assigned to the assignee-vendee.
Considering now the facts of the case at bar, it is beyond dispute that Nyco executed a deed of assignment
in favor of BA Finance with Sanshell Corporation as the debtor-obligor. BA Finance is actually enforcing
said deed and the check covered thereby is merely an incidental or collateral matter. This particular check
merely evidenced the credit which was actually assigned to BA Finance. Thus, the designation is
immaterial as it could be any other check. It is only what is represented by the said checks that Nyco is
being asked to pay.
Nyco Sales pretension that it had not been notified of the fact of dishonor is belied not only by the formal
demand letter issued by BA Finance but also by the fact that Nyco Sales and Sanshell had frequent
contacts before, during and after the dishonor. More importantly, as long as the credit remains
outstanding, Nyco Sales shall continue to be liable to BA Finance as its assignor. The dishonor of an
assigned check simply stresses its liability and the failure to give a notice of dishonor will not discharge it
from such liability. This is because the cause of action stems from the breach of the warranties embodied
in the Deed of Assignment, and not from the dishonoring of the check alone.