VOL. 194, FEBRUARY 18, 1991 169 CRUZ, J.
:
Metropolitan Bank and Trust Company vs. Court of Appeals
G.R. No. 88866. February 18, 1991.*
METROPOLITAN BANK & TRUST COMPANY, petitioner, vs. COURT OF
APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA
CASTILLO, MAGNO CASTILLO and GLORIA CASTILLO, respondents.
Civil Law; Obligations and Contracts; Agency; The agent is
responsible not only for fraud, but also for negligence, which shall be
judged with more or less rigor by the courts, according to whether the
agency was or was not for a compensation.—The negligence of Metro-
bank has been sufficiently established. To repeat for emphasis, it was the
clearance given by it that assured Golden Savings it was already safe to
allow Gomez to withdraw the proceeds of the treasury warrants he had
deposited. Metrobank misled Golden Savings. There may have been no
express clearance, as Metrobank insists (although this is refuted by
Golden Savings) but in any case that clearance could be implied from its
allowing Golden Savings to withdraw from its account not only once or
even twice but three times. The total withdrawal was in excess of its
original balance before the treasury warrants were deposited, which only
added to its belief that the treasury warrants had indeed been cleared.
Mercantile Law; Negotiable Instruments; Requisites of Negotiabil-
ity; An instrument to be negotiable must contain an unconditional promise
or order to pay a sum certain in money.—SEC. 3. When promise is
unconditional.—An unqualified order or promise to pay is unconditional
within the meaning of this Act though coupled with—(a) An indication of a
particular fund out of which reimbursement is to be made or a particular
account to be debited with the amount; or (b) A statement of the trasaction
which gives rise to the instrument. But an order or promise to pay out of a
particular fund is not unconditional. The indication of Fund 501 as the
source of the payment to be made on the treasury warrants makes the
order or promise to pay “not uncon-ditional” and the warrants themselves
non-negotiable. There should be no question that the exception on Section
3 of the Negotiable Instruments Law is applicable in the case at bar.
PETITION to review the decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Angara, Abello, Concepcion, Regala & Cruz for petitioner.
Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno
and Lucia Castillo.
Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden
Savings & Loan Association, Inc.
This case, for all its seeming complexity, turns on a simple question of
negligence. The facts, pruned of all non-essentials, are easily told.
The Metropolitan Bank and Trust Co. is a commercial bank with
branches throughout the Philippines and even abroad. Golden Savings
and Loan Association was, at the time these events happened, operating
in Calapan, Mindoro, with the other private respondents as its principal
officers.
In January 1979, a certain Eduardo Gomez opened an account with
Golden Savings and deposited over a period of two months 38 treasury
warrants with a total value of P1,755,228.37. They were all drawn by the
Philippine Fish Marketing Authority and purportedly signed by its General
Manager and countersigned by its Auditor. Six of these were directly
payable to Gomez while the others appeared to have been indorsed by
their respective payees, followed by Gomez as second indorser.1
On various dates between June 25 and July 16, 1979, all these
warrants were subsequently indorsed by Gloria Castillo as Cashier of
Golden Savings and deposited to its Savings Account No. 2498 in the
Metrobank branch in Calapan, Mindoro. They were then sent for clearing
by the branch office to the principal office of Metrobank, which forwarded
them to the Bureau of Treasury for special clearing.2
More than two weeks after the deposits, Gloria Castillo went to the
Calapan branch several times to ask whether the warrants had been
cleared. She was told to wait. Accordingly, Gomez was meanwhile not
allowed to withdraw from his account. Later, however, “exasperated” over
Gloria’s repeated inquiries and also as an accommodation for a “valued
client,” the petitioner says it finally decided to allow Golden Savings to
withdraw from the proceeds of the warrants.3 The first withdrawal was
made on July 9, 1979, in the amount of P508,000.00, the second on July
13, 1979, in the amount of P310,000.00, and the third on July 16, 1979, in
the amount of P150,000.00. The total withdrawal was P968,000.00.4 In
turn, Golden Savings subsequently allowed Gomez to make withdrawals
from his own account, eventually collecting the total amount of
P1,167,500.00 from the proceeds of the apparently cleared warrants. The
last withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the
warrants had been dishonored by the Bureau of Treasury on July 19, 1979,
and demanded the refund by Golden Savings of the amount it had
previously withdrawn, to make up the deficit in its account.
The demand was rejected. Metrobank then sued Golden Savings in the
Regional Trial Court of Mindoro.5 After trial, judgment was rendered in
favor of Golden Savings, which, however, filed a motion for reconsideration
even as Metrobank filed its notice of appeal. On November 4, 1986, the
lower court modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:
1. 1.Dismissing the complaint with costs against the plaintiff;
2. 2.Dissolving and lifting the writ of attachment of the properties of
defendant Golden Savings and Loan Association, Inc. and
defendant Spouses Magno Castillo and Lucia Castillo;
3. 3.Directing the plaintiff to reverse its action of debiting Savings
Account No. 2498 of the sum of P1,754,089.00 and to reinstate
and credit to such account such amount existing before the debit
was made including the amount of P812,033.37 in favor of
defendant Golden Savings and Loan Association, Inc. and
thereafter, to allow defendant Golden Savings and Loan
Association, Inc. to withdraw the amount outstanding thereon
before the debit;
4. 4.Ordering the plaintiff to pay the defendant Golden Savings and
Loan Association, Inc. attorney’s fees and expenses of litigation
in the amount of P200,000.00.
5. 5.Ordering the plaintiff to pay the defendant Spouses Magno
Castillo and Lucia Castillo attorney’s fees and expenses of
litigation in the amount of P100,000.00.
SO ORDERED.
On appeal to the respondent court,6 the decision was affirmed, prompting
Metrobank to file this petition for review on the following grounds:
1. 1.Respondent Court of Appeals erred in disregarding and fail-ing
to apply the clear contractual terms and conditions on the deposit
slips allowing Metrobank to charge back any amount erroneously
credited.
________________
5 Through Judge Marciano T. Virola.
6 Penned by Ejercito, J., with Pe and Victor, JJ., concurring.
173
VOL. 194, FEBRUARY 18, 1991 173
Metropolitan Bank and Trust Company vs. Court of Appeals
1. (a)Metrobank’s right to charge back is not limited to instances
where the checks or treasury warrants are forged or
unauthorized.
2. (b)Until such time as Metrobank is actually paid, its obligation is
that of a mere collecting agent which cannot be held liable for its
failure to collect on the warrants.
1. 2.Under the lower court’s decision, affirmed by respondent Court
of Appeals, Metrobank is made to pay for warrants already
dishonored, thereby perpetuating the fraud committed by
Eduardo Gomez.
2. 3.Respondent Court of Appeals erred in not finding that as between
Metrobank and Golden Savings, the latter should bear the loss.
3. 4.Respondent Court of Appeals erred in holding that the treasury
warrants involved in this case are not negotiable instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the Court that
Metrobank was indeed negligent in giving Golden Savings the impression
that the treasury warrants had been cleared and that, consequently, it was
safe to allow Gomez to withdraw the proceeds thereof from his account
with it. Without such assurance, Golden Savings would not have allowed
the withdrawals; with such assurance, there was no reason not to allow the
withdrawal. Indeed, Golden Savings might even have incurred liability for
its refusal to return the money that to all appearances belonged to the
depositor, who could therefore withdraw it any time and for any reason he
saw fit.
It was, in fact, to secure the clearance of the treasury warrants that
Golden Savings deposited them to its account with Metrobank. Golden
Savings had no clearing facilities of its own. It relied on Metrobank to
determine the validity of the warrants through its own services. The
proceeds of the warrants were withheld from Gomez until Metrobank
allowed Golden Savings itself to withdraw them from its own deposit.7 It
was only when Metrobank gave the go-signal that Gomez was finally
allowed by Golden Savings to withdraw them from his own account.
The argument of Metrobank that Golden Savings should have
exercised more care in checking the personal circumstances of Gomez
before accepting his deposit does not hold water. It was Gomez who was
entrusting the warrants, not Golden Savings
_______________
7 Rollo, p. 84.
174
174 SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. Court of Appeals
that was extending him a loan; and moreover, the treasury warrants were
subject to clearing, pending which the depositor could not withdraw its
proceeds. There was no question of Gomez’s identity or of the
genuineness of his signature as checked by Golden Savings. In fact, the
treasury warrants were dishonored allegedly because of the forgery of the
signatures of the drawers, not of Gomez as payee or indorser. Under the
circumstances, it is clear that Golden Savings acted with due care and
diligence and cannot be faulted for the withdrawals it allowed Gomez to
make.
By contrast, Metrobank exhibited extraordinary carelessness. The
amount involved was not trifling—more than one and a half million pesos
(and this was 1979). There was no reason why it should not have waited
until the treasury warrants had been cleared; it would not have lost a single
centavo by waiting. Yet, despite the lack of such clearance—and
notwithstanding that it had not received a single centavo from the proceeds
of the treasury warrants, as it now repeatedly stresses—it allowed Golden
Savings to withdraw—not once, not twice, but thrice—from
the uncleared treasury warrants in the total amount of P968,000.00
Its reason? It was “exasperated” over the persistent inquiries of Gloria
Castillo about the clearance and it also wanted to “accommodate” a valued
client. It “presumed” that the warrants had been cleared simply because of
“the lapse of one week.”8 For a bank with its long experience, this
explanation is unbelievably naive.
And now, to gloss over its carelessness, Metrobank would invoke the
conditions printed on the dorsal side of the deposit slips through which the
treasury warrants were deposited by Golden Savings with its Calapan
branch. The conditions read as follows:
Kindly note that in receiving items on deposit, the bank obligates itself only
as the depositor’s collecting agent, assuming no responsibility beyond care
in selecting correspondents, and until such time as actual payment shall
have come into possession of this bank, the right is reserved to charge
back to the depositor’s account any amount previously credited, whether
or not such item is returned. This also applies to checks drawn on local
banks and bankers and their branches as well as on this bank, which are
unpaid due toinsufficiency of funds, forgery, unauthorized overdraft or any
other reason. (Italics supplied.)
According to Metrobank, the said conditions clearly show that it was acting
only as a collecting agent for Golden Savings and give it the right to “charge
back to the depositor’s account any amount previously credited, whether
or not such item is returned. This also applies to checks “. . . which are
unpaid due to insufficiency of funds, forgery, unauthorized overdraft of any
other reason.” It is claimed that the said conditions are in the nature of
contractual stipulations and became binding on Golden Savings when
Gloria Castillo, as its Cashier, signed the deposit slips.
Doubt may be expressed about the binding force of the conditions,
considering that they have apparently been imposed by the bank
unilaterally, without the consent of the depositor. Indeed, it could be argued
that the depositor, in signing the deposit slip, does so only to identify
himself and not to agree to the conditions set forth in the given permit at
the back of the deposit slip. We do not have to rule on this matter at this
time. At any rate, the Court feels that even if the deposit slip were
considered a contract, the petitioner could still not validly disclaim
responsibility thereunder in the light of the circumstances of this case.
In stressing that it was acting only as a collecting agent for Golden
Savings, Metrobank seems to be suggesting that as a mere agent it cannot
be liable to the principal. This is not exactly true. On the contrary, Article
1909 of the Civil Code clearly provides that—
Art. 1909.—The agent is responsible not only for fraud, but also for
negligence, which shall be judged with more or less rigor by the courts,
according to whether the agency was or was not for a compensation.
The negligence of Metrobank has been sufficiently established. To repeat
for emphasis, it was the clearance given by it that assured Golden Savings
it was already safe to allow Gomez to withdraw the proceeds of the
treasury warrants he had deposited. Metrobank misled Golden Savings.
There may have been no express clearance, as Metrobank insists
(although this is refuted by Golden Savings) but in any case that clearance
could be implied from its allowing Golden Savings to withdraw from its
account not only once or even twice but three times. The total withdrawal
was in excess of its original balance before the treasury warrants were
deposited, which only added to its belief that the treasury warrants had
indeed been cleared.
Metrobank’s argument that it may recover the disputed amount if the
warrants are not paid for any reason is not acceptable. Any reason does
not mean no reason at all. Otherwise, there would have been no need at
all for Golden Savings to deposit the treasury warrants with it for clearance.
There would have been no need for it to wait until the warrants had been
cleared before paying the proceeds thereof to Gomez. Such a condition, if
interpreted in the way the petitioner suggests, is not binding for being
arbitrary and unconscionable. And it becomes more so in the case at bar
when it is considered that the supposed dishonor of the warrants was not
communicated to Golden Savings before it made its own payment to
Gomez.
The belated notification aggravated the petitioner’s earlier negligence
in giving express or at least implied clearance to the treasury warrants and
allowing payments therefrom to Golden Savings. But that is not all. On top
of this, the supposed reason for the dishonor, to wit, the forgery of the
signatures of the general manager and the auditor of the drawer
corporation, has not been established.9 This was the finding of the lower
courts which we see no reason to disturb. And as we said in MWSS v.
Court of Appeals:10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238).
It must be established by clear, positive and convincing evidence. This was
not done in the present case.
A no less important consideration is the circumstance that the treasury
warrants in question are not negotiable instruments. Clearly stamped on
their face is the word “non-negotiable.” Moreover, and this is of equal
significance, it is indicated that they are payable from a particular fund, to
wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially
the underscored parts, are pertinent:
SECTION 1.—Form of negotiable instruments.—An instrument to be
negotiable must conform to the following requirements:
1. (a)It must be in writing and signed by the maker or drawer;
2. (b)Must contain an unconditional promise or order to pay a sum
certain in money;
3. (c)Must be payable on demand, or at a fixed or determinable future
time;
4. (d)Must be payable to order or to bearer; and
5. (e)Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.
xxx
SEC. 3. When promise is unconditional.—An unqualified order or
promise to pay is unconditional within the meaning of this Act though
coupled with—
1. (a)An indication of a particular fund out of which reimbursement is
to be made or a particular account to be debited with the amount;
or
2. (b)A statement of the transaction which gives rise to the instrument.
But an order or promise to pay out of a particular fund is not
unconditional.
The indication of Fund 501 as the source of the payment to be made on
the treasury warrants makes the order or promise to pay “not
unconditional” and the warrants themselves non-negotiable. There should
be no question that the exception on Section 3 of the Negotiable
Instruments Law is applicable in the case at bar. This conclusion conforms
to Abubakar vs. Auditor General11where the Court held:
The petitioner argues that he is a holder in good faith and for value of a
negotiable instrument and is entitled to the rights and privileges of a holder
in due course, free from defenses. But this treasury warrant is not within
the scope of the negotiable instrument law. For one thing, the document
bearing on its face the words “pay-able from the appropriation for food
administration, is actually an Order for payment out of “a particular fund,”
and is not unconditional and does not fulfill one of the essential
requirements of a negotiable instrument (Sec. 3 last sentence and section
[1(b)] of the Negotiable Instruments Law).
Metrobank cannot contend that by indorsing the warrants in general,
Golden Savings assumed that they were “genuine and in all respects what
they purport to be,” in accordance with Section 66 of the Negotiable
Instruments Law. The simple reason is that this law is not applicable to the
non-negotiable treasury warrants. The indorsement was made by Gloria
Cas-tillo not for the purpose of guaranteeing the genuineness of the
warrants but merely to deposit them with Metrobank for clearing. It was in
fact Metrobank that made the guarantee when it stamped on the back of
the warrants: “All prior indorsement and/or lack of endorsements
guaranteed, Metropolitan Bank & Trust Co., Calapan Branch.”
The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the
Philippine Islands,12 but we feel this case is inapplicable to the present
controversy. That case involved checks whereas this case involves
treasury warrants. Golden Savings never represented that the warrants
were negotiable but signed them only for the purpose of depositing them
for clearance. Also, the fact of forgery was proved in that case but not in
the case before us. Finally, the Court found the Jai Alai Corporation
negligent in accepting the checks without question from one Antonio
Ramirez notwithstanding that the payee was the Inter-Island Gas Services,
Inc. and it did not appear that he was authorized to indorse it. No similar
negligence can be imputed to Golden Savings.
We find the challenged decision to be basically correct. However, we
will have to amend it insofar as it directs the petitioner to credit Golden
Savings with the full amount of the treasury checks deposited to its
account.
The total value of the 32 treasury warrants dishonored was
_______________
12
66 SCRA 29.
179
VOL. 194, FEBRUARY 18, 1991 179
Metropolitan Bank and Trust Company vs. Court of Appeals
P1,754,089.00, from which Gomez was allowed to withdraw
P1,167,500.00 before Golden Savings was notified of the dishonor. The
amount he has withdrawn must be charged not to Golden Savings but to
Metrobank, which must bear the consequences of its own negligence. But
the balance of P586,589.00 should be debited to Golden Savings, as
obviously Gomez can no longer be permitted to withdraw this amount from
his deposit because of the dishonor of the warrants. Gomez has in fact
disappeared. To also credit the balance to Golden Savings would unduly
enrich it at the expense of Metrobank, let alone the fact that it has already
been informed of the dishonor of the treasury warrants.
WHEREFORE, the challenged decision is AFFIRMED, with the
modification that Paragraph 3 of the dispositive portion of the judgment of
the lower court shall be reworded as follows: 3. Debiting Savings Account
No. 2498 in the sum of P586,589.00 only and thereafter allowing defendant
Golden Savings & Loan Association, Inc. to withdraw the amount
outstanding thereon, if any, after the debit.
SO ORDERED.
Narvasa (Chairman), Gancayco, Griño-Aquino and Medialdea,
JJ., concur.
Decision affirmed with modification.
Note.—It is the duty of the payee to ascertain the holder’s title to the
check or the nature of his possession. (State Investment House vs.
IAC, 175 SCRA 310.)

——o0o——
448 SUPREME COURT REPORTS ANNOTATED
Caltex (Philippines), Inc. vs. Court of Appeals
G.R. No. 97753. August 10, 1992.*
CALTEX (PHILIPPINES), INC., petitioner, vs. COURT OF APPEALS and
SECURITY BANK AND TRUST COMPANY, respondents.
Commercial Law; Negotiable Instruments Law; Requisites for an
instrument to become negotiable.—Section 1 of Act No. 2031, otherwise
known as the Negotiable Instruments Law, enumerates the requisites for
an instrument to become negotiable, viz: “(a) It must be in writing and
signed by the maker or drawer; (b) Must contain an unconditional promise
or order to pay a sum certain in money; (c) Must be payable on demand,
or at a fixed or determinable future time; (d) Must be payable to order or to
bearer; and (e) Where the instrument is addressed to a drawee, he must
be named or otherwise indicated therein with reasonable certainty.”
Same; Same; Same; The negotiability or non-negotiability of an
instrument is determined from the writing that is from the face of the
instrument itself.—On this score, the accepted rule is that the negotiability
or non-negotiability of an instrument is determined from the writing, that is,
from the face of the instrument itself. In the construction of a bill or note,
the intention of the parties is to control, if it can be legally ascertained.
While the writing may be read in the light of surrounding circumstances in
order to more perfectly understand the intent and meaning of the parties,
yet as they have constituted the writing to be the only outward and visible
expression of their meaning, no other words are to be added to it or
substituted in its stead. The duty of the court in such case is to ascertain,
not what the parties may have secretly intended as contradistinguished
from what their words express, but what is the meaning of the words they
have used. What the parties meant must be determined by what they said.
Same; Same; Same; An instrument is negotiated when it is
transferred from one person to another in such a manner as to constitute
the transferee the holder thereof and a holder may be the payee or
indorsee of a bill or note who is in possession of it or the bearer thereof.—
Under the Negotiable Instruments Law, an instrument is negotiated when
it is transferred from one person to another in such a manner as to
constitute the transferee the holder thereof, and a holder may be the payee
or indorsee of a bill or note, who is in possession of it, or the bearer thereof.
In the present case, however, there was no negotiation in the sense of a
transfer of the legal title to the CTDs in favor of petitioner in which situation,
for obvious reasons, mere delivery of the bearer CTDs would have
sufficed. Here, the delivery thereof only as security for the purchases of
Angel de la Cruz (and we even disregard the fact that the amount involved
was not disclosed) could at the most constitute petitioner only as a holder
for value by reason of his lien. Accordingly, a negotiation for such purpose
cannot be effected by mere delivery of the instrument since, necessarily,
the terms thereof and the subsequent disposition of such security, in the
event of non-payment of the principal obligation, must be contractually
provided for.
Same; Same; Same; Where the holder has a lien on the instrument
arising from contract, he is deemed a holder for value to the extent of his
lien.—The pertinent law on this point is that where the holder has a lien on
the instrument arising from contract, he is deemed a holder for value to the
extent of his lien. As such holder of collateral security, he would be a
pledgee but the requirements there-for and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the
Civil Code provisions on pledge of incorporeal rights.
Civil Law; Estoppel; Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it and
cannot be denied or disproved as against the person relying thereon.—In
a letter dated November 26, 1982 addressed to respondent Security Bank,
J.Q. Aranas, Jr., Caltex Credit Manager, wrote: “x x x These certificates of
deposit were negotiated to us by Mr. Angel dela Cruz to guarantee his
purchases of fuel products” (Italics ours.) This admission is conclusive
upon petitioner, its protestations notwithstanding. Under the doctrine of
estoppel, an admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against the person
relying thereon. A party may not go back on his own acts and
representations to the prejudice of the other party who relied upon them.
In the law of evidence, whenever a party has, by his own declaration, act,
or omission, intentionally and deliberately led another to believe a
particular thing true, and to act upon such belief, he cannot, in any litigation
arising out of such declaration, act, or omission, be permitted to falsify it.
Same; Same; An issue raised for the first time on appeal and not
raised timely in the proceedings in the lower court is barred by estoppel.—
As respondent court correctly observed, with appropriate citation of some
doctrinal authorities, the foregoing enumeration does not include the issue
of negligence on the part of respondent bank. An issue raised for the first
time on appeal and not raised timely in the proceedings in the lower court
is barred by estoppel. Questions raised on appeal must be within the
issues framed by the parties and, consequently, issues not raised in the
trial court cannot be raised for the first time on appeal.
Remedial Law; Pre-trial; The determination of issues at a pretrial
conference bars the consideration of other questions on appeal.—Pre-trial
is primarily intended to make certain that all issues necessary to the
disposition of a case are properly raised. Thus, to obviate the element of
surprise, parties are expected to disclose at a pre-trial conference all
issues of law and fact which they intend to raise at the trial, except such as
may involve privileged or impeaching matters. The determination of issues
at a pre-trial conference bars the consideration of other questions on C T D Dates C T D Serial Nos. Quantity Amount
appeal. 5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
PETITION for review on certiorari of the decision of the Court of Appeals. 9 Mar. 82 90023 to 90050 28 112,000
Chua, J. 9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
The facts are stated in the opinion of the Court. Total 280 P1,120,000
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofileña & Guingona for private. 1. “2.Angel dela Cruz delivered the said certificates of time deposit
(CTDs) to herein plaintiff in connection with his purchase of fuel
REGALADO, J.: products from the latter (Original Record, p. 208).
2. “3.Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo
This petition for review on certiorari impugns and seeks the reversal of the Tiangco, the Sucat Branch Manager, that he lost all the
decision promulgated by respondent court on March 8, 1991 in CA-G.R. certificates of time deposit in dispute. Mr. Tiangco advised said
CV No. 236151affirming, with modifications, the earlier decision of the depositor to execute and submit a notarized Affidavit of Loss, as
Regional Trial Court of Manila, Branch XLII,2 which dismissed the required by defendant bank’s procedure, if he desired
complaint filed therein by herein petitioner against private respondent replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-
bank. 50).
The undisputed background of this case, as found by the 3. “4.On March 18, 1982, Angel dela Cruz executed and delivered to
defendant bank the required Affidavit of Loss (Defendant’s Exhibit
_________________ 281). On the basis of said affidavit of loss, 280 replacement CTDs
were issued in favor of said depositor (Defendant’s Exhibits 282-
1 Per Justice Segundino G. Chua, with the concurrence of Justices 561).
Santiago M. Kapunan and Luis L. Victor.
2 Judge Ramon Mabutas, Jr., presiding; Rollo, 64-88.
1. “5.On March 25, 1982, Angel dela Cruz negotiated and obtained a
451 loan from defendant bank in the amount of Eight Hundred
VOL. 212, AUGUST 10, 1992 451 Seventy Five Thousand Pesos (P875,000.00). On the same date,
Caltex (Philippines), Inc. vs. Court of Appeals said depositor executed a notarized Deed of Assignment of Time
court a quo and adopted by respondent court, appears of record: Deposit (Exhibit 562) which stated, among others, that he (dela
Cruz) surrenders to defendant bank ‘full control of the indicated
1. “1.On various dates, defendant, a commercial banking institution, time deposits from and after date’ of the assignment and further
through its Sucat Branch issued 280 certificates of time deposit authorizes said bank to pre-terminate, set-off and ‘apply the said
(CTDs) in favor of one Angel dela Cruz who deposited with herein time deposits to the payment of whatever amount or amounts may
defendant the aggregate amount of P1,120,000.00, as follows: be due’ on the loan upon its maturity (TSN, February 9, 1987, pp.
(Joint Partial Stipulation of Facts and Statement of Issues, 60-62).
Original Records, p. 207; Defendant’s Exhibits 1 to 280); 2. “6.Sometime in November, 1982, Mr. Aranas, Credit Manager of
plaintiff Caltex (Phils.) Inc., went to the defendant bank’s Sucat
C T D Dates C T D Serial Nos. Quantity Amount branch and presented for verification the CTDs declared lost by
22 Feb. 82 90101 to 90120 20 P80,000 Angel dela Cruz alleging that the same were delivered to herein
26 Feb. 82 74602 to 74691 90 360,000 plaintiff ‘as security for purchases made with Caltex Philippines,
2 Mar. 82 74701 to 74740 40 160,000 Inc.’ by said depositor (TSN, February 9, 1987, pp. 54-68).
4 Mar. 829 0127 to 90146 20 80,000 3. “7.On November 26, 1982, defendant received a letter
5 Mar. 82 74797 to 94800 4 16,000 (Defendant’s Exhibit 563) from herein plaintiff formally informing
5 Mar. 82 89965 to 89986 22 88,000
 it of its possession of the CTDs in question and of its decision to
pre-terminate the same.
4. “8.On December 8, 1982, plaintiff was requested by herein
defendant to furnish the former ‘a copy of the document
evidencing the guarantee agreement with Mr. Angel dela Cruz’ as
well as ‘the details of Mr. Angel dela Cruz’ obligations against
which’ plaintiff proposed to apply the time deposits (Defendant’s
Exhibit 564).
5. “9.No copy of the requested documents was furnished herein
defendant.
6. “10.Accordingly, defendant bank rejected the plaintiff’s demand
and claim for payment of the value of the CTDs in a letter dated
February 7, 1983 (Defendant’s Exhibit 566).
7. “11.In April 1983, the loan of Angel dela Cruz with the defendant
bank matured and fell due and on August 5, 1983, the latter set-
off and applied the time deposits in question to the payment of the
matured loan (TSN, February 9, 1987, pp. 130-131).
8. “12.In view of the foregoing, plaintiff filed the instant complaint,
praying that defendant bank be ordered to pay it the aggregate
value of the certificates of time deposit of P1,120,000.00 plus
accrued interest and compounded interest therein at 16% per
annum, moral and exemplary damages as well as attorney’s fees.
“After trial, the court a quo rendered its decision dismissing the instant
complaint.”3
On appeal, as earlier stated, respondent court affirmed the lower court’s
dismissal of the complaint, hence this petition
_______________
3
Rollo, 24-26.
453
VOL. 212, AUGUST 10, 1992 453
Caltex (Philippines), Inc. vs. Court of Appeals
wherein petitioner faults respondent court in ruling (1) that the subject
certificates of deposit are non-negotiable despite being clearly negotiable
instruments; (2) that petitioner did not become a holder in due course of
the said certificates of deposit; and (3) in disregarding the pertinent
provisions of the Code of Commerce relating to lost instruments payable
to bearer.4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to
provide a better understanding of the issues involved in this recourse.
“SECURITY BANK
AND TRUST COMPANY No. 90101
6778 Ayala Ave., Makati
Metro Manila, Philippines
SUCAT OFFICE P4,000.00
CERTIFICATE OF
DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22 1982,
19____
This is to Certify that B E A R E R has deposited in this Bank the sum
of PESOS: FOUR THOUSAND ONLY, SUCAT SECURITY BANK OFFICE
P4,000 & 00 CTS Pesos, Philippine Currency, repayable to said
depositor 731 das. after date, upon presentation and surrender of this
certificate, with interest at the rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)
AUTHORIZED SIGNATURES”5
__________________
4 Ibid., 12.
5
Exhibit A, Documentary Evidence for the Plaintiff, 8.
454
454 SUPREME COURT REPORTS ANNOTATED
Caltex (Philippines), Inc. vs. Court of Appeals
Respondent court ruled that the CTDs in question are non-negotiable
instruments, rationalizing as follows:
“x x x While it may be true that the word ‘bearer’ appears rather boldly in
the CTDs issued, it is important to note that after the word ‘BEARER’
stamped on the space provided supposedly for the name of the depositor,
the words ‘has deposited’ a certain amount follows. The document further
provides that the amount deposited shall be ‘repayable to said depositor’
on the period indicated. Therefore, the text of the instrument(s) themselves
manifest with clarity that they are payable, not to whoever purports to be
the ‘bearer’ but only to the specified person indicated therein, the depositor.
In effect, the appellee bank acknowledges its depositor Angel dela Cruz as
the person who made the deposit and further engages itself to pay said
depositor the amount indicated thereon at the stipulated date.”6
We disagree with these findings and conclusions, and hereby hold that the
CTDs in question are negotiable instruments. Section 1 of Act No. 2031,
otherwise known as the Negotiable Instruments Law, enumerates the
requisites for an instrument to become negotiable, viz:
1. “(a)It must be in writing and signed by the maker or drawer;
 2. (b)Must contain an unconditional promise or order to pay a sum
certain in money;
3. (c)Must be payable on demand, or at a fixed or determinable future
time;
4. (d)Must be payable to order or to bearer; and
5. (e)Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.”
The CTDs in question undoubtedly meet the requirements of the law for
negotiability. The parties’ bone of contention is with regard to requisite (d)
set forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank’s
Branch Manager way back in 1982, testified in open court that the
depositor referred to in the CTDs is no other than Mr. Angel dela Cruz.
_____________
6Rollo, 28.
455
VOL. 212, AUGUST 10, 1992 455
Caltex (Philippines), Inc. vs. Court of Appeals
xxx
“Atty. Calida:
q In other words Mr. Witness, you are saying that per books of
the bank, the depositor referred (sic) in these certificates
states that it was Angel dela Cruz?
witness:
a Yes, your Honor, and we have the record to show that Angel
dela Cruz was the one who cause (sic) the amount.
Atty. Calida:
q And no other person or entity or company, Mr. Witness?
witness:
a None, your Honor.”7
xxx
“Atty. Calida:
q Mr. Witness, who is the depositor identified in all of these
certificates of time deposit insofar as the bank is concerned?
witness:
a Angel dela Cruz is the depositor.”8
xxx
On this score, the accepted rule is that the negotiability or non-negotiability
of an instrument is determined from the writing, that is, from the face of the
instrument itself.9 In the construction of a bill or note, the intention of the
parties is to control, if it can be legally ascertained.10 While the writing may
be read in the light of surrounding circumstances in order to more perfectly
understand the intent and meaning of the parties, yet as they have
constituted the writing to be the only outward and visible expression of their
meaning, no other words are to be added to it or substituted in its stead.
The duty of the court in such case is to ascertain, not what the parties may
have secretly intended as contradistinguished from what their words
express, but what is the meaning of the words they have used. What the
parties meant must be determined by what they said.11
_________________
7
TSN, February 9, 1987, 46-47.
8
Ibid., id., 152-153.
9
11 Am. Jur. 2d, Bills and Notes, 79.
10 Ibid., 86.
11 Ibid., 87-88.
456
456 SUPREME COURT REPORTS ANNOTATED
Caltex (Philippines), Inc. vs. Court of Appeals
Contrary to what respondent court held, the CTDs are negotiable
instruments. The documents provide that the amounts deposited shall be
repayable to the depositor. And who, according to the document, is the
depositor? It is the “bearer.” The documents do not say that the depositor
is Angel de la Cruz and that the amounts deposited are repayable
specifically to him. Rather, the amounts are to be repayable to the bearer
of the documents or, for that matter, whosoever may be the bearer at the
time of presentment.
If it was really the intention of respondent bank to pay the amount to
Angel de la Cruz only, it could have with facility so expressed that fact in
clear and categorical terms in the documents, instead of having the word
“BEARER” stamped on the space provided for the name of the depositor
in each CTD. On the wordings of the documents, therefore, the amounts
deposited are repayable to whoever may be the bearer thereof. Thus,
petitioner’s aforesaid witness merely declared that Angel de la Cruz is the
depositor “insofar as the bank is concerned,” but obviously other parties
not privy to the transaction between them would not be in a position to
know that the depositor is not the bearer stated in the CTDs. Hence, the
situation would require any party dealing with the CTDs to go behind the
plain import of what is written thereon to unravel the agreement of the
parties thereto through facts aliunde.This need for resort to extrinsic
evidence is what is sought to be avoided by the Negotiable Instruments
Law and calls for the application of the elementary rule that the
interpretation of obscure words or stipulations in a contract shall not favor
the party who caused the obscurity.12

The next query is whether petitioner can rightfully recover on the CTDs.
This time, the answer is in the negative. The records reveal that Angel de
la Cruz, whom petitioner chose not to implead in this suit for reasons of its
own, delivered the CTDs amounting to P1,120,000.00 to petitioner without
informing respondent bank thereof at any time. Unfortunately for petitioner,
although the CTDs are bearer instruments, a valid negotiation thereof for
the true purpose and agreement be-
______________
12
Art. 1377, Civil Code.
457
VOL. 212, AUGUST 10, 1992 457
Caltex (Philippines), Inc. vs. Court of Appeals
tween it and De la Cruz, as ultimately ascertained, requires both delivery
and indorsement. For, although petitioner seeks to deflect this fact, the
CTDs were in reality delivered to it as a security for De la Cruz’ purchases
of its fuel products. Any doubt as to whether the CTDs were delivered as
payment for the fuel products or as a security has been dissipated and
resolved in favor of the latter by petitioner’s own authorized and
responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security
Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: “x x x These
certificates of deposit were negotiated to us by Mr. Angel dela Cruz to
guarantee his purchases of fuel products” (Italics ours.)13 This admission
is conclusive upon petitioner, its protestations notwithstanding. Under the
doctrine of estoppel, an admission or representation is rendered
conclusive upon the person making it, and cannot be denied or disproved
as against the person relying thereon.14 A party may not go back on his
own acts and representations to the prejudice of the other party who relied
upon them.15 In the law of evidence, whenever a party has, by his own
declaration, act, or omission, intentionally and deliberately led another to
believe a particular thing true, and to act upon such belief, he cannot, in
any litigation arising out of such declaration, act, or omission, be permitted
to falsify it.16
If it were true that the CTDs were delivered as payment and not as
security, petitioner’s credit manager could have easily said so, instead of
using the words “to guarantee” in the letter aforequoted. Besides, when
respondent bank, as defendant in the court below, moved for a bill of
particularity therein17 praying, among others, that petitioner, as plaintiff, be
required
_______________
13
Exhibit 563, Documentary Evidence for the Defendant, 442; Original
Record, 211.
14
Panay Electric Co., Inc. vs. Court of Appeals, et al., 174 SCRA
500(1989).
15
Philippine National Bank vs. Intermediate Appellate Court, et al., 189
SCRA 680 (1990).
16
Section 2(a), Rule 131, Rules of Court.
17
Original Record, 152.
458
458 SUPREME COURT REPORTS ANNOTATED
Caltex (Philippines), Inc. vs. Court of Appeals
to aver with sufficient definiteness or particularity (a) the due date or dates
of payment of the alleged indebtedness of Angel de la Cruz to plaintiff and
(b) whether or not it issued a receipt showing that the CTDs were delivered
to it by De la Cruz as payment of the latter’s alleged indebtedness to it,
plaintiff corporation opposed the motion.18 Had it produced the receipt
prayed for, it could have proved, if such truly was the fact, that the CTDs
were delivered as payment and not as security. Having opposed the
motion, petitioner now labors under the presumption that evidence willfully
suppressed would be adverse if produced.19
Under the foregoing circumstances, this disquisition in Integrated
Realty Corporation, et al. vs. Philippine National Bank, et al.20 is apropos:
“x x x Adverting again to the Court’s pronouncements in Lopez, supra, we
quote therefrom:
‘The character of the transaction between the parties is to be determined
by their intention, regardless of what language was used or what the form
of the transfer was. If it was intended to secure the payment of money, it
must be construed as a pledge; but if there was some other intention, it is
not a pledge. However, even though a transfer, if regarded by itself,
appears to have been absolute, its object and character might still be
qualified and explained by contemporaneous writing declaring it to have
been a deposit of the property as collateral security. It has been said that
a transfer of property by the debtor to a creditor, even if sufficient on its
face to make an absolute conveyance, should be treated as a pledge if the
debt continues in existence and is not discharged by the transfer, and that
accordingly the use of the terms ordinarily importing conveyance of
absolute ownership will not be given that effect in such a transaction if they
are also commonly used in pledges and mortgages and therefore do not
unqualifiedly indicate a transfer of absolute ownership, in the absence of
clear and unambiguous language or other circumstances excluding an
intent to pledge.’ ”
______________
 18
Ibid., 154.
19 Section 3(e), Rule 131, Rules of Court.
20
174 SCRA 295 (1989), jointly decided with Overseas Bank of Manila
vs. Court of Appeals, et al., G.R. No. 60907.
459
VOL. 212, AUGUST 10, 1992 459
Caltex (Philippines), Inc. vs. Court of Appeals
Petitioner’s insistence that the CTDs were negotiated to it begs the
question. Under the Negotiable Instruments Law, an instrument is
negotiated when it is transferred from one person to another in such a
manner as to constitute the transferee the holder thereof,21 and a holder
may be the payee or indorsee of a bill or note, who is in possession of it,
or the bearer thereof.22 In the present case, however, there was no
negotiation in the sense of a transfer of the legal title to the CTDs in favor
of petitioner in which situation, for obvious reasons, mere delivery of the
bearer CTDs would have sufficed. Here, the delivery thereof only as
security for the purchases of Angel de la Cruz (and we even disregard the
fact that the amount involved was not disclosed) could at the most
constitute petitioner only as a holder for value by reason of his lien.
Accordingly, a negotiation for such purpose cannot be effected by mere
delivery of the instrument since, necessarily, the terms thereof and the
subsequent disposition of such security, in the event of non-payment of the
principal obligation, must be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the
instrument arising from contract, he is deemed a holder for value to the
extent of his lien.23 As such holder of collateral security, he would be a
pledgee but the requirements therefor and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the
Civil Code provisions on pledge of incorporeal rights,24 which inceptively
provide:
“Art. 2095. Incorporeal rights, evidenced by negotiable instruments, x x x
may also be pledged. The instrument proving the right pledged shall be
delivered to the creditor, and if negotiable, must be indorsed.”
“Art. 2096. A pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do not appear
in a public instrument.”
________________
21
Sec. 30, Act No. 2031.
22
Sec. 191, id.
23 Sec. 27, id.; see also Art. 2118, Civil Code.
24 Commentaries and Jurisprudence on the Philippine Commercial
Laws, T.C. Martin, 1985 Rev. Ed., Vol. I, 134; Art. 18, Civil Code;
460
460 SUPREME COURT REPORTS ANNOTATED
Caltex (Philippines), Inc. vs. Court of Appeals
Aside from the fact that the CTDs were only delivered but not indorsed, the
factual findings of respondent court quoted at the start of this opinion show
that petitioner failed to produce any document evidencing any contract of
pledge or guarantee agreement between it and Angel de la
Cruz.25 Consequently, the mere delivery of the CTDs did not legally vest in
petitioner any right effective against and binding upon respondent bank.
The requirement under Article 2096 aforementioned is not a mere rule of
adjective law prescribing the mode whereby proof may be made of the date
of a pledge contract, but a rule of substantive law prescribing a condition
without which the execution of a pledge contract cannot affect third persons
adversely.26
On the other hand, the assignment of the CTDs made by Angel de la
Cruz in favor of respondent bank was embodied in a public
instrument.27 With regard to this other mode of transfer, the Civil Code
specifically declares:
“Art. 1625. An assignment of credit, right or action shall produce no effect
as against third persons, unless it appears in a public instrument, or the
instrument is recorded in the Registry of Property in case the assignment
involves real property.”
Respondent bank duly complied with this statutory requirement. Contrarily,
petitioner, whether as purchaser, assignee or lienholder of the CTDs,
neither proved the amount of its credit or the extent of its lien nor the
execution of any public instrument which could affect or bind private
respondent. Necessarily, therefore, as between petitioner and respondent
bank, the latter has definitely the better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the
question of whether or not private respondent observed the requirements
of the law in the case of lost nego-
_________________
Sec. 196, Act No. 2031.
25 Rollo, 25.
26 Tec Bi & Co. vs. Chartered Bank of India, Australia and China, 41
Phil. 596 (1916); Ocejo, Perez & Co. vs. The International Banking
Corporation, 37 Phil. 631 (1918); Te Pate vs. Ingersoll, 43 Phil.
394 (1922).
27 Rollo, 25.
461
VOL. 212, AUGUST 10, 1992 461
Caltex (Philippines), Inc. vs. Court of Appeals
tiable instruments and the issuance of replacement certificates therefor, on
the ground that petitioner failed to raise that issue in the lower court.28
On this matter, we uphold respondent court’s finding that the aspect of
alleged negligence of private respondent was not included in the stipulation
of the parties and in the statement of issues submitted by them to the trial
court.29The issues agreed upon by them for resolution in this case are:
1. “1.Whether or not the CTDs as worded are negotiable instruments.
2. 2.Whether or not defendant could legally apply the amount covered
by the CTDs against the depositor’s loan by virtue of the
assignment (Annex ‘C’).
3. 3.Whether or not there was legal compensation or set off involving
the amount covered by the CTDs and the depositor’s outstanding
account with defendant, if any.
4. 4.Whether or not plaintiff could compel defendant to preterminate
the CTDs before the maturity date provided therein.
5. 5.Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. 6.Whether or not the parties can recover damages, attorney’s fees
and litigation expenses from each other.”
As respondent court correctly observed, with appropriate citation of some
doctrinal authorities, the foregoing enumeration does not include the issue
of negligence on the part of respondent bank. An issue raised for the first
time on appeal and not raised timely in the proceedings in the lower court
is barred by estoppel.30 Questions raised on appeal must be within the
issues framed by the parties and, consequently, issues not raised in the
trial court cannot be raised for the first time on appeal.31
_______________
28 Ibid., 15.
29 Joint Partial Stipulation of Facts and Statement of Issues, dated
November 27, 1984; Original Record, 209.
30 Mejorada vs. Municipal Council of Dipolog, 52 SCRA 451 (1973).
31 Sec. 18, Rule 46, Rules of Court; Garcia, et al. vs. Court of Appeals,
et al., 102 SCRA 597 (1981); Matienzo vs. Servidad, 107
462
462 SUPREME COURT REPORTS ANNOTATED
Caltex (Philippines), Inc. vs. Court of Appeals
Pre-trial is primarily intended to make certain that all issues necessary to
the disposition of a case are properly raised. Thus, to obviate the element
of surprise, parties are expected to disclose at a pre-trial conference all
issues of law and fact which they intend to raise at the trial, except such as
may involve privileged or impeaching matters. The determination of issues
at a pre-trial conference bars the consideration of other questions on
appeal.32
To accept petitioner’s suggestion that respondent bank’s supposed
negligence may be considered encompassed by the issues on its right to
preterminate and receive the proceeds of the CTDs would be tantamount
to saying that petitioner could raise on appeal any issue. We agree with
private respondent that the broad ultimate issue of petitioner’s entitlement
to the proceeds of the questioned certificates can be premised on a
multitude of other legal reasons and causes of action, of which respondent
bank’s supposed negligence is only one. Hence, petitioner’s submission, if
accepted, would render a pre-trial delimitation of issues a useless
exercise.33
Still, even assuming arguendo that said issue of negligence was raised
in the court below, petitioner still cannot have the odds in its favor. A close
scrutiny of the provisions of the Code of Commerce laying down the rules
to be followed in case of lost instruments payable to bearer, which it
invokes, will reveal that said provisions, even assuming their applicability
to the CTDs in the case at bar, are merely permissive and not mandatory.
The very first article cited by petitioner speaks for itself.
“Art. 548. The dispossessed owner, no matter for what cause it may
be, may apply to the judge or court of competent jurisdiction, asking that
the principal, interest or dividends due or about to become due, be not paid
a third person, as well as in order to prevent the ownership of the
instrument that a duplicate be issued him.” (Empha-
_______________
SCRA 276 (1981); Aguinaldo Industries Corporation, etc. vs.
Commissioner of Internal Revenue, et al., 112 SCRA 136 (1982); Dulos
Realty & Development Corporation vs. Court of Appeals, et al., 157 SCRA
425 (1988).
32 Bergado vs. Court of Appeals, et al., 173 SCRA 497 (1989).
33 Rollo, 58.
463
VOL. 212, AUGUST 10, 1992 463
Caltex (Philippines), Inc. vs. Court of Appeals
ses ours.)
xxx
The use of the word “may” in said provision shows that it is not mandatory
but discretionary on the part of the “dispossessed owner” to apply to the
judge or court of competent jurisdiction for the issuance of a duplicate of
the lost instrument. Where the provision reads “may,” this word shows that
it is not mandatory but discretional.34 The word “may” is usually permissive,
not mandatory.35 It is an auxiliary verb indicating liberty, opportunity,
permission and possibility.36
Moreover, as correctly analyzed by private respondent,37Articles 548 to
558 of the Code of Commerce, on which petitioner seeks to anchor
respondent bank’s supposed negligence, merely established, on the one
hand, a right of recourse in favor of a dispossessed owner or holder of a
bearer instrument so that he may obtain a duplicate of the same, and, on
the other, an option in favor of the party liable thereon who, for some valid
ground, may elect to refuse to issue a replacement of the instrument.
Significantly, none of the provisions cited by petitioner categorically
restricts or prohibits the issuance a duplicate or replacement
instrument sans compliance with the procedure outlined therein, and none
establishes a mandatory precedent requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition
is DENIED and the appealed decision is hereby AFFIRMED.
SO ORDERED.
Narvasa (C.J., Chairman), Padilla and Nocon, JJ.,concur.
Petition denied, decision affirmed with modification.

_________________
34
U.S. vs. Sanchez, 13 Phil. 336 (1909); Capati vs. Ocampo, 113
SCRA 794 (1982).
35
Luna vs. Abaya, 86 Phil. 472 (1950).
36 Philippine Law Dictionary, F.B. Moreno, Third Edition, 590.
37 Rollo, 59.

464
464 SUPREME COURT REPORTS ANNOTATED
Macasiano vs. Diokno
Note.—The instrument in order to be considered negotiable must
contain the so-called “words of negotiability___i.e. Must be payable to
“order” or “bearer” (Salas vs. Court of Appeals, 181 SCRA 296).

——o0o——
 [No. L-2516. September 25, 1950]
ANG TEK LIAN, petitioner, vs. THE COURT OF APPEALS, respondent.
1. 1.CRIMINAL LAW; "ESTAFA"; ISSUING CHECK WITH
INSUFFICIENT BANK DEPOSIT TO COVER THE SAME.—One
who issues a check payable to cash to accomplish deceit and
knows that at the time had no sufficient deposit with the bank to
cover the amount of the check and without informing the payee of
such circumstances, is guilty of estafa as provided by article 315,
paragraph (d), subsection 2 of the Revised Penal Code.
1. 2.NEGOTIABLE INSTRUMENTS; CHECK DRAWN PAYABLE TO
THE ORDER OF "CASH"; INDORSEMENT.—A check payable to
the order of "cash" is a check payable to bearer, and the bank
may pay it to the person presenting it for payment without the
drawer's indorsement.
PETITION to review on certiorari a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Laurel, Sabido, Almario & Laurel for petitioner.
384
384 PHILIPPINE REPORTS ANNOTATED
Ang Tek Lian vs. Court of Appeals
Solicitor General Felix Bautista Angelo and Solicitor Manuel Tomacruz for
respondent.
BENGZON, J.:
For having issued a rubber check, Ang Tek Lian was convicted of estafa, in
the Court of First Instance of Manila. The Court of Appeals affirmed the
verdict.
It appears that, knowing he had no funds therefor, Ang Tek Lian drew
on Saturday, November 16, 1946, the check Exhibit A upon the China
Banking Corporation f or the sum of P4,000, payable to the order of "cash".
He delivered it to Lee Hua Hong in exchange for money which the latter
handed in the act. On November 18, 1946, the next business day, the
check was presented by Lee Hua Hong to the drawee bank for payment,
but it was dishonored for insufficiency of funds, the balance of the deposit
of Ang Tek Lian on both dates being P335 only.
The Court of Appeals believed the version of Lee Huan Hong who
testified that "on November 16, 1946, appellant went to his (complainant's)
office, at 1217 Herran, Paco, Manila, and asked him to exchange Exhibit
A—which he (appellant) then brought with him—with cash alleging that he
needed badly the sum of P4,000 represented by the check, but could not
withdraw it from the bank, it being then already closed; that in view of this
request and relying upon appellant's assurance that he had sufficient funds
in the bank to meet Exhibit A, and because they used to borrow money
from each other, even before the war, and appellant owns a hotel and
restaurant known as the North Bay Hotel, said complainant delivered to
him, on the same date, the sum of P4,000 in cash; that despite repeated
efforts to notify him that the check had been dishonored by the bank,
appellant could not be located any-where, until he was summoned in the
City Fiscal's Office in view of the complaint for estafa filed in connection
therewith; and that appellant has not paid as yet the amount of the check,
or any part thereof."
385
VOL. 87, SEPTEMBER 25, 1950 385
Ang Tek Lian vs. Court of Appeals
Inasmuch as the findings of fact of the Court of Appeals are final, the only
question of law for decision is whether under the facts found, estafa had
been accomplished.
Article 315, paragraph (d), subsection 2 of the Revised Penal Code,
punishes swindling committed "By postdating a check, or issuing such
check in payment of an obligation the offender knowing that at the time he
had no funds in the bank, or the funds deposited by him in the bank were
not sufficient to cover the amount of the check, and without informing the
payee of such circumstances".
We believe that under this provision of law Ang Tek Lian was properly
held liable. In this connection, it must be stated that, as explained
in People vs. Fernandez (59 Phil., 615), estafa is committed by issuing
either a postdated check or an ordinary check to accomplish the deceit, It
is argued, however, that as the check had been made payable to "cash"
and had not been endorsed by Ang Tek Lian, the defendant is not guilty of
the offense charged. Based on the proposition that "by uniform practice of
all banks in the Philippines a check so drawn is invariably dishonored," the
following line of reasoning is advanced in support of the argument:
"* * * When, therefore, he (the offended party) accepted the check (Exhibit
A) from the appellant, he did so with full knowledge that it would be
dishonored upon presentment. In that sense, the appellant could not be
said to have acted fraudulently because the complainant, in so accepting
the check as it was drawn, must be considered, by every rational
consideration, to have done so fully aware of the risk he was running
thereby." (Brief for the appellant, p. 11.)
We are not aware of the uniformity of such practice. Instances have
undoubtedly occurred wherein the Bank required the indorsement of the
drawer before honoring a check payable to "cash." But cases there are too,
where no such requirement had been made. It depends upon the
circumstances of each transaction.
 Under the Negotiable Instruments Law (sec. 9 [d], a check drawn have occurred prior to the presentment.' 1 Morse, Banks and Banking, sec.
payable to the order of "cash" is a check pay- 393.
386 "Although a bank is entitled to pay the amount of a bearer check without
386 PHILIPPINE REPORTS ANNOTATED further inquiry, it is entirely reasonable for the bank to insist that the holder
Ang Tek Lian vs. Court of Appeals give satisfactory proof of his identity. * * *." (Paton's Digest, Vol. I, p. 1089.)
able to bearer, and the bank may pay it to the person presenting it for Anyway, it is significant, and conclusive, that the form of the check Exhibit
payment without the drawer's indorsement. A was totally unconnected with its dishonor. The Court of Appeals declared
"A check payable to the order of cash is a bearer that it was returned unsatisfied because the drawer had insufficient
instrument. Bacal vs. National City Bank of New York (1933), 146 Misc., funds—not because the drawer's indorsement was lacking.
732; 262 N. Y. S., 839; Cleary vs. De Beck Plate Glass Co. (1907), 54 Wherefore, there being no question as to the correctness of the penalty
Misc., 537; 104 N. Y. S., 831; Massachusetts Bonding & Insurance imposed on the appellant, the writ of certiorari is denied and the decision
Co. vs. Pittsburgh Pipe & Supply Co. (Tex. Civ. App., 1939), 135 S. W. of the Court of Appeals is hereby affirmed, with costs.
(2d), 818. See also H. Cook & Son vs. Moody (1916), 17 Ga. App., 465; Moran, C. J., Ozaeta, Parás, Pablo, Tuason, and Reyes, JJ., concur.
87 S. E., 713." Writ denied, decision affirmed.
"Where a check is made payable to the order of 'cash', the word cash
'does not purport to be the name of any person', and hence the instrument _______________
is payable to bearer. The drawee bank need not obtain any indorsement
of the check, but may pay it to the person presenting it without any
indorsement. * * *" (Zollmann, Banks and Banking, Permanent Edition, Vol.
6, p. 494.)
Of course, if the bank is not sure of the bearer's identity or financial
solvency, it has the right to demand identification and/or assurance against
possible complications,—for instance, (a) forgery of drawer's signature, (b)
loss of the check by the rightful owner, (c) raising of the amount payable,
etc. The bank may therefore require, for its protection, that the indorsement
of the drawer—or of some other person known to it—be obtained. But
where the Bank is satisfied of the identity and/or the economic standing of
the bearer who tenders the check for collection, it will pay the instrument
without further question; and it would incur no liability to the drawer in thus
acting.
"A check payable to bearer is authority for payment to the holder. Where a
check is in the ordinary form, and is payable to bearer, so that no
indorsement is required, a bank, to which it is presented for payment, need
not have the holder identified, and is not negligent in failing to do so. * * *"
(Michie on Banks and Banking, Permanent Edition, Vol. 5, p. 343.)
"* * * Consequently, a drawee bank to which a bearer check is
presented for payment need not necessarily have the holder identified and
ordinarily may not be charged with negligence in failing to do so. See
Opinions 6C:2 and 6C:3. If the bank has no reasonable cause for
suspecting any irregularity, it will be protected in paying a bearer check,
'no matter what facts unknown to it may
387
VOL. 87, SEPTEMBER 25, 1950 387
Phil. Assn. of Mech. and Electrical Eng. vs. Sanidad
SP No. 83556 are set aside. This case is remanded to the Office of the
President for further proceedings and determination thereof on the merits.
No costs.
SO ORDERED.
Ynares-Santiago (Chairperson), Austria-Martinez,
Reyes and Leonardo-De Castro,** JJ., concur.
Petition granted, judgment and resolution set aside.
Notes.—Taking into account the condition of our postal service, it is
unreasonable to expect receipt within two (2) days of a letter sent from
Manila to Bacolod City. (Jones vs. National Labor Relations Commission,
250 SCRA 668 [1995])
A Postmaster is charged with the duty of preserving the privacy of
communication and correspondence, particularly the integrity of the postal
system. (Faeldonea vs. Civil Service Commission, 386 SCRA 384 [2002])
——o0o——
G.R. No. 170325. September 26, 2008.*
PHILIPPINE NATIONAL BANK, petitioner, vs. ERLANDO T. RODRIGUEZ
and NORMA RODRIGUEZ, respondents.
Courts; Judgments; Amendment of decisions is more acceptable than
an erroneous judgment attaining finality to the prejudice of innocent
parties; The Court does not sanction careless disposition of cases by
courts of justice—the highest degree of diligence must go into the study of
every controversy submitted for decision by litigants.—
_______________
** Justice Teresita J. Leonardo de Castro was designated to sit as
additional member, replacing Justice Antonio Eduardo B. Nachura per
Raffle dated 23 May 2008.
* THIRD DIVISION.
514
514 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Rodriguez
Prefatorily, amendment of decisions is more acceptable than an
erroneous judgment attaining finality to the prejudice of innocent parties. A
court discovering an erroneous judgment before it becomes final
may, motu proprio or upon motion of the parties, correct its judgment with
the singular objective of achieving justice for the litigants. However, a word
of caution to lower courts, the CA in Cebu in this particular case, is in order.
The Court does not sanction careless disposition of cases by courts of
justice. The highest degree of diligence must go into the study of every
controversy submitted for decision by litigants. Every issue and factual
detail must be closely scrutinized and analyzed, and all the applicable laws
judiciously studied, before the promulgation of every judgment by the court.
Only in this manner will errors in judgments be avoided.
Negotiable Instruments Law; Checks; Fictitious Payee Rule; As a
rule, when the payee is fictitious or not intended to be the true recipient of
the proceeds, the check is considered as a bearer instrument.—As a rule,
when the payee is fictitious or not intended to be the true recipient of the
proceeds, the check is considered as a bearer instrument. A check is “a
bill of exchange drawn on a bank payable on demand.” It is either an order
or a bearer instrument.
Same; Same; Same; “Bearer” and “Order” Instruments; Words and
Phrases; An order instrument requires an indorsement from the payee or
holder before it may be validly negotiated while a bearer instrument is
negotiable by mere delivery.—The distinction between bearer and order
instruments lies in their manner of negotiation. Under Section 30 of the
NIL, an order instrument requires an indorsement from the payee or holder
before it may be validly negotiated. A bearer instrument, on the other hand,
does not require an indorsement to be validly negotiated. It is negotiable
by mere delivery. The provision reads: 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.
Same; Same; Same; Same; Under Section 9(c) of the Negotiable
Instruments Law (NIL), a check payable to a specified payee may
nevertheless be considered as a bearer instrument if it is payable to515
VOL. 566, SEPTEMBER 26, 2008 515
Philippine National Bank vs. Rodriguez
the order of a fictitious or non-existing person, and such fact is known
to the person making it so payable.—A check that is payable to a specified
payee is an order instrument. However, under Section 9(c) of the NIL, a
check payable to a specified payee may nevertheless be considered as a
bearer instrument if it is payable to the order of a fictitious or non-existing
person, and such fact is known to the person making it so payable. Thus,
checks issued to “Prinsipe Abante” or “Si Malakas at si Maganda,” who are
well-known characters in Philippine mythology, are bearer instruments
because the named payees are fictitious and non-existent.
Same; Same; Same; Same; Words and Phrases; Legal Research; In
discussing the broader meaning of the term “fictitious” as used in the
Negotiable Instruments Law (NIL), court rulings in the United States are a
logical starting point since our law on negotiable instruments was directly
lifted from the Uniform Negotiable Instruments Law of the United States; A
review of US jurisprudence yields that an actual, existing, and living payee
may also be “fictitious” if the maker of the check did not intend for the payee
to in fact receive the proceeds of the check—if the payee is not the
intended recipient of the proceeds of the check, the payee is considered a
“fictitious” payee and the check is a bearer instrument; In a fictitious-payee
situation, the drawee bank is absolved from liability and the drawer bears
the loss, the underlying theory being that one cannot expect a fictitious
payee to negotiate the check by placing his indorsement thereon.—We
have yet to discuss a broader meaning of the term “fictitious” as used in
the NIL. It is for this reason that We look elsewhere for guidance. Court
rulings in the United States are a logical starting point since our law on
negotiable instruments was directly lifted from the Uniform Negotiable
Instruments Law of the United States. A review of US jurisprudence yields
that an actual, existing, and living payee may also be “fictitious” if the maker
of the check did not intend for the payee to in fact receive the proceeds of
the check. This usually occurs when the maker places a name of an
existing payee on the check for convenience or to cover up an illegal
activity. Thus, a check made expressly payable to a non-fictitious and
existing person is not necessarily an order instrument. If the payee is not
the intended recipient of the proceeds of the check, the payee is
considered a “fictitious” payee and the check is a bearer instrument. In a
fictitious-payee situation, the drawee bank is absolved from liability and the
drawer bears the loss. When faced with a516
516 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Rodriguez
check payable to a fictitious payee, it is treated as a bearer instrument
that can be negotiated by delivery. The underlying theory is that one cannot
expect a fictitious payee to negotiate the check by placing his indorsement
thereon. And since the maker knew this limitation, he must have intended
for the instrument to be negotiated by mere delivery. Thus, in case of
controversy, the drawer of the check will bear the loss. This rule is justified
for otherwise, it will be most convenient for the maker who desires to
escape payment of the check to always deny the validity of the
indorsement. This despite the fact that the fictitious payee was purposely
named without any intention that the payee should receive the proceeds of
the check.
Same; Same; Same; Under the commercial bad faith exception to the
fictitious-payee rule, a showing of commercial bad faith on the part of the
drawee bank, or any transferee of the check for that matter, will work to
strip it of this defense.—There is a commercial bad faith exception to the
fictitious-payee rule. A showing of commercial bad faith on the part of
the drawee bank, or any transferee of the check for that matter, will work
to strip it of this defense. The exception will cause it to bear the loss.
Commercial bad faith is present if the transferee of the check acts
dishonestly, and is a party to the fraudulent scheme. Said the US Supreme
Court in Getty: Consequently, a transferee’s lapse of wary vigilance,
disregard of suspicious circumstances which might have well induced a
prudent banker to investigate and other permutations of negligence are not
relevant considerations under Section 3-405 x x x. Rather, there is a
“commercial bad faith” exception to UCC 3-405, applicable when the
transferee “acts dishonestly—where it has actual knowledge of facts and
circumstances that amount to bad faith, thus itself becoming a participant
in a fraudulent scheme. x x x Such a test finds support in the text of the
Code, which omits a standard of care requirement from UCC 3-405 but
imposes on all parties an obligation to act with “honesty in fact.” x x x
Same; Same; Same; For the fictitious-payee rule to be available as a
defense, the bank must show that the maker did not intend for the named
payees to be part of the transaction involving the checks—mere lack of
knowledge on the part of the payees of the existence of the checks is not
tantamount to a lack of intention on the part of maker that the payees would
not receive the checks’ proceeds; It is a requisite condition of a fictitious-
payee situation that the maker of the check intended for the payee to have
no interest in the transaction.—For the517
VOL. 566, SEPTEMBER 26, 2008 517
Philippine National Bank vs. Rodriguez
fictitious-payee rule to be available as a defense, PNB must show that
the makers did not intend for the named payees to be part of the
transaction involving the checks. At most, the bank’s thesis shows that the
payees did not have knowledge of the existence of the checks. This lack
of knowledge on the part of the payees, however, was not tantamount to a
lack of intention on the part of respondents-spouses that the payees would
not receive the checks’ proceeds. Considering that respondents-spouses
were transacting with PEMSLA and not the individual payees, it is
understandable that they relied on the information given by the officers of
PEMSLA that the payees would be receiving the checks. Verily, the subject
checks are presumed order instruments. This is because, as found by both
lower courts, PNB failed to present sufficient evidence to defeat the claim
of respondents-spouses that the named payees were the intended
recipients of the checks’ proceeds. The bank failed to satisfy a requisite
condition of a fictitious-payee situation—that the maker of the check
intended for the payee to have no interest in the transaction. Because of
a failure to show that the payees were “fictitious” in its broader sense, the
fictitious-payee rule does not apply. Thus, the checks are to be deemed
payable to order. Consequently, the drawee bank bears the loss.
Same; Same; Same; Banks and Banking; A bank that regularly
processes checks that are neither payable to the customer nor duly
indorsed by the payee is apparently grossly negligent in its operations.—
PNB was remiss in its duty as the drawee bank. It does not dispute the fact
that its teller or tellers accepted the 69 checks for deposit to the PEMSLA
account even without any indorsement from the named payees. It bears
stressing that order instruments can only be negotiated with a valid
indorsement. A bank that regularly processes checks that are neither
payable to the customer nor duly indorsed by the payee is apparently
grossly negligent in its operations. This Court has recognized the unique
public interest possessed by the banking industry and the need for the
people to have full trust and confidence in their banks. For this reason,
banks are minded to treat their customer’s accounts with utmost care,
confidence, and honesty.
Same; Same; Same; Same; In a checking transaction, the drawee
bank has the duty to verify the genuineness of the signature of the drawer
and to pay the check strictly in accordance with the518
518 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Rodriguez
drawer’s instructions, i.e., to the named payee in the check.—In a
checking transaction, the drawee bank has the duty to verify the
genuineness of the signature of the drawer and to pay the check strictly in
accordance with the drawer’s instructions, i.e., to the named payee in the
check. It should charge to the drawer’s accounts only the payables
authorized by the latter. Otherwise, the drawee will be violating the
instructions of the drawer and it shall be liable for the amount charged to
the drawer’s account.
Banks and Banking; The trustworthiness of bank employees is
indispensable to maintain the stability of the banking industry—banks are
enjoined to be extra vigilant in the management and supervision of their
employees.—PNB was negligent in the selection and supervision of its
employees. The trustworthiness of bank employees is indispensable to
maintain the stability of the banking industry. Thus, banks are enjoined to
be extra vigilant in the management and supervision of their employees.
In Bank of the Philippine Islands v. Court of Appeals, 216 SCRA 51 (1992),
this Court cautioned thus: Banks handle daily transactions involving
millions of pesos. By the very nature of their work the degree of
responsibility, care and trustworthiness expected of their employees and
officials is far greater than those of ordinary clerks and employees. For
obvious reasons, the banks are expected to exercise the highest degree
of diligence in the selection and supervision of their employees.
Actions; Default; Failure to file an answer is a ground for a declaration
that defendant is in default.—We note that the RTC failed to thresh out the
merits of PNB’s cross-claim against its co-defendants PEMSLA and MPC.
The records are bereft of any pleading filed by these two defendants in
answer to the complaint of respondents-spouses and cross-claim of PNB.
The Rules expressly provide that failure to file an answer is a ground for a
declaration that defendant is in default. Yet, the RTC failed to sanction the
failure of both PEMSLA and MPC to file responsive pleadings. Verily, the
RTC dismissal of PNB’s cross-claim has no basis. Thus, this judgment
shall be without prejudice to whatever action the bank might take against
its co-defendants in the trial court.
PETITION for review on certiorari of an amended decision of the Court of
Appeals.
The facts are stated in the opinion of the Court.519
VOL. 566, SEPTEMBER 26, 2008 519
Philippine National Bank vs. Rodriguez
Kenneth A. Alovera for petitioner.
Joel G. Dojillo for respondents.
REYES, R.T., J.:
WHEN the payee of the check is not intended to be the true recipient
of its proceeds, is it payable to order or bearer? What is the fictitious-payee
rule and who is liable under it? Is there any exception?
These questions seek answers in this petition for review on certiorari of
the Amended Decision1 of the Court of Appeals (CA) which affirmed with
modification that of the Regional Trial Court (RTC).2
The Facts
The facts as borne by the records are as follows:
Respondents-Spouses Erlando and Norma Rodriguez were clients of
petitioner Philippine National Bank (PNB), Amelia Avenue Branch, Cebu
City. They maintained savings and demand/checking accounts, namely,
PNBig Demand Deposits (Checking/Current Account No. 810624-6 under
the account name Erlando and/or Norma Rodriguez), and PNBig Demand
Deposit (Checking/Current Account No. 810480-4 under the account name
Erlando T. Rodriguez).
The spouses were engaged in the informal lending business. In line
with their business, they had a discounting3
_______________
1 CA-G.R. CV No. 76645 dated October 11, 2005. Penned by
Associate Justice Isaias P. Dicdican, with Associate Justices Pampio A.
Abarintos and Ramon M. Bato, Jr., concurring; Rollo, pp. 29-42.
2 Civil Case No. 99-10892, Regional Trial Court in Negros Occidental,
Branch 51, Bacolod City, dated May 10, 2002; CA Rollo, pp. 63-72.
3 A financing scheme where a postdated check is exchanged for a
current check with a discounted face value.
520
520 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Rodriguez
arrangement with the Philnabank Employees Savings and Loan
Association (PEMSLA), an association of PNB employees. Naturally,
PEMSLA was likewise a client of PNB Amelia Avenue Branch. The Name of Payees Check No. Date Amount
association maintained current and savings accounts with petitioner bank. Issued
PEMSLA regularly granted loans to its members. Spouses Rodriguez
would rediscount the postdated checks issued to members whenever the 04. Pacifico Castillo 0000011565 01.22.99 39,995.00
association was short of funds. As was customary, the spouses would 05. Jose Bago-od 0000011587 02.01.99 38,000.00
replace the postdated checks with their own checks issued in the name of
the members. 06. Dioleto Delcano 0000011594 02.02.99 28,500.00
It was PEMSLA’s policy not to approve applications for loans of
members with outstanding debts. To subvert this policy, some PEMSLA 07. Antonio Maravilla 0000011593 02.02.99 37,715.00
officers devised a scheme to obtain additional loans despite their 08. Josel Juguan 0000011595 02.02.99 45,002.00
outstanding loan accounts. They took out loans in the names of unknowing
members, without the knowledge or consent of the latter. The PEMSLA 09. Domingo Roa, Jr. 0000011591 02.01.99 35,373.00
checks issued for these loans were then given to the spouses for
rediscounting. The officers carried this out by forging the indorsement of 10. Antonio Maravilla 0001657 02.05.99 39,900.00
the named payees in the checks. 11. Christy Mae Berden 0001655 02.05.99 28,595.00
In return, the spouses issued their personal checks (Rodriguez checks)
in the name of the members and delivered the checks to an officer of 12. Nelson Guadalupe 0000011588 02.01.99 34,819.00
PEMSLA. The PEMSLA checks, on the other hand, were deposited by the
spouses to their account. 13. Antonio Londres 0000011596 02.05.99 32,851.00
Meanwhile, the Rodriguez checks were deposited directly by PEMSLA 14. Arnel Navarosa 0000011597 02.05.99 28,785.00
to its savings account without any indorsement from the named payees.
This was an irregular procedure made possible through the facilitation of 15. Estrella Alunan 0000011600 02.05.99 32,509.00
Edmundo Palermo, Jr., treasurer of PEMSLA and bank teller in the PNB
Branch. It appears that this became the usual practice for the parties. 16. Dennis Montemayor 0000011598 02.05.99 43,691.00
For the period November 1998 to February 1999, the spouses issued sixty- 17. Mickle Argusar 0000011599 02.05.99 31,498.00
nine (69) checks, in the total amount of521
VOL. 566, SEPTEMBER 26, 2008 521 18. Perlita Gallego 0000011564 01.21.99 38,000.00
Philippine National Bank vs. Rodriguez
19. Sheila Arcobillas 0000011563 01.19.99 38,000.00
P2,345,804.00. These were payable to forty-seven (47) individual payees
who were all members of PEMSLA.4 20. Danilo Villarosa 0001656 02.05.99 32,006.00

_______________ 21. Almie Borce 0000011583 02.01.99 20,093.00

22. Ronie Aragon 0000011566 01.20.99 28,844.00
4 Current Account No. 810480-4 in the name of Erlando T. Rodriguez
Name of Payees Check No. Date Amount Total: 775,337.00
Issued
01. Simon Carmelo B. 0001110 11.27.98 40,934.00 522
Libo-on 522 SUPREME COURT REPORTS ANNOTATED
02. Simon Carmelo Libo- 0000011589 02.01.99 29,877.00 Philippine National Bank vs. Rodriguez
on Petitioner PNB eventually found out about these fraudulent acts. To put
a stop to this scheme, PNB closed the current
03. Simon Libo-on 0000011567 01.25.99 50,350.00
_______________
 Current Account No. 810624-6 in the name of Erlando and/or Norma Name of Payees Check No. Date Issued Amount
Rodriguez
Name of Payees Check No. Date Issued Amount 25. Yvonne Ano-os 0001967 01/22/99 36,566.00

01. Elma Bacarro 0001944 01.15.99 37,449.00 26. Joel Abibuag 0002022 02/01/99 37,981.00

02. Delfin Recarder 0001927 01.14.99 30,020.00 523

VOL. 566, SEPTEMBER 26, 2008 523
03. Elma Bacarro 0001926 01.14.99 34,884.00 Philippine National Bank vs. Rodriguez
account of PEMSLA. As a result, the PEMSLA checks deposited by the
04. Perlita Gallego 0001924 01.14.99 35,502.00
spouses were returned or dishonored for the reason “Account Closed.” The
05. Jose Weber 0001932 01.14.99 38,323.00 corresponding Rodriguez checks, however, were deposited as usual to the
PEMSLA savings account. The amounts were duly debited from the
06. Rogelio Alfonso 0001922 01.14.99 43,852.00 Rodriguez account. Thus, because the PEMSLA checks given as payment
were returned, spouses Rodriguez incurred losses from the rediscounting
07. Gianni Amantillo 0001928 01.14.99 32,414.00
transactions.
08. Eddie Bago-od 0001929 01.14.99 38,361.00
09. Manuel Longero 0001933 01.14.99 38,285.00 _______________
10. Anavic Lorenzo 0001923 01.14.99 29,982.00
27. Ma. Corazon Salva 0002029 02/02/99 25,270.00
11. Corazon Salva 0001945 01.15.99 37,449.00
28. Jose Bago-od 0001957 01/18/99 34,656.00
12. Arlene Diamante 0001951 01.18.99 39,995.00
29. Avelino Brion 0001965 01/22/99 31,882.00
13. Joselin Laurilla 0001955 01.18.99 37,221.00
30. Mickle Algusar 0001962 01/22/99 25,004.00
14. Andy Javellana 0001960 01.22.99 30,923.00
31. Jose Weber 0001959 01/22/99 37,001.00
15. Erdelinda Porras 0001958 01.22.99 40,679.00
32. Joel Velasco 0002028 02/02/99 9,500.00
16. Nelson Guadalupe 0001956 01.18.99 24,700.00
33. Elma Bacarro 0002031 02/02/99 23,750.00
17. Barnard Escano 0001969 01/22/99 38,304.00
34. Grace Tambis 0001952 01/18/99 39,995.00
18. Buena Coscolluela 0001968 01/22/99 37,706.00
35. Proceso Mailim 0001980 01/21/99 37,193.00
19. Erdelinda Porras 0002021 02/01/99 36,727.00
36. Ronnie Aragon 0001983 01/22/99 30,324.00
20. Neda Algara 0002023 02/01/99 38,000.00
37. Danilo Villarosa 0001931 01/14/99 31,008.00
21. Eddie Bago-od 0002030 02/02/99 26,600.00
38. Joel Abibuag 0001954 01/18/99 26,600.00
22. Gianni Amantillo 0002032 02/02/99 19,000.00
39. Danilo Villarosa 0001984 01/22/99 26,790.00
23. Alfredo Llena 0002020 02/01/99 32,282.00
40. Reynard Guia 0001985 01/22/99 42,959.00
24. Emmanuel Fermo 0001972 01/22/99 36,376.00
41. Estrella Alunan 0001925 01/14/99 39,596.00
 27. Ma. Corazon Salva 0002029 02/02/99 25,270.00 _______________
42. Eddie Bago-od 0001982 01/22/99 31,018.00 5 Rollo, pp. 64-69.
43. Jose Bago-od 0001982 01/22/99 37,240.00 525
VOL. 566, SEPTEMBER 26, 2008 525
44. Nicandro Aguilar 0001964 01/22/99 52,250.00 Philippine National Bank vs. Rodriguez
After trial, the RTC rendered judgment in favor of spouses Rodriguez
45. Guandencia Banaston 0001963 01/22/99 38,000.00 (plaintiffs). It ruled that PNB (defendant) is liable to return the value of the
46. Dennis Montemayor 0001961 01/22/99 26,600.00 checks. All counterclaims and cross-claims were dismissed. The
dispositive portion of the RTC decision reads:
47. Eduardo Buglosa 0002027 01/02/99 14,250.00 “WHEREFORE, in view of the foregoing, the Court hereby renders
judgment, as follows:
Total ................. 1,570,467.00 1. Defendant is hereby ordered to pay the plaintiffs the total amount
Grand Total ........ 2,345,804.00 of P2,345,804.00 or reinstate or restore the amount of P775,337.00 in the
524 PNBig Demand Deposit Checking/Current Account No. 810480-4 of
524 SUPREME COURT REPORTS ANNOTATED Erlando T. Rodriguez, and the amount of P1,570,467.00 in the PNBig
Philippine National Bank vs. Rodriguez Demand Deposit, Checking/Current Account No. 810624-6 of Erlando T.
RTC Disposition Rodriguez and/or Norma Rodriguez, plus legal rate of interest thereon to
Alarmed over the unexpected turn of events, the spouses Rodriguez be computed from the filing of this complaint until fully paid;
filed a civil complaint for damages against PEMSLA, the Multi-Purpose 2. The defendant PNB is hereby ordered to pay the plaintiffs the
Cooperative of Philnabankers (MCP), and petitioner PNB. They sought to following reasonable amount of damages suffered by them taking into
recover the value of their checks that were deposited to the PEMSLA consideration the standing of the plaintiffs being sugarcane planters,
savings account amounting to P2,345,804.00. The spouses contended realtors, residential subdivision owners, and other businesses:
that because PNB credited the checks to the PEMSLA account even (a) Consequential damages, unearned income in the amount
without indorsements, PNB violated its contractual obligation to them as of P4,000,000.00, as a result of their having incurred great dificulty
depositors. PNB paid the wrong payees, hence, it should bear the loss. (sic) especially in the residential subdivision business, which was
PNB moved to dismiss the complaint on the ground of lack of cause of not pushed through and the contractor even threatened to file a case
action. PNB argued that the claim for damages should come from the against the plaintiffs;
payees of the checks, and not from spouses Rodriguez. Since there was (b) Moral damages in the amount of P1,000,000.00;
no demand from the said payees, the obligation should be considered as (c) Exemplary damages in the amount of P500,000.00;
discharged. (d) Attorney’s fees in the amount of P150,000.00 considering
In an Order dated January 12, 2000, the RTC denied PNB’s motion to that this case does not involve very complicated issues; and for the
dismiss. (e) Costs of suit.526
In its Answer,5 PNB claimed it is not liable for the checks which it paid 526 SUPREME COURT REPORTS ANNOTATED
to the PEMSLA account without any indorsement from the payees. The Philippine National Bank vs. Rodriguez
bank contended that spouses Rodriguez, the makers, actually did not 3. Other claims and counterclaims are hereby dismissed.”6
intend for the named payees to receive the proceeds of the
checks. Consequently, the payees were considered as “fictitious payees” CA Disposition
as defined under the Negotiable Instruments Law (NIL). Being checks
made to fictitious payees which are bearer instruments, the checks were PNB appealed the decision of the trial court to the CA on the principal
negotiable by mere delivery. PNB’s Answer included its cross-claim ground that the disputed checks should be considered as payable to bearer
against its co-defendants PEMSLA and the MCP, praying that in the event and not to order.
that judgment is rendered against the bank, the cross-defendants should
be ordered to reimburse PNB the amount it shall pay.
 In a Decision7 dated July 22, 2004, the CA reversed and set aside the
RTC disposition. The CA concluded that the checks were obviously meant
by the spouses to be really paid to PEMSLA. The court a quo declared:
“We are not swayed by the contention of the plaintiffs-appellees
(Spouses Rodriguez) that their cause of action arose from the alleged
breach of contract by the defendant-appellant (PNB) when it paid the value
of the checks to PEMSLA despite the checks being payable to
order. Rather, we are more convinced by the strong and credible evidence
for the defendant-appellant with regard to the plaintiffs-appellees’ and
PEMSLA’s business arrangement—that the value of the rediscounted
checks of the plaintiffs-appellees would be deposited in PEMSLA’s
account for payment of the loans it has approved in exchange for
PEMSLA’s checks with the full value of the said loans. This is the only
obvious explanation as to why all the disputed sixty-nine (69) checks were
in the possession of PEMSLA’s errand boy for presentment to the
defendant-appellant that led to this present controversy. It also appears
that the teller who accepted the said checks was PEMSLA’s officer, and
that such was a regular practice by the parties until the defendant-appellant
discovered the scam. The logical conclusion, therefore, is that the checks
were never meant to be paid to order, but instead, to PEMSLA. We thus
find no breach of contract on the part of the defendant-appellant.
According to plaintiff-appellee Erlando Rodriguez’ testimony, PEMSLA
allegedly issued post-dated checks to its qualified members who had
applied for loans. However, because of PEMSLA’s insuffi-
_______________
6 CA Rollo, pp. 71-72.
7 Rollo, pp. 44-49. Penned by Associate Justice Isaias P. Dicdican, with
Associate Justices Elvi John S. Asuncion and Ramon M. Bato, Jr.,
concurring.
527
VOL. 566, SEPTEMBER 26, 2008 527
Philippine National Bank vs. Rodriguez
ciency of funds, PEMSLA approached the plaintiffs-appellees for the latter
to issue rediscounted checks in favor of said applicant members. Based
on the investigation of the defendant-appellant, meanwhile, this
arrangement allowed the plaintiffs-appellees to make a profit by issuing
rediscounted checks, while the officers of PEMSLA and other members
would be able to claim their loans, despite the fact that they were
disqualified for one reason or another. They were able to achieve this
conspiracy by using other members who had loaned lesser amounts of
money or had not applied at all. x x x.”8 (Emphasis added)
The CA found that the checks were bearer instruments, thus they do
not require indorsement for negotiation; and that spouses Rodriguez and
PEMSLA conspired with each other to accomplish this money-making
scheme. The payees in the checks were “fictitious payees” because they
were not the intended payees at all.
The spouses Rodriguez moved for reconsideration. They argued, inter
alia, that the checks on their faces were unquestionably payable to order;
and that PNB committed a breach of contract when it paid the value of the
checks to PEMSLA without indorsement from the payees. They also
argued that their cause of action is not only against PEMSLA but also
against PNB to recover the value of the checks.
On October 11, 2005, the CA reversed itself via an Amended Decision,
the last paragraph and fallo of which read:
“In sum, we rule that the defendant-appellant PNB is liable to the
plaintiffs-appellees Sps. Rodriguez for the following:
1. Actual damages in the amount of P2,345,804 with interest at
6% per annum from 14 May 1999 until fully paid;
2. Moral damages in the amount of P200,000;
3. Attorney’s fees in the amount of P100,000; and
4. Costs of suit.
_______________
8 Id., at p. 47.
528
528 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Rodriguez
WHEREFORE, in view of the foregoing premises, judgment is hereby
rendered by Us AFFIRMING WITH MODIFICATION the assailed decision
rendered in Civil Case No. 99-10892, as set forth in the immediately next
preceding paragraph hereof, and SETTING ASIDE Our original decision
promulgated in this case on 22 July 2004.
SO ORDERED.”9
The CA ruled that the checks were payable to order. According to the
appellate court, PNB failed to present sufficient proof to defeat the claim of
the spouses Rodriguez that they really intended the checks to be received
by the specified payees. Thus, PNB is liable for the value of the checks
which it paid to PEMSLA without indorsements from the named payees.
The award for damages was deemed appropriate in view of the failure of
PNB to treat the Rodriguez account with the highest degree of care
considering the fiduciary nature of their relationship, which constrained
respondents to seek legal action.
Hence, the present recourse under Rule 45.
 Issues
The issues may be compressed to whether the subject checks are
payable to order or to bearer and who bears the loss?
PNB argues anew that when the spouses Rodriguez issued the
disputed checks, they did not intend for the named payees to receive the
proceeds. Thus, they are bearer instruments that could be
validly negotiated by mere delivery. Further, testimonial and documentary
evidence presented during trial amply proved that spouses Rodriguez and
the officers of PEMSLA conspired with each other to defraud the bank.
_______________
9 Id., at p. 41.
529
VOL. 566, SEPTEMBER 26, 2008 529
Philippine National Bank vs. Rodriguez
Our Ruling
Prefatorily, amendment of decisions is more acceptable than an
erroneous judgment attaining finality to the prejudice of innocent parties. A
court discovering an erroneous judgment before it becomes final
may, motu proprio or upon motion of the parties, correct its judgment with
the singular objective of achieving justice for the litigants.10
However, a word of caution to lower courts, the CA in Cebu in this
particular case, is in order. The Court does not sanction careless
disposition of cases by courts of justice. The highest degree of diligence
must go into the study of every controversy submitted for decision by
litigants. Every issue and factual detail must be closely scrutinized and
analyzed, and all the applicable laws judiciously studied, before the
promulgation of every judgment by the court. Only in this manner will errors
in judgments be avoided.
Now to the core of the petition.
As a rule, when the payee is fictitious or not intended to be the true
recipient of the proceeds, the check is considered as a bearer
instrument. A check is “a bill of exchange drawn on a bank payable on
demand.”11It is either an order or a bearer instrument. Sections 8 and 9 of
the NIL states:
_______________
10 Veluz v. Justice of the Peace of Sariaga, 42 Phil. 557 (1921).
11 Negotiable Instruments Law, Sec. 185. Check defined.—A check is
a bill of exchange drawn on a bank payable on demand. Except as herein
otherwise provided, the provisions of this Act applicable to a bill of
exchange payable on demand apply to a check.
Section 126. Bill of exchange defined.—A bill of exchange is
an unconditional order in writing addressed by one person to
another, signed by the person giving it, requiring the person to whom
it is addressed to pay on demand or at a fixed or determinable future
time a sum certain in money to order or to bearer.
530
530 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Rodriguez
“SEC. 8. When payable to order.—The instrument is payable to order
where it is drawn payable to the order of a specified person or to him or his
order. It may be drawn payable to the order of—
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named or
otherwise indicated therein with reasonable certainty.
SEC. 9. When payable to bearer.—The instrument is payable to
bearer—
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer; or
(c) When it is payable to the order of a fictitious or non-existing
person, and such fact is known to the person making it so payable; or
(d) When the name of the payee does not purport to be the name of
any person; or
(e) Where the only or last indorsement is an indorsement in
blank.”12 (Italics supplied)
The distinction between bearer and order instruments lies in their
manner of negotiation. Under Section 30 of the NIL, an order instrument
requires an indorsement from the payee or holder before it may be validly
negotiated. A bearer instrument, on the other hand, does not require an
indorsement to be validly negotiated. It is negotiable by mere delivery. The
provision reads:
“SEC. 30. What constitutes negotiation.—An instrument is
negotiated when it is transferred from one person to another in such
_______________
12 Id.
531
 VOL. 566, SEPTEMBER 26, 2008 531
Philippine National Bank vs. Rodriguez
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.”
A check that is payable to a specified payee is an order instrument.
However, under Section 9(c) of the NIL, a check payable to a specified
payee may nevertheless be considered as a bearer instrument if it is
payable to the order of a fictitious or non-existing person, and such fact is
known to the person making it so payable. Thus, checks issued to “Prinsipe
Abante” or “Si Malakas at si Maganda,” who are well-known characters in
Philippine mythology, are bearer instruments because the named payees
are fictitious and non-existent.
We have yet to discuss a broader meaning of the term “fictitious” as
used in the NIL. It is for this reason that We look elsewhere for guidance.
Court rulings in the United States are a logical starting point since our law
on negotiable instruments was directly lifted from the Uniform Negotiable
Instruments Law of the United States.13
A review of US jurisprudence yields that an actual, existing, and living
payee may also be “fictitious” if the maker of the check did not intend for
the payee to in fact receive the proceeds of the check. This usually occurs
when the maker places a name of an existing payee on the check for
convenience or to cover up an illegal activity.14 Thus, a check made
expressly payable to a non-fictitious and existing person is not necessarily
an order instrument. If the payee is not the intended recipient of the
proceeds of the check, the payee is considered a “fictitious” payee and the
check is a bearer instrument.
_______________
13 Campos, J.C., Jr. and Lopez-Campos, M.C., Notes and Selected
Cases on Negotiable Instruments Law (1994), 5th ed., pp. 8-9.
14 Bourne v. Maryland Casualty, 192 SE 605 (1937); Norton v. City
Bank & Trust Co., 294 F. 839 (1923); United States v. Chase Nat. Bank,
250 F. 105 (1918).
532
532 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Rodriguez
In a fictitious-payee situation, the drawee bank is absolved from liability
and the drawer bears the loss. When faced with a check payable to a
fictitious payee, it is treated as a bearer instrument that can be negotiated
by delivery. The underlying theory is that one cannot expect a fictitious
payee to negotiate the check by placing his indorsement thereon. And
since the maker knew this limitation, he must have intended for the
instrument to be negotiated by mere delivery. Thus, in case of controversy,
the drawer of the check will bear the loss. This rule is justified for otherwise,
it will be most convenient for the maker who desires to escape payment of
the check to always deny the validity of the indorsement. This despite the
fact that the fictitious payee was purposely named without any intention
that the payee should receive the proceeds of the check.15
The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty
Insurance Bank.16 In the said case, the corporation Mueller & Martin was
defrauded by George L. Martin, one of its authorized signatories. Martin
drew seven checks payable to the German Savings Fund Company
Building Association (GSFCBA) amounting to $2,972.50 against the
account of the corporation without authority from the latter. Martin was also
an officer of the GSFCBA but did not have signing authority. At the back of
the checks, Martin placed the rubber stamp of the GSFCBA and signed his
own name as indorsement. He then successfully drew the funds from
Liberty Insurance Bank for his own personal profit. When the corporation
filed an action against the bank to recover the amount of the checks, the
claim was denied.
The US Supreme Court held in Mueller that when the person making
the check so payable did not intend for the specified payee to have any
part in the transactions, the payee is
_______________
15 Mueller & Martin v. Liberty Insurance Bank, 187 Ky. 44, 218 SW 465
(1920).
16 Id.
533
VOL. 566, SEPTEMBER 26, 2008 533
Philippine National Bank vs. Rodriguez
considered as a fictitious payee. The check is then considered as a bearer
instrument to be validly negotiated by mere delivery. Thus, the US
Supreme Court held that Liberty Insurance Bank, as drawee, was
authorized to make payment to the bearer of the check, regardless of
whether prior indorsements were genuine or not.17
The more recent Getty Petroleum Corp. v. American Express Travel
Related Services Company, Inc.18 upheld the fictitious-payee rule. The rule
protects the depositary bank and assigns the loss to the drawer of the
check who was in a better position to prevent the loss in the first place.
Due care is not even required from the drawee or depositary bank in
accepting and paying the checks. The effect is that a showing of
negligence on the part of the depositary bank will not defeat the protection
that is derived from this rule.
 However, there is a commercial bad faith exception to the fictitious-
payee rule. A showing of commercial bad faith on the part of the drawee
bank, or any transferee of the check for that matter, will work to strip it of
this defense. The exception will cause it to bear the loss. Commercial bad
faith is present if the transferee of the check acts dishonestly, and is a party
to the fraudulent scheme. Said the US Supreme Court in Getty:
“Consequently, a transferee’s lapse of wary vigilance, disregard of
suspicious circumstances which might have well induced a prudent banker
to investigate and other permutations of negligence are not relevant
considerations under Section 3-405 x x x. Rather, there is a “commercial
bad faith” exception to UCC 3-405, applicable when the transferee “acts
dishonestly—where it has actual knowledge of facts and circumstances
that amount to bad faith, thus itself becoming a participant in a fraudulent
scheme. x x x Such a test finds support in the text of the Code, which omits
a standard of care re-
_______________
17 Mueller & Martin v. Liberty Insurance Bank, id.
18 90 NY 2d 322 (1997), citing the Uniform Commercial Code, Sec. 3-
405.
534
534 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Rodriguez
quirement from UCC 3-405 but imposes on all parties an obligation to act
with “honesty in fact.” x x x”19 (Emphasis added)
Getty also laid the principle that the fictitious-payee rule extends
protection even to non-bank transferees of the checks.
In the case under review, the Rodriguez checks were payable to
specified payees. It is unrefuted that the 69 checks were payable to specific
persons. Likewise, it is uncontroverted that the payees were actual,
existing, and living persons who were members of PEMSLA that had a
rediscounting arrangement with spouses Rodriguez.
What remains to be determined is if the payees, though existing
persons, were “fictitious” in its broader context.
For the fictitious-payee rule to be available as a defense, PNB must
show that the makers did not intend for the named payees to be part of the
transaction involving the checks. At most, the bank’s thesis shows that the
payees did not have knowledge of the existence of the checks. This lack
of knowledge on the part of the payees, however, was not tantamount to a
lack of intention on the part of respondents-spouses that the payees would
not receive the checks’ proceeds. Considering that respondents-spouses
were transacting with PEMSLA and not the individual payees, it is
understandable that they relied on the information given by the officers of
PEMSLA that the payees would be receiving the checks.
Verily, the subject checks are presumed order instruments. This is
because, as found by both lower courts, PNB failed to present sufficient
evidence to defeat the claim of respondents-
_______________
19 Getty Petroleum Corp. v. American Express Travel Related
Services Company, Inc., id., citing Peck v. Chase Manhattan Bank, 190
AD 2d 547, 548-549 (1993); Touro Coll. v. Bank Leumi Trust Co., 186 AD
2d 425, 427 (1992); Prudential-Bache Sec. v. Citibank, N.A., 73 NY 2d 276
(1989); Merrill Lynch, Pierce, Fenner & Smith v. Chemical Bank, 57 NY 2d
447 (1982).
535
VOL. 566, SEPTEMBER 26, 2008 535
Philippine National Bank vs. Rodriguez
spouses that the named payees were the intended recipients of the checks’
proceeds. The bank failed to satisfy a requisite condition of a fictitious-
payee situation—that the maker of the check intended for the payee to
have no interest in the transaction.
Because of a failure to show that the payees were “fictitious” in its
broader sense, the fictitious-payee rule does not apply. Thus, the checks
are to be deemed payable to order. Consequently, the drawee bank bears
the loss.20
PNB was remiss in its duty as the drawee bank. It does not dispute the
fact that its teller or tellers accepted the 69 checks for deposit to the
PEMSLA account even without any indorsement from the named payees.
It bears stressing that order instruments can only be negotiated with a valid
indorsement.
A bank that regularly processes checks that are neither payable to the
customer nor duly indorsed by the payee is apparently grossly negligent in
its operations.21 This Court has recognized the unique public interest
possessed by the banking industry and the need for the people to have full
trust and confidence in their banks.22 For this reason, banks are minded to
treat their customer’s accounts with utmost care, confidence, and
honesty.23
In a checking transaction, the drawee bank has the duty to verify the
genuineness of the signature of the drawer and to pay the check strictly in
accordance with the drawer’s instructions, i.e., to the named payee in the
check. It should charge
_______________
 20 See Traders Royal Bank v. Radio Philippines Network, Inc., G.R.
No. 138510, October 10, 2002, 390 SCRA 608.
21 Id.
22 Metropolitan Bank and Trust Company v. Cabilzo, G.R. No. 154469,
December 6, 2006, 510 SCRA 259.
23 Citytrust Banking Corporation v. Intermediate Appellate Court, G.R.
No. 84281, May 27, 1994, 232 SCRA 559; Bank of the Philippine Islands
v. Intermediate Appellate Court, G.R. No. 69162, February 21, 1992, 206
SCRA 408.
536
536 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Rodriguez
to the drawer’s accounts only the payables authorized by the latter.
Otherwise, the drawee will be violating the instructions of the drawer and it
shall be liable for the amount charged to the drawer’s account.24
In the case at bar, respondents-spouses were the bank’s depositors.
The checks were drawn against respondents-spouses’ accounts. PNB, as
the drawee bank, had the responsibility to ascertain the regularity of the
indorsements, and the genuineness of the signatures on the checks before
accepting them for deposit. Lastly, PNB was obligated to pay the checks
in strict accordance with the instructions of the drawers. Petitioner
miserably failed to discharge this burden.
The checks were presented to PNB for deposit by a representative of
PEMSLA absent any type of indorsement, forged or otherwise. The facts
clearly show that the bank did not pay the checks in strict accordance with
the instructions of the drawers, respondents-spouses. Instead, it paid the
values of the checks not to the named payees or their order, but to
PEMSLA, a third party to the transaction between the drawers and the
payees.
Moreover, PNB was negligent in the selection and supervision of its
employees. The trustworthiness of bank employees is indispensable to
maintain the stability of the banking industry. Thus, banks are enjoined to
be extra vigilant in the management and supervision of their employees.
In Bank of the Philippine Islands v. Court of Appeals,25 this Court cautioned
thus:
“Banks handle daily transactions involving millions of pesos. By the very
nature of their work the degree of responsibility, care and trustworthiness
expected of their employees and officials is far greater than those of
ordinary clerks and employees. For obvious
_______________
24 Associated Bank v. Court of Appeals, G.R. Nos. 107382 & 107612,
January 31, 1996, 252 SCRA 620, 631.
25 G.R. No. 102383, November 26, 1992, 216 SCRA 51.
537
VOL. 566, SEPTEMBER 26, 2008 537
Philippine National Bank vs. Rodriguez
reasons, the banks are expected to exercise the highest degree of
diligence in the selection and supervision of their employees.”26
PNB’s tellers and officers, in violation of banking rules of procedure,
permitted the invalid deposits of checks to the PEMSLA account. Indeed,
when it is the gross negligence of the bank employees that caused the
loss, the bank should be held liable.27
PNB’s argument that there is no loss to compensate since no demand
for payment has been made by the payees must also fail. Damage was
caused to respondents-spouses when the PEMSLA checks they deposited
were returned for the reason “Account Closed.” These PEMSLA checks
were the corresponding payments to the Rodriguez checks. Since they
could not encash the PEMSLA checks, respondents-spouses were unable
to collect payments for the amounts they had advanced.
A bank that has been remiss in its duty must suffer the consequences
of its negligence. Being issued to named payees, PNB was duty-bound by
law and by banking rules and procedure to require that the checks be
properly indorsed before accepting them for deposit and payment. In fine,
PNB should be held liable for the amounts of the checks.
One Last Note
We note that the RTC failed to thresh out the merits of PNB’s cross-
claim against its co-defendants PEMSLA and MPC. The records are bereft
of any pleading filed by these two defendants in answer to the complaint
of respondents-spouses and cross-claim of PNB. The Rules expressly
provide that failure to file an answer is a ground for a declaration
_______________
26 Bank of the Philippine Islands v. Court of Appeals, id., at p. 71.
27 Id., at p. 77.
538
538 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Rodriguez
that defendant is in default.28 Yet, the RTC failed to sanction the failure of
both PEMSLA and MPC to file responsive pleadings. Verily, the RTC
dismissal of PNB’s cross-claim has no basis. Thus, this judgment shall be
without prejudice to whatever action the bank might take against its co-
defendants in the trial court.
 To PNB’s credit, it became involved in the controversial transaction not
of its own volition but due to the actions of some of its employees.
Considering that moral damages must be understood to be in concept of
grants, not punitive or corrective in nature, We resolve to reduce the award
of moral damages to P50,000.00.29
WHEREFORE, the appealed Amended Decision is AFFIRMED with the
MODIFICATION that the award for moral damages is reduced to
P50,000.00, and that this is without prejudice to whatever civil, criminal, or
administrative action PNB might take against PEMSLA, MPC, and the
employees involved.
SO ORDERED.
Ynares-Santiago (Chairperson), Austria-Martinez, Chico-
Nazario and Nachura, JJ., concur.
Amended decision affirmed with modification.

_______________

28 Rules of Civil Procedure, Rule 9, Sec. 3. Default: declaration of.—If

the defending party fails to answer within the time allowed therefor, the
court shall, upon motion of the claiming party with notice to the defending
party, and proof of such failure, declare the defending party in default.
Thereupon, the court shall proceed to render judgment granting the
claimant such relief as his pleading may warrant, unless the court in its
discretion requires the claimant to submit evidence. Such reception of
evidence may be delegated to the clerk of court.
29 Morales v. Court of Appeals, G.R. No. 117228, June 19, 1997, 274
SCRA 282.
 [No. 18103. June 8, 1922]
PHILIPPINE NATIONAL BANK, plaintiff and
appellee, vs. MANILA OIL REFINING & BY-PRODUCTS COMPANY,
INC., defendant and appellant.
1. 1.JUDGMENTS; JUDGMENTS BY CONFESSION; ORIGIN.—
The practice of entering judgments in debt on warrants of attorney
is of ancient origin.
1. 2.ID. ; ID. ; COMMON LAW PRACTICE.—In the course of time a
warrant of attorney to confess judgment became a familiar
commonlaw security.
1. 3.lD.; ID. ; ID.; KINDS.—At common law, there were two kinds of
judgments by confession; the one a judgment by cognovit
actionem, and the other by confession relicta verificatione.
445
VOL. 43, JUNE 8, 1922 445
National Bank vs. Manila Oil Refining & Ey-Products Co.
1. 4.ID.; ID.; ADVANTAGBS.—Judgments by confession as
appeared at common law were considered an amicable, easy,
and cheap way to settle and secure debts.
1. 5.ID.; ID.; DISADVANTAGES.—The recognition of such a form of
obligation would bring about a complete reorganization of
commercial customs and practices, with reference to short-term
obligations. Instead of resulting to the advantage of commercial
life in the Philippines, judgment notes might be the source of
abuse and oppression, and make the courts involuntary parties
thereto.
1. 6.ID.; ID.; VALIDITY OF; IN THE UNITED STATES.—A number of
jurisdictions in the United States have accepted the common law
view of judgments by confession, while still other jurisdictions
have refused to sanction them.
1. 7.ID. ; ID. ; ID. ; ID.—In the absence of statute, there is a conflict of
authority as to the validity of a warrant of attorney for the
confession of judgment. The weight of opinion is that unless
authorized by statute, warrants of attorney to confess judgment
are void, as against public policy.
1. 8.ID.; ID.; ID.; IN THE PHILIPPINE ISLANDS; STATUTORY
PROVISIONS.—Neither the Code of Civil Procedure nor any
other remedial statute expressly or tacitly recognizes a
confession of judgment commonly called a judgment note.
1. 9.ID.; ID.; ID.; ID.; ID.; RIGHT TO A DAY IN COUBT.—The
provisions of the Code of Civil Procedure, in relation to
constitutional safeguards relating to the right to take a man's
property only after a day in court and after due process of law,
contemplate that all defendants shall have opportunity to be
heard.
1. 10.ID.; ID.; ID.; ID.; ID.; COUNTERCLAIMS.—The provisions of
the Code of Civil Procedure pertaining to counterclaims argue
against judgment notes, especially as the Code provides that in
case the defendant or his assignee omits to set up a counterclaim,
he cannot afterwards maintain an action against the plaintiff
therefor.
1. 11.ID.; ID.; ID.; ID.; ID.; ARTICLE 1256, CIVIL CODE.—At least
one provision of the substantive law, namely, that the validity and
fulfillment of contracts cannot be left to the will of one of the
contracting parties (Civil Code, art. 1256), constitutes another
indication of fundamental legal purpose.
1. 12.ID.; ID.; ID.; ID.; ID.; NEGOTIABLE INSTRUMENTS LAW (AcT
No. 2031), SECTION 5 (&).—Section 5 (b) of the Negotiable
Instruments Law providing that the negotiable character of an
instrument otherwise negotiable is not affected by a provision
which authorizes a confession of judgment if the instru
446
446 PHILIPPINE REPORTS ANNOTATED
National Bank vs. Manila Oil Refining & By-Products Co.
1. ment be not paid at maturity, cannot be taken to sanction
judgments by confession.
1. 13.ID.; ID.; ID.; ID.—Warrants of attorney to confess judgment are
void as against public policy, because they enlarge the field for
fraud, because under these instruments the promissor bargains
away his right to a day in court, and because the effect of the
 instrument is to strike down the right of appeal accorded by
statute.
1. 14.ID.; ID.; ID.; ID.—Warrants of attorney to confess judgment are
not authorized, nor contemplated by our law.
1. 15.BILLS AND NOTES: JUDGMENT NOTES, VALIDITY OF.—In
the absence of express legislative sanction, provisions in notes
authorizing attorneys to appear and confess judgments against
makers should not be recognized in this jurisdiction by
implication.
1. 16.ID. ; ID.—A provision in a promissory note whereby in case the
same is not paid at maturity, the maker authorizes any attorney
to appear and confess judgment thereon for the principal amount,
with interest, costs, and attorney's fees, and waives all errors,
rights to inquisition, and appeal, and all property exemptions, is
not valid in this jurisdiction.
APPEAL from a judgment of the Court of First Instance of Manila. Diaz, J.
The facts are stated in the opinion of the court.
Antonio Gonzalez for appellant.
Roman J. Lacson for appellee.
Hartigan & Welch; Fisher & DeWitt; Perkins & associated with the PhilippineNational Bank, entered his appearance in
Kincaid; Gibbs, McDonough & Johnson; Julian Wolfson; Ross &
Lawrence; Francis B. Mahoney, and Jose A. Espiritu, amici curise.
MALCOLM, J.:
The question of first impression raised in this case concerns the validity in
this jurisdiction of a provision in a promissory note whereby in case the
same is not paid at maturity, the maker authorizes any attorney to appear
and confess judgment thereon for the principal amount, with interest, costs,
and attorney's fees, and waives all errors, rights to inquisition, and appeal,
and all property exemptions.
447
VOL. 43, JUNE 8, 1922 447
National Bank vs. Manila Oil Refining & By-Products Co.
On May 8, 1920, the manager and the treasurer of
the Manila Oil Refining & By-Products Company, Inc., executed and
delivered to the Philippine National Bank, a written instrument reading as
follows:
"RENEWAL.
"P61,000.00
"MANILA, P. I., May 8,1920.
"On demand after date we promise to pay to the order of
the Philippine National Bank sixty-one thousand only pesos
at Philippine National Bank, Manila, P. I.
"Without defalcation, value received; and do hereby authorize any
attorney in the Philippine Islands, in case this note be not paid at maturity,
to appear in my name and confess judgment for the above sum with
interest, cost of suit and attorney's fees of ten (10) per cent for collection,
a release of all errors and waiver of all rights to inquisition and appeal, and
to the benefit of all laws exempting property, real or personal, from levy or
sale. Value received. No. Due
"MANILA OIL REFINING & BY-PRODUCTS Co., INC.,
(Sgd.) "VlCENTE SOTELO,
"Manager.
"MANILA OIL REFINING & BY-PRODUCTS Co., INC.,
(Sgd.) "RAFAEL LOPEZ,
"Treasurer."
The Manila Oil Refining & By-Products Company, Inc. failed to pay the
promissory note on demand. The Philippine National Bank brought action
in the Court of First Instance of Manila, to recover P61,000, the amount of
the note, together with interest and costs. Mr. Elias N. Recto, an attorney
representation of the defendant, and filed a motion confessing judgment.
The defendant, however, in a sworn declaration, objected strongly to the
unsolicited representation of attorney Recto. Later, attorney Antonio
Gonzalez appeared for the defendant and
448
448 PHILIPPINE REPORTS ANNOTATED
National Bank vs. Manila, Oil Refining & By-Products Co.
filed a demurrer, and when this was overruled, presented an answer. The
trial judge rendered judgment on the motion of attorney Recto in the terms
of the complaint.
The foregoing facts, and appellant's three assignments of error, raise
squarely the question which was suggested in the beginning of this opinion.
In view of the importance of the subject to the business community, the
advice of prominent attorneys-at-law with banking connections, was
solicited. These members of the bar responded promptly to the request of
the court, and their memoranda have proved highly useful in the solution
of the question. It is to the credit of the bar that although the sanction of
judgment notes in the Philippines might prove of immediate value to clients,
every one of the attorneys has looked upon the matter in a big way, with
the result that out of their independent investigations has come a practically
unanimous protest against the recognition in this jurisdiction of judgment
notes.1
_______________
1 merely provides that such clauses will not affect the negotiable
MEMORANDA OF "AMICI CURIÆ"
Attorney Thos. L. Hartigan, of Hartigan & Welch, states:
"Though we are attorneys for two of the large banks here and keenly
interested in the introduction of any improvements that would make for
simplification of procedure and rapidity of practice, we cannot favor the
introduction of confessions of judgment in the Philippine Islands. In our
opinion, it would open the doors to fraud to an extent that would more than
counterbalance any advantages of its use.
"With our lack of system in recording judgments and with the practice
of keeping merchants' books in various foreign languages, there would be
ample opportunity for a debtor to make preferences by confessions of
judgment which could not be discovered by the creditors until too late and
which would be nearly impossible to set aside even when discovered in
time.
"Although, as representatives of the banks, we are representing the
creditor class, we believe the introduction of confessions of judgment
would ultimately cause much more loss than benefit to that class."
Attorney Clyde A. DeWitt, of Fisher & DeWitt, states:
"There is no statutory sanction in this jurisdiction for such provisions in
negotiable instruments. Section 5 (6) of the Negotiable Instruments Law
does not constitute such sanction because (1) it
449
VOL. 43, JUNE 8, 1922 449
Natiowl Bank vs. Manila, Oil Refining & By-Products Co.
Neither the Code of Civil Procedure nor any other remedial statute
expressly or tacitly recognizes a confession of judgment commonly called
a judgment note. On the contrary, the provisions of the Code of Civil
Procedure, in relation to constitutional safeguards relating to the right to
take a man's property only after a day in court and after due process of
law, contemplate that all defendants shall have an opportunity to be heard.
Further, the provisions of the Code of Civil Procedure pertaining to
counterclaims argue against judgment notes, especially as the Code
provides that in case the defendant or his assignee omits to set up a
counterclaim, he cannot afterwards maintain an action against the plaintiff
therefor. (Secs. 95, 96, 97.) At least one provision of the substantive law,
namely, that the validity and fulfillment of contracts cannot be left to the will
of one of the contracting parties (Civil Code, art. 1256), constitutes another
indication of fundamental legal purpose.
_______________
character of the instrument, and (2) it concludes with language showing
that the Legislature did not intend thereby to validate any provision
otherwise unlawful. The language is: 'But nothing in this section shall
validate any provision or stipulation otherwise illegal.'
"The question then is whether or not, in the absence of express
legislative sanction, such warrants of attorney are valid. There are not
many American cases in which this precise question has been considered,
and in those cases in which the question has been raised, the reasoning
of the courts has been colored by the fact that the commercial use of these
warrants of attorney as security for debt was sanctioned at common law,
and the procedural statutes are held to be merely cumulative and not in
derogation of the commonlaw remedies. We, of course, have no such
situation here.
"The cases are collected in a note to First National Bank vs. White (220
Mo., 717), found in 16 Ann. Cas., 893, and it is there shown that in Missouri
and Kansas such provisions are held to be void as against the public policy
of the State as expressed in its laws and the decisions of its courts, while
in Colorado and Illinois their validity was upheld as a familiar common-law
security not affected by the procedural statutes. Yet it is there pointed out
that in Kahn vs. Lesser (97 Wis., 217, 72 N. W., 739), the court, in
450
450 PHILIPPINE REPORTS ANNOTATED
NatioTial Bank vs. Manila, Oil Refining & By-Products Co.
The attorney f or the appellee contends that the Negotiable Instruments
Law (Act No. 2031) expressly recognizes judg-
_______________
referring to a judgment by confession under warrant of attorney in a
promissory note, said:
" The judgment in this case must stand, if at all, by the authority of the
statute. The proceeding by which it was entered was outside and in
derogation of the common-law practice of courts; and the statute, as well
as the proceedings under it, must be strictly construed.'
"In lowa, in an early case, McClish vs. Manning (3 Green, 223), the
validity of these warrants of attorney was upheld, referring to a statute
authorizing any person to confess a judgment, by himself or his attorney.
In a later decision, Hamilton vs. Schoenberger (47 lowa, 385), it was
expressly held that such a provision in a note could not be enforced in the
courts of that State, and was not authorized or contemplated by its laws.
And in Tolman vs. Jansen (106 lowa, 455), it was held that such a
provision, being void, would not affect the negotiability of a note, even
though its effect would be to make uncertain the time of payment.
"The reasoning in First National Bank vs. White, supra, is persuasive.
The court there held that these warrants of attorney are void as against the
public policy of the state on the ground, first, that their effect is to enlarge
the field for fraud; second, that under such an instrument the promissor
bargains away his right to his day in court; third, that the effect of the
instrument is to strike down the right to appeal accorded by statute, and,
fourth, that there was no provision for the public recording of. such an
instrument if regarded as a security for a debt.
"It seems to me that on the precise grounds stated in the White case,
these warrants of attorney &hould be held void as against public policy in
this jurisdiction. If given effect, they bargain away the jurisdiction of the
courts to try and determine the liability of the maker of the note on its merits.
To uphold them would be to facilitate the operations of usurers, the
collection of gambling debts, and would make difficult, if not impossible
under our procedure, the setting aside of judgments entered in virtue
thereof where the execution of the instrument was obtained by fraud,
duress, or where there had been an entire failure of consideration. I can
think of no advantage which would result to the commercial world from
upholding these warrants of attorney which would outweigh the foregoing
considerations."
Attorney E. Arthur Perkins, 'of Perkins & Kincaid, states:
"Leaving aside entirely the legal considerations involved, I feel that
there is only one answer to your inquiry, and that is, that the
451
VOL. 43, JUNE 8, 1922 451
Natioml Bank vs. Manila Oil Refimng & By-Products Co.
ment notes, and that they are enforcible under the regular procedure. The
Negotiable Instruments Law, in section
_______________
best interests of the commercial life of the Philippines require the non-
recognition of such a form of judgment note. Feeling that you would want
to know the reasons which impell me to adopt such a conclusion, I will say
briefly that if the Supreme Court should, by a decision, recognize such a
judgment note and thereby place the stamp of approval upon transactions
of such a nature, the entire business population of the Philippine Islands
would be justified in their future transactions with debtors in requiring, in all
instances, the execution of notes of a similar tenor, with the consequence
that the debtor would thereby be deprived, to all intents and purposes, of
his day in court. It will pave the way for the practice of fraud upon ignorant
debtors. It will prove a serious drawback to the campaign being now waged
against usury.
"There is the further fear that the banks and money lenders having
accounts now outstanding will immediately require every debtor to execute
that form of note and to refuse further extensions of credit unless it is done,
which the debtor under the stress of circumstances will be compelled to
accept, amounting in effect to duress.
"The recognition of such a form of obligation would be so revolutionary
in character as to bring about a complete reorganization of commercial
customs and practices with reference to short-term obligations.
"Having in mind that the Philippine National Bank is practically the only
institution which can assist the farmers and agriculturists, the practice of
requiring a judgment note would place the latter wholly at the mercy of the
bank, and this is stated without any reflection on the bank, but merely to
point out one of the consequent evils which will necessarily follow if the
practice should receive the high judicial sanction which a judgment of the
Supreme Court would necessarily give to it.
"Another feature which occurs to me is that where any new enterprise
is being launched, it is universally the custom for. such company to arrange
with some banking institution for credit facilities, over and above the capital
with which it brings business. Shotild it become the custom here to require
the execution of so-called judgment notes, organizers of corporations,
partnerships and the like, who have in mind to secure additional working
capital or credit facilities from banks, will be very reluctant to put their funds
into any enterprises which could be destroyed without warning by the
creditor exercising the rights which that form of transaction would give him.
This would act therefore as a deterrent to new enter
452
452 PHILIPPINE REPORTS ANNOTATED
National Bank vs. Manila Oil Refining & By-Products Co.
5, provides that "The negotiable character of an instrument otherwise
negotiable is not affected by a provision
_______________
prises and the development of industry through individual initiative and
with private funds.
"Let us take a very simple illustration of this. Suppose that you and I
should form. a partnership, wi+h a capital of P50,000 to buy hemp and, in
connection with our business, we went to some banking institution for the
purpose of securing credit facilities, as is customary, in the conduct of our
business. Let us then suppose that the bank, taking into consideration the
capital which we ourselves had furnished and our standing in the
community, was willing to allow us a credit in the further sum of ?50,000
upon our signing a so-called judgment note. Would not you and I consider
a long time before we would so far obligate ourselves as to place it in the
power of the bank to send their attorney over to court, upon the least
provocation or at the first unfavorable rumor, and to confess judgment in
our names, which would permit the sheriff to close us out without even an
opportunity to be heard?
"The sum and substance of the whole proposition is that such a practice
is contrary to good morals."
Attorney David C. Johnson, of Gibbs, McDonough & Johnson, states:
"It seems that under the common law a confession of judgment was
only allowable by the defendant himself, either before or after appearance
and answer. The confession of judgment by warrant of attorney is a
statutory development (15 R. C. L.,, 656, 657; 17 Am. and Eng. Encyc. of
Law [2d ed.], 765; 11 Enc. Pl. and Pr., 973-975; Mason vs. Ward, 80 Vt.,
290; 130 A. S. R., 987, 988).
"The procedure contemplated in the note quoted in your letter is
contrary to that contemplated in our code of procedure, which gives to all
defendants an opportunity at least to be heard. An action on the note in
question could be so presented that the def endant would never be
summoned or notified, since an appearance and confession of judgment
might be filed simultaneously. We believe that this procedure should not
be recognized in this jurisdiction by implication, but should have legislative
sanction with the rights of the defendant amply safeguarded. We believe
that section 5 of Act No. 2031 does not of itself sanction any of the acts
mentioned in that section, but is only a statement regarding the negotiable
character of the instrument. Subsection A of section 5 states that the
authority to sell collateral security does not affect negotiability. As we
understand the decision of the Supreme Court in the case
of Mahoney vs. Tuason (39 Phil., 952), the creditor in this, jurisdiction is
n0t authorized by law to sell collateral security except in the manner
453
VOL. 43, JUNE 8, 1922 453
National Bank vs. Manila Oil Refining & By-Products Co.
which "* * * (b) Authorizes a confession of judgment if the instrument be
not paid at maturity." We do not
_______________
provided in section 14 of Act No. 1508. This would seem to reinforce
our opinion.
"There are some favorable features of a judgment note or warrant for
confession of judgment, but we believe that there are many objections
which outweigh any of the advantages. Forgery and usury are more
prevalent in these Islands than in the, United States. The sanctioning of
this procedure would add an additional weapon to the money lender who
desires to overreach his debtor.
"We have delayed answering your letter in order that we might consult
our Mr. Gibbs, who returned from Baguio yesterday.
"The foregoing is the consensus of opinion of the members of this firm."
Attorney Julian Wolfson states:
"It is assumed that the only question propounded is:
" 'Admitting that there may be some doubt, as to a correct solution,
which solution, the recognition of a confession of judgment, or a non-
recognition of a confession of judgment, would be for the best interests of
the commercial life of the Philippines?' and that no opinion is required upon
the incidental questions previously asked, as same have already been
determined by an examination of such authorities as: 23 Cyc., pp. 699,
701-2-3-5-6-7, 723-5; 6 C. J., pp. 645-6 (Notes 35 & 42); 8 C. J., p. 128
(Notes 43-47); 12 C. J., p. 418 (Note 37); and such leading textbooks as
'Brannan's Negotiable Instruments Law' and 'Selover on Negotiable
Instruments.'
"Everyone is entitled to 'his day in court.' This right may be
waived after an opportunity has been given to exercise the right, but
must not and cannot be taken away before an opportunity has been given
to exercise the right.
"The ordinary ship's bill of lading and the ordinary fire and marine
insurance policy are generally printed on forms prepared by the carrier and
the insurer respectively, and generally contain a clause making it a
condition precedent to the institution of an action to first submit the matter
to a board of arbitration. The Supreme Court has never recognized this
clause. The reasons are stated in the opinions. Once submitted to
arbitration, then another question is raised.
"Special defenses to written instruments are common. Need we do
more than cite the following cases: Maulini vs. Serrano (28 Phil.,
640); Henry W. Peabody & Co. vs. Bromfield and Ross (38 Phil.,
841); Cuyugan vs. Santos(34 Phil., 100; 39 Phil., 970).
"If the 'judgment note' (this term is used throughout for brevity and as it
is the recognized term) is to' be recognized, what chance
454
454 PHILIPPINE REPORTS ANNOTATED
National Bank vs. Manila, Oil Refining & By-Products Co.
believe, however, that this provision of law can be taken to sanction
judgments by confession, because it is a portion of a uniform law which
merely provides that, in jurisdic-
_______________
has defendant of defending as did the defendants in the above cited
cases? None!
"Often a promissory note is a mere formality taken by a bank as
evidence of indebtedness, while the real indebtedness may be for a
superior or inferior amount incurred by way of overdraft, letters of credit
outstanding, acceptances to mature, or a thousand other forms of banking
credit. Such 'judgment notes' are generally made payable on demand- In
the case at bar, the note is made payable on demand. The real
indebtedness may be partially paid, or the liquidation may be going along
too slow to suit the bank and/ then use is made of the judgment note. The
defendant might have a perfect defense except for the judgment note.
Would not article 1269 of the Civil Code here apply?
"The 'judgment note' is not once in a thousand times signed at the time
of receiving money from the bank. The indebtedness represented thereby
is incurred in prior transactions, the obligation became past due and the
bank, as a forcible measure, produces one of these 'judgment notes,' when
the debtor is absolutely helpless, and says 'Sign on the dotted line' and the
debtor has no option, he signs. The minds of the parties never met. The
debtor owes the money, knows that the bank must have evidence of the
indebtedness to pass the auditors and the debtor further realizes he must
accept the bank's dictation, because if he declines, he is liable to
immediate ruin, or if not that, he will never get further accommodation from
the bank. He does not realize, even if he knows, what is meant by a
'judgment note.' Again, would not article 1269 of the Civil Code here apply?
"Just a few months ago there was a suit instituted by a local bank for a
large sum of money, based on a written instrument which, on its face,
seemed absolute. Special defenses were pleaded, setting up that the
instrument did not express the real understanding of the parties and the
real understanding was set up. The special defenses were fully proved and
the lower court dismissed the bank's suit. The bank did not even attempt
to appeal to the Supreme Court (See Cause No.' 18239 of the Docket of
the Court of Pirst Instance of Manila). Suppose the instrument sued on had
contained a clause of confession of judgment, what chance would
defendant have had to prove his defense? None!
"Let us go a step further and see where this leads us. A is a dealer in
hardware and sells B a bill of goods, A prints a form, which he has B to
sign, in which B acknowledges receipt of the
455
VOL. 43, JUNE 8, 1922 455
National Bank vs. Manila, Oil Refining & By-Products Co.
tions where judgment notes are recognized, such clauses shall not affect
the negotiable character of the instrument. Moreover, the same section of
the Negotiable Instruments
_______________
goods and in consideration thereof promises to pay A and 'a confession
of judgment' clause is inserted. The goods turn out entirely different from
those ordered and invoiced. B refuses to pay. A sues on his 'judgment
note.' What chance has B? None!
"Very often a promissory note is only one of a series of documents
given as security for the debt. What about considering the other documents
which bear on the transaction?
"A bank may have made certain advances and may have undertaken
to make more, but fails to do so, to the damage and prejudice of debtor.
Let us assume that the bank agreed to advance several hundred thousand
pesos in instalments of P60,000 each, and had advanced only the first
instalment, taking a 'judgment note' for said first instalment, and had failed
to advance further, to the damage of the debtor. What would become of
section 97 of the Code of Civil Procedure? How would debtor be able to
exercise his right of counterclaim? Was it ever contemplated at the time of
signing the judgment note that the debtor would not only waive defense,
but absolutely shut himself out of court, as he would, according to section
97 above cited, on his counterclaim? Yet again, would not article 1269 of
the Civil Code here apply?
"We dare not attempt to elaborate on what would happen in the
provinces of the Philippines should a 'judgment note' be held valid.
"What about the Usury Law? How could a defense be offered there?
The usurious rate might not appear on the face of the 'judgment note,' but
it may be there all the same.
"Examples could be multiplied until the very absurdity of the proposition
would be clearly seen, even by a blind man.
"Of what possible benefit would the recognition of a 'judgment note'
serve 'the best interests of the commercial life of the Philippines?' None!
An honest creditor is willing to let his debtor have his day in court and is
willing to prove to the court his case. It might take slightly longer to go
through with a trial, but that cannot be considered a set-back. But, on the
other hand, a dishonest creditor would take unfair advantage of a
'judgment note' and would use it to the utmost to harass and take
advantage of the poor and helpless debtor. The real consequences likely,
in fact sure, to arise from such recognition are horrible beyond words to
contemplate.
 "There can be but one answer to the proposition and that is: The non-
recognition of a confession of judgment would be for the best interests of
the commercial life of the Philippines"
456
456 PHILIPPINE REPORTS ANNOTATED
National Bank vs. Manila Oil Refining & By-Products Co.
Law concludes with these words: "But nothing in this section shall validate
any provision or stipulation otherwise illegal."
_______________
Attorney J. G. Lawrence, of Ross & Lawrence, states:
"We are aware of no expression of our Legislature or courts which
would indicate that confessions of judgment under powers given in a
promissory note are contrary to public policy. This action was regularly
brought in accordance with the provisions of the Code of Civil Procedure
and the defendant served with process. The answer, confessing judgment,
was filed in strict accordance with the powers contained in the note—a
power coupled with an interest which defendant would be estopped of
denying. We think that no express legal sanction is necessary to legalize
such a proceeding.
"0n the question of what ought to be the public policy of the Philippines,
we hold quite a different opinion. While the use of judgment notes might in
some cases expedite the collection of just debts, we believe that under
conditions as exist here, their use should be discouraged. They lend
themselves easily to fraud in the hands of friends of a dishonest debtor,
and to extortion in the hands of usurers who .are already too well equipped
with the pacto de retro.
"While we believe that the position of the bank is sound legally, we
should be very glad to be proven mistaken."
Attorney Francis B. Mahoney, of the Philippine Trust Company, states:
"I have not gone into the law and cases, except to take a glance at the
subject of judgments in Volume 15 of Ruling Case Law. However, the
reasons indicated on page 651 thereof are significant.
"Unquestionably, if our Legislature provided in unmistakable terms for
confession of judgment as herein indicated, the validity and
constitutionality of the enactment might be questioned as failing to provide
those constitutional safeguards of taking a man's property onlyafter a day
in court and after due process of law.
"This conclusion is stronger—a fortiori—where the enacting
provision—if such section 5 of Act No. 2031 may be called—is of a
lefthanded nature, apparently relating only to negotiability—incidentally
thus answering here your first inquiry. Whatever legal principles there
might be in favor of recognizing a confession of judgment—for example,
the matter of expediency—stronger and more vital principles oppose such
recognition.
"By refusing to recognize confession of judgment under existing
statutes or under general legal principles, at the worst phase from the point
of view of the plaintiff bank, there would result only possible delay, costs
and attorney's fees, which, after all, are only passed on to the clients of the
bank in the shape of interests, charges.
457
VOL. 43, JUNE 8, 1922 457
National Bank vs. Manila, Oil Refimng & By-Products Co.
The court is thus put in the position of having to determine the validity in
the absence of statute of a provision in a note authorizing an attorney to
appear and confess
_______________
etc. If the bank has a meritorious case, the judgment is ultimately
certain as courts.
"If the defendant debtor has any defense of merit, he is given an
opportunity to present it, as, for example, in the matter of usury so
common, so difficult to uncover and such an unscrupulous rival of
legitimate banking, the courts may keep their doors open to the equities of
each individual case. Whereas, if defendant, who theoretically may allege
fraud and who practically has great difficulty in proving it, must rely upon a
defense of fraud, he has little chance and the doors of the court are closed
to any other defense. "In the final analysis, the matter simmers down to: 1.
Possible delay in judgment with costs, etc. 2. Certain justice in the end. 3.
The eyes and doors of courts open to the equities of each individual case.
4. Equality before the law,
or
(a) Expediting judgment. (b) Defendant debtor practically kept out of
court by additional expense and difficulty in securing a hearing. (c) Putting
a strong weapon in the hands of unscrupulous persons and taking the
strength necessary to wield this weapon from the courts.
"At first glance, if a debtor signs a document throwing away his right to
be heard, the average man has a feeling such debtor deserves to suffer
the consequences. If that were the entire story, probably he should. But
what man, needing money badly enough—facing strenuous necessity—
will not in the circumstances be inclined to look on the cheerful side—to
sign and get the money, letting the future take care of itself ? Such is the
frailty of human nature. Then, as the usual thing, the rich and powerful can
take care of themselves, and it is usually others who have need of courts,
just laws and liberal interpretation of them.
"No doubt, banks would favor expediting judgments against their
debtors, other things being equal. And no doubt, additional delay in courts
and the incidental costs thereof will be borne by the clients of the bank. But
sound banking is not established and enhanced by harsh laws which put
strong weapons in powerful hands. Contented peoples, safe laws and
sound banking usually go hand in hand."
Professor Jose A. Espiritu, of the University of the Phihppmes, states:
"Permit me to cite first of all the authorities that I have gathered
concerning the principal question, at issue in the case mentioned in
458
458 PHILIPPINE REPORTS ANNOTATED
National Bank vs, Manila, Oil Refining & By-Products Co.
judgment against the maker. This situation, in reality, has its advantages
for it permits us to reach that solution
_______________
your letter, namely, 'The Effect and Validity of Confession of Judgment
in the Philippines.'
1. "1.Confession of judgment has been defined as 'a voluntary
submission to the jurisdiction of the court, giving by consent and
without the service of process, what could otherwise be obtained
by summons and complaint, and other f ormal proceedings, an
acknowledgment of indebtedness, upon which it is contemplated
that a judgment may and will be rendered.' (8 Cyc., pp. 563, 564.)
2. "2.As to the general effects of confession of judgment, the following
statements may be mentioned: 'A warrant to confess judgment
does not destroy the negotiability of the note. Such a note is
commonly called a "judgment note." Decisions to the contrary in
the States where the Negotiable Instruments Law is now in force
are abrogated thereby, since it expressly provides that the
negotiable character of an instrument otherwise negotiable is not
affected by a provision which authorizes a confession of
judgment, if the instrument is not paid at maturity. However, this
statutory provision does not apply to stipulations for the
confession of judgment "prior" to maturity.' (8 C. J., p. 128, sec.
222.)
3. "3.Nature and Requisites. 'A judgment may be rendered upon the
confession of defendant, either in an action regularly commenced
against him by the issuance and service of process, in which case
the confession may be made by his attorney of record, or, without
the institution of a suit, upon a confession by defendant in person
or by his attorney in fact. It implies something more than a mere
admission of a debt to plaintiff; in addition, it is defendant's
consent that a judgment shall be entered against him. * * *.' (23
Cyc., 699.)
4. "4.Statutory Provisions. 'Statutes regulating the confession of
judgments without action, or otherwise than according to the
course of the common law, are strictly construed, and a strict
compliance with their provisions must be shown in order to
sustain the validity of the judgment.' (Chapin vs. Thompson, 20
Cal, 681.) 'And this applies also to statutory restrictions upon the
right to confess judgment, as that authority to confess judgment
shall not be given in the same instrument which contains the
promise or obligation to pay the debt, or that such confession shall
not be authorized by any instrument executed prior to suit
brought.' (23 Cyc., 699, 700.)
5. "5.Warrant or Power of Attorney—Validity and Necessity. 'A
judgment by confession may be entered upon a written authority,
called a warrant or letter of attorney, by which the debtor
empowers an attorney to enter an appearance for him, waive
process, and
459
VOL. 43, JUNE 8, 1922 459
National Bank vs. Manila Oil Refining & By-Products Co.
which is best grounded in the solid principles of the law, and which will best
advance the public interest.
_______________
1. confess judgment against him for a designated sum, except where
this method of proceeding is prohibited by statute. The warrant as
the basis of the judgment is generally required to be placed on file
in the clerk's office, and no judgment can be so entered until it is
so filed.' (23 Cyc., 703.)
2. "6.Requisites and Sufficiency. 'A warrant or power of attorney to
confess judgment should be in writing and should conform to the
requirements of the statute in force at the time of its execution,
'although in the absence of specific statutory directions it is
sufficient, without much regard to its form, if it contains the
essentials of a good power and clearly states its purpose. It must
be signed by the person against whom the judgment is to be
entered * * *.' (23 Cyc., 704.)
 "The above quoted authorities are among the various authorities I found
bearing on the question at issue. As it can be readily seen none of them
decides squarely and definitely the questions propounded in your letter.
One thing, however, seems to be clear, from the very provision of section
5 (b) of the Negotiable Instruments Law and from the quotation No. 2 of
this letter, that a provision in a note or bill of exchange authorizing a
confession of judgment in default of payment at its maturity has particular
reference, in so far as Act No. 2031 is concerned, only to the negotiable
character of an instrument. I do not believe that the Legislature had the
intention in passing the said Act No. 2031 to introduce in the Philippines a
new practice in our Remedial Law, namely, that of confession of judgment,
which is purely procedural in nature.
"Now as to the second question, to wit: 'Does the silence of the Code
of Civil Procedure on the subject mean that a confession of judgment
cannot be recognized in this jurisdiction, or can a judgment by confession
be imported into the Philippines under general legal principles?' Before
answering this question attention is respectfully called to the quotation No.
4 of this letter, which expressly provides that statutes regulating confession
of judgments must be strictly construed and their provisions strictly
complied with to sustain the validity of judgments rendered under such
statutes. Now it being admitted that there is no express provision in our
Code of Civil Procedure authorizing or sanctioning this mode of practice in
this jurisdiction, and consequently there are no regulations provided to be
followed in this particular remedy, I am therefore of the opinion that
confession of judgment should not be deemed as imported in the
Philippines under the general legal principles. The remedy itself is a most
summary one, and when the defendant-debtor, instead of ad
460
460 PHILIPPINE REPORTS ANNOTATED
National Bank vs. Manila Oil Refining & By-Products Co.
The practice of entering judgments in debt on warrants of attorney is of
ancient origin. In the course of time a warrant of attorney to confess
judgment became a familiar common law security. At common law, there
were two kinds of judgments by confession; the one a judgment
by cognovit actionem, and the other by confession relicta verificatione. A
number of jurisdictions in the United States have accepted the common
law view of judgments by confession, while still other jurisdictions have
refused to sanction them. In some States, statutes have been passed
which have either expressly authorized confession of judgment on warrant
of attorney, without antecedent process, or have forbidden judgments of
this character. In the absence of statute, there is a conflict of authority as
to the validity of a warrant of attorney for the confession of judgment. The
weight of opinion is that, unless authorized by statute, warrants of attorney
to confess judgment are void, as against public policy.
_______________
mitting or allowing a judgment be taken against him, presents his
appearance and answers the complaint filed against him, it seems that the
trial court should not render a judgment without first hearing the evidence
that the parties may wish to submit before him, for it may happen that the
defendant-debtor may have some valid or good defences against the
plaintiff-creditor. This is especially true in the case of a counterclaim that
the defendant may have against the plaintiff as provided in sections 95 and
96 of the Code of Civil Procedure. The same Code provides that in case of
an omission to set up his counterclaim, the defendant or his assignee loses
all his right to bring further suit on such claim. (Sec. 97, Act No. 190.)
"In answer to the last question, namely: 'Admitting that there may be
some doubt, as to the correct solution, which solution, the recognition of a
confession of judgment, or the non-recognition of a confession of
judgment, would be for the best interests of the commercial life of the
Philippines?', I wish first of all to state what I believe to be the advantages
and disadvantages of this particular remedy. As to advantages, it can, of
course, be readily seen that a confession of judgment is a quick remedy. It
saves time and money as far as the parties to the suit are concerned if the
same is properly and legally brought. It saves the court's time and the
government the expense that a long litigation entails. As to its
disadvantages we may say among other things the following: 1. It
461
VOL. 43, JUNE 8, 1922 461
National Bank vs. Manila Oil Refining & By-Products Co.
Possibly the leading case on the subject is First NationalBank of Kansas
City vs. White ([19Q9], 220 Mo., 717; 16 Ann. Cas., 889; 120 S. W., 36;
132 Am. St. Rep., 612). The record in this case discloses that on October
4, 1900, the defendant executed and delivered to the plaintiff an obligation
in which the defendant authorized any attorney-at-law to appear for him in
an action on the note at any time after the note became due in any court
of record in the State of Missouri, or elsewhere, to waive the issuing and
service of process, and to confess judgment in favor of the
First National Bank of Kansas City for the amount that might then be due
thereon, with interest at the rate therein mentioned and the costs of suit,
together with an attorney's fee of 10 per cent and also to waive and release
all errors in said proceedings and judgment, and all proceedings, appeals,
or writs of error thereon. Plaintiff filed a petition in the Circuit Court to which
was attached the
_______________
 may be abused in the same way as the usurious rates of interest on
loans are now in the Philippines, because a borrower who is in great need
of money might be induced, if not actually compelled, to sign such a
burdensome obligation; 2. It deprives the defendant of his day in court, and
as a consequence it will prevent him to set up and prove before the court
his just claims and other lawful defences against the plaintiff; 3. It will create
multiplicity of actions in this jurisdiction, for if the confession of judgment
has been wrongfully or unjustly entered, the judgment debtor may start
another litigation on the same subject-matter that might have been brought
before the court in case a proper trial was formally held before the rendition
of such a judgment; and 4. It does not really hold the plaintiff who has a
good cause of action against the defendant as his proofs will surely
establish his claims and consequently a judgment must necessarily be
rendered in his favor.
"From the above statements, I am of the opinion that unless proper
regulations are first duly introduced and incorporated in our remedial law,
confession of judgments, instead of resulting advantageous to our
commercial life in the Philippines, might be the sources of abuse and
oppression. The very fact that confession of judgment is a most summary
and in fact a violent remedy,4t should first of all be properly regulated by
statute, and those regulations must be strictly complied with, before the
court should concede to such a remedy."
462
462 PHILIPPINE REPORTS ANNOTATED
National Bank vs. Manila Oil Refining & By-Products Co.
above-mentioned instrument. An attorney named Denham appeared
pursuant to the authority given by the note sued on, entered the
appearance of the defendant, and consented that judgment be rendered in
favor of the plaintiff as prayed in the petition. After the Circuit Court had
entered a judgment, the defendant, through counsel, appeared specially
and filed a motion to set it aside. The Supreme Court of Missouri, speaking
through Mr. Justice Graves, in part said:
"But going beyond the mere technical question in our preceding paragraph
discussed, we come to a question urged which goes to the very root of this
case, and whilst new and novel in this state, we do not feel that the cause
should be disposed of without discussing and passing upon that question.
* * * * * * * allowed by the statute of limitations within which suit shall be brought or
"And if this instrument be considered as a security for a debt, as it was
by the common law, it has never so f ound recognition in this state. The
policy of our law has been against such hidden securities for debt. Our
Recorder's Act is such that instruments intended as security for debt
shoUld find a place in the public records, and if not, they have often been
viewed with suspicion, and their bona fides often questioned.
"Nor do we think that the policy of our law is such as to thus place a
debtor in the absolute power of his creditor. The field for fraud is too far
enlarged by such an instrument. Oppression and tyranny would follow the
footsteps of such a diversion in the way of security for debt. Such
instruments procured by duress could shortly be placed in .-judgment in a
foreign court and much distress result therefrom.
"Again, under the law the right to appeal to this court or some other
appellate court is granted to all persons against whom an adverse
judgment is rendered, and this statutory right is by the instrument stricken
down. True it is that such right is not claimed in this case, but it is a
463
VOL. 43, JUNE 8, 1922 463
National Bank vs. Manila Oil Refining & By-Products Co.
part of the bond and we hardly know why this pound of flesh has not been
demanded. Courts guard with jealous eye any contract innovations upon
their jurisdiction. The instrument before us, considered in the light of a
contract, actually reduces the courts to mere clerks to enter and record the
judgment called for therein. By our statute (Rev. St. 1899, sec. 645) a party
to a written instrument of this character has the right to show a failure of
consideration, but this right is brushed to the wind by this instrument and
the jurisdiction of the court to hear that controversy is by the contract
divested. In 9 Cyc., 510, it is said: 'Agreements whose object is to oust the
jurisdiction of the courts are contrary to public policy and will not be enf
orced. Thus it is held that any stipulation between parties to a contract
distinguishing between the different courts of the country is contrary to
public policy. The principle has also been applied to a stipulation in a
contract that a party who breaks it may not be sued, to an agreement
designating a person to be sued for its breach who is nowise liable and
prohibiting action against any but him, to a provision in a lease that the
landlord shall have the right to take immediate judgment against the tenant
in case of a default on his part, without giving the notice and demand for
possession and filing the complaint required by statute, to a by-law of a
benefit association that the decisions of its officers on a claim shall be final
and conclusive, and to many other agreements of a similar tendency. In
some courts, any agreement as to the time for suing different from the time
the right to sue be barred is held -void.'
* * * * * * *
"We shall not pursue this question further. This contract, in so far as it
goes-beyond the usual provisions of a note, is void as against the public
policy of the state, as such public policy is found expressed in our laws and
decisions. Such agreements are iniquitous to the uttermost and should
464
464 PHILIPPINE REPORTS ANNOTATED
National Bank vs. Manila, Oil Refining & By-Products Co.
be promptly condemned by the courts, until such time as they may receive
express statutory recognition, as they have in some states.
* * * * * * * process, and confess judgment. But we do not wish to be understood as
"From what has been said, it follows that the Circuit Court never had
jurisdiction of the defendant, and the judgment is reversed."
The case of Parquhar & Co. vs. Dehaven ([1912], 70 W. Va., 738; 40 L. R.
A. [N. S.], 956; 75 S. E., 65; Ann. Cas. [1914-A], 640), is another well-
considered authority. The notes referred to in the record contained waiver
of presentment and protest, homestead and exemption rights real and
personal, and other rights, and also the following material provision: " 'And
we do hereby empower and authorize the said A. B. Farquhar Co. Limited,
or agent, or any prothonotary or attorney of any Court of Record to appear
for us and in our name to confess judgment against us and in favor of said
A. B. Farquhar Co., Limited, for the above named sum with costs of suit
and release of all errors and without stay of execution after the maturity of
this note." ' The Supreme Court of West Virginia, on consideration of the
validity of the judgment note above described, speaking through Mr.
Justice Miller, in part said:
"As both sides agree the question presented is one of first impression in
this State. We have -no statute, as has Pennsylvania and many other
states, regulating the subject. In the decision we are called upon to render,
we must have recourse to the rules and principles of the common law, in
force here, and to our statute law, applicable, and to such judicial decisions
and practices in Virginia, in force at the time of the separation, as are
properly binding on us. It is pertinent to remark in this connection, that after
nearly fifty years of judicial history in this State no case has been brought
here involving this question, strong evidence, we think, that such notes, if
at all, have never been in very general use in this commonwealth.
465
VOL. 43, JUNE 8, 1922 465
Ndtional Bank vs. Manila, Oil Refining & By-Products Co.
And in most states where they are current the use of them has grown up
under statutes authorizing them, and regulating the practice of employing
them in commercial transactions.
* * * * * * * the poor debtor and cut him off from his ordinary day in court. On the other
"It is contended, however, that the old legal maxim, qui facit per alium,
facit per se, is as applicable here as in other cases. We do not think so.
Strong reasons exist, as we have shown, for denying its application, when
holders of contracts of this character seek the aid of the courts and of their
execution process to enforce them, defendant having had no day in court
or opportunity to be heard. We need not say in this case that a debtor may
not, by proper power of attorney duly executed, authorize another to
appear in court, and by proper endorsement upon the writ waive service of
approving or intending to countenance the practice of employing in this
state commercial paper of the character here involved. Such paper has
heretofore had little if any currency here. If the practice is adopted into this
state it ought to be, we think, by act of the Legislature, with all proper
safeguards thrown around it, to prevent fraud and imposition. The policy of
our law is, that no man shall suffer judgment at the hands of our courts
without proper process and a day to be heard. To give currency to such
paper by judicial pronouncement would be to open the door to fraud and
imposition, and to subject the people to wrongs and injuries not heretofore
contemplated. This we are unwilling to do."
A case typical of those authorities which lend support to judgment notes
is First National Bank of Las Cruces vs.Baker ([1919], 180 Pac., 291). The
Supreme Court of New Mexico, in a per curiam decision, in part, said:
"In some of the states the judgments upon warrants of attorney are
condemned as being against public policy. (Farquhar & Co. vs.Dehaven,
70 W. Va., 738; 75 S. E.,
466
466 PHILIPPINE REPORTS ANNOTATED
National Bank vs. Manila Oil Refining & By-Products Co.
G5; 40 L. R. A. [N. S.], 956; Ann. Cas. [1914 A], 640,
and First National Bank of Kansas City vs. White, 220 Mo., 717; 120 S. W.,
36; 132 Am. St. Rep., 612; 16 Ann. Cas., 889, are examples of such
holding.) By just what course of reasoning it can be said by the courts that
such judgments are against public policy we are unable to understand. It
was a practice from time immemorial at common law, and the common law
comes down to us sanctioned as justified by the reason and experience of
English-speaking peoples. If conditions have arisen in this country which
make the application of the common law undesirable, it is for the
Legislature to so announce, and to prohibit the taking of judgments of this
kind. Until the Legislature has spoken along that line, we know of no theory
upon which such judgments can be declared as against the public policy
of the state. We are aware that the argument against them is that they
enable the unconscionable creditor to take advantage of the necessities of
hand, it may be said in their favor that it frequently enables a debtor to
obtain money which he could by no possibility otherwise obtain. It judgments against makers should not be recognized in this jurisdiction by
strengthens his credit, and may be most highly beneficial to him at times. implication and should only be considered as valid when given express
In some of the states these judgments have been condemned' by statute legislative sanction.
and of course in that case are not allowed. 468
"Our conclusion in this case is that a warrant of attorney given as 468 PHILIPPINE REPORTS ANNOTATED
security to a creditor accompanying a promissory note confers a valid Gonzalez vs. Davis
power, and authorizes a confession of judgment in any court of competent The judgment appealed from is set aside, and the case is remanded to the
jurisdiction in an action to be brought upon said note; that our cognovit lower court for further proceedings in accordance with this decision.
statute does not cover the same field as that occupied by the common-law Without special finding as to costs in this instance, it is so ordered.
practice of taking judgments upon warrant of attorney, and does not Araullo, C.
impliedly or otherwise abrogate such practice; and that the practice of J., Avanceña, Villamor, Ostrand, Johns,and Romualdez, JJ., concur.
taking judgments upon warrants of attorney as it was pursued in this case Judgment set aside.
is not against any public policy of the state, as declared by its laws."
467 ____________
VOL. 43, JUNE 8, 1922 467
National Bank vs. Manila, Oil Refining & By-Products Co.
With reference to the conclusiveness of the decisions here mentioned, it
may be said that they are based on the practice of the English-American
common law, and that the doctrines of the common law are binding
upon Philippinecourts only in so f ar as they are f ounded on sound
principles applicable to local conditions.
Judgments by confession as appeared at common law were
considered an amicable, easy, and cheap way to settle and secure debts.
They are a quick remedy and serve to save the court's time. They also
save the time and money of the litigants and the government the expenses
that a long litigation entails. In one sense, instruments of this character may
be considered as special agreements, with power to enter up judgments
on them, binding the parties to the result as they themselves viewed it.
On the other hand, are disadvantages to the commercial world which
outweigh the considerations just mentioned. Such warrants of attorney are
void as against public policy, because they enlarge the field for fraud,
because under these instruments the promissor bargains away his right to
a day in court, and because the effect of the instrument is to strike down
the right of appeal accorded by statute. The recognition of such a form of
obligation would bring about a complete reorganization of commercial
customs and practices, with reference to short-term obligations. It can
readily be seen that judgment notes, instead of resulting to the advantage
of commercial life in the Philippines might be the source of abuse and
oppression, and make the courts involuntary parties thereto. If
the bank has a meritorious case, the judgment is ultimately certain in the
courts.
We are of the opinion that warrants of attorney to confess judgment are
not authorized nor contemplated by our law. We are further of the opinion
that provisions in notes authorizing attorneys to appear and confess
738 SUPREME COURT REPORTS ANNOTATED
Republic Planters Bank vs. Court of Appeals
G.R. No. 93073. December 21, 1992.*
REPUBLIC PLANTERS BANK, petitioner, vs. COURT OF APPEALS and
FERMIN CANLAS, respondents.
Commercial Law; Negotiable Instruments Law; Under the Negotiable
Instruments Law, persons who write their names on the face of promissory
notes are makers and are liable as such.—Under the Negotiable
Instruments 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. 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.
Same; Same; Same; 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.—Where an instrument containing the words “I
promise to pay” is signed by two or more persons, they are deemed to be
jointly and severally liable thereon. An instrument which begins with “I”,
“We”, or “Either of us” promise to pay, when signed by two or more
persons, makes them solidarily liable. The fact that the singular pronoun is
used indicates that the promise is individual as to each other; meaning that
each of the co-signers is deemed to have made an independent singular
promise to pay the notes in full.
Same; Same; Same; Same; 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.—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. 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
________________
*
SECOND DIVISION.
739
VOL. 216, DECEMBER 21, 1992 739
Republic Planters Bank vs. Court of Appeals
is liable for the entire amount, and not merely for his proportionate
share.
Corporation Law; The corporation, upon such change in its name, is
in no sense a new corporation, nor the successor 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.
Same; Same; A change in the corporate name does not make a new
corporation and whether affected by special act or under a general law has
no effect on the identity of the corporation or on its property, rights or
liabilities.—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 effect on the identity of the corporation, or on its property, rights,
or liabilities.
Same; Same; Same; The corporation continues as before
responsible in its new name for all debts or other liabilities which it had
previously contracted or incurred.—The corporation continues, as before,
responsible in its new name for all debts or other liabilities which it had
previously contracted or incurred.
Same; Same; Same; Same; Generally, 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.—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.
Usury Law; Interest; 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 forbearance of money.—This Courthas 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 forbearance of money. Article 2209 of the Civil Code, on the other
hand, governs interests by way of damages. This fine distinction was not
taken into consideration by the appellate court,
740
740 SUPREME COURT REPORTS ANNOTATED
Republic Planters Bank vs. Court of Appeals
which instead made a general statement that the interest rate be at
12% per annum.
Same; Same; Same; Central Bank Circular No. 905, Series of 1982
removed the Usury Law ceiling on interest rates.—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 rate at 12% per annum. Central Bank Circular No. 905, Series of
1982 removed the Usury Law ceiling on interest rates.
PETITION for review on certiorari from the decision of the Court of
Appeals. Fule, J.
The facts are stated in the opinion of the Court.
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. 82-5448except 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 hereun-der:
“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:
________________
**
Associate Justice Hector C. Fule, ponente, Associate Justices Lorna
S. Lombos-de la Fuente and Luis L. Victor, concurring.
*** Penned by Judge Daniel C. Macaraeg, RTC Manila, Branch LX.
741
VOL. 216, DECEMBER 21, 1992 741
Republic Planters Bank vs. Court of Appeals
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 with
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, 1981 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 (formerly 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 Appellate Court (now the Court of 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
________________
1
Rollo, pp. 49-50.
742
742 SUPREME COURT REPORTS ANNOTATED
Republic Planters Bank vs. Court of Appeals
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
severally promise to pay to the ORDER of the REPUBLIC PLANTERS
BANK, at its office in Manila, Philippines, the sum
of___________________ PESOS ( ), Philippine Currency x x x.”
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 asExhibits 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. voted
to change its corporate name to Pinch Manufacturing Corporation.
743
VOL. 216, DECEMBER 21, 1992 743
Republic Planters Bank vs. Court of Appeals
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 complaint
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 in 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 notes are negotiable instruments and must be
governed by the Negotiable Instruments Law.2
Under the Negotiable Instruments 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 holder4 according to the tenor thereof.5 Based on the above provisions
of law, there is no
________________
2
Act 2031, enacted on February 3, 1991.
3 Negotiable Instruments Law, Section 184; H.D. Lee Merchantile Co.
vs. Merchantile Co., 276 P. 807 (1929).
4 Ibid.,Section 1.
5 Ibid.,Section 60.
744
744 SUPREME COURT REPORTS ANNOTATED
Republic Planters Bank vs. Court of Appeals
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
________________
6 Ibid.,Section 17 (g).
7
Powell vs. Mobley, 142 S.E. 678 (1928); Keenig vs. Curran’s
Restaurant, 159 Atl. 553 (1932).
8
Rice vs. Gove, 22 Pick Mass 158; 33 AM Dec. 724.
9 Black’s Law Dictionary, p. 1249 (5th ed., 1979).
745
VOL. 216, DECEMBER 21, 1992 745
Republic Planters Bank vs. Court of Appeals
will not affect 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 effect 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 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:
________________
10
6 Fletcher, Cyclopedia of the Law of Private Corporations, pp. 224-
225 (Rev. ed., 1968).
11
Mutual Building & Loan Association vs. Corum, 220 Cal. 282, citing
Corpus Juris; 30 P. 2d 509, 514 (1934); Pilsen Brewing Co. vs. Wallace,
291 ILL. 59, 125 N.E. 714, 8 A.L.R. 579 (1919).
12
Ozan Lumber Co. vs. Davis Sewing Machine Co., 284 F. 161 (1922);
18 C.J.S. 572.
746
746 SUPREME COURT REPORTS ANNOTATED
Republic Planters Bank vs. Court of Appeals
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 the 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 possession thereof has a prima
facie authority to complete it by filling up the blanks therein, x x x x 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 accor-
________________
13
Crocker National Bank vs. Say, 209 Cal. 436; 288 P. 69
(1930); Dayries vs. Lindsly, 54 So. 791 (1911); Granada vs. PNB, 18
SCRA 1 (1966).
747
VOL. 216, DECEMBER 21, 1992 747
Republic Planters Bank vs. Court of Appeals
dance with the authority given and within a reasonable time. x x x x.
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 that 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 Negotiable Instruments Law
is not applicable.
This Court takes note that the respondent Court, relying on Reformina
vs. Tomol,14 lowered the interest rate on the promissory notes from 16% to
12%.
The ruling in the 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 judgments 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
________________
14 139 SCRA 260 (1985).
748
748 SUPREME COURT REPORTS ANNOTATED
Republic Planters Bank vs. Court of Appeals
limits allowed by 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 rate at 12% per annum. Central Bank Circular
No. 905, Series of 1982 removed the Usury Law ceiling on interest rates.16
In the light 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. Judgment 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
________________
 15
GSIS vs. Court of Appeals, 145 SCRA 311 (1986).
16 Philippine National Bank vs. Court of Appeals, 196 SCRA 536(1991).
749
VOL. 216, DECEMBER 21, 1992 749
Tiatco vs. Civil Service Commission
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 from 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 solidarily liable
with defendants for the amounts found by the Court a quo. With costs
against private respondent.
SO ORDERED.
Narvasa (C.J.), Feliciano, Regalado and Nocon, JJ.,concur.
Note.—The Usury Law is now legally inexistent pursuant to Central
Bank Circular No. 905 and the interest now legally chargeable depends
upon the agreement of the lender and borrower (Javier vs. De
Guzman, 192 SCRA 434).

——o0o——
410 SUPREME COURT REPORTS ANNOTATED
Evangelista vs. Mercator Finance Corp.
G.R. No. 148864. August 21, 2003.*
SPOUSES EDUARDO B. EVANGELISTA and EPIFANIA
C. EVANGELISTA, petitioners, vs. MERCATOR FINANCE CORP.,
LYDIA P. SALAZAR, LAMEC’S** REALTY AND DEVELOPMENT CORP.
and the REGISTER OF DEEDS OF BULACAN, respondents.
Civil Procedure; Motions; Summary Judgment; The crucial question
in a motion for summary judgment is where the issues raised in the
pleadings are genuine or fictitious.—Summary judgment “is a procedural
technique aimed at weeding out sham claims or defenses at an early stage
of the litigation.” The crucial question in a motion for summary judgment is
whether the issues raised in the pleadings are genuine or fictitious, as
shown by affidavits, depositions or admissions accompanying the motion.
Same; Same; Same; “Genuine Issue”; The proper inquiry would
therefore be whether the affirmative defenses offered by petitioners
constitute genuine issue of fact requiring a full-blown trial.—A genuine
issue means “an issue of fact which calls for the presentation of evidence,
as distinguished from an issue which is fictitious or contrived so as not to
constitute a genuine issue for trial.” To forestall summary judgment, it is
essential for the non-moving party to confirm the existence of genuine
issues where he has substantial, plausible and fairly arguable defense, i.e.,
issues of fact calling for the presentation of evidence upon which a
reasonable finding of fact could return a verdict for the non-moving party.
The proper inquiry would therefore be whether the affirmative defenses
offered by petitioners constitute genuine issue of fact requiring a full-blown
trial.
Civil Law; Contracts; Suretyship; Liability; A surety is bound by the
same consideration that makes the contract effective between the parties
thereto.—A surety is one who is solidarily liable with the principal.
Petitioners cannot claim that they did not personally receive any
consideration
_______________
*
THIRD DIVISION.
**
Sometimes spelled as Lamees.
411
VOL. 409, AUGUST 21, 2003 411
Evangelista vs. Mercator Finance Corp.
for the contract for well-entrenched is the rule that the consideration
necessary to support a surety obligation need not pass directly to the
surety, a consideration moving to the principal alone being sufficient. A
surety is bound by the same consideration that makes the contract
effective between the principal parties thereto.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Wilfredo O. Arceo for petitioners.
Cases, Corpus and Associates Law Offices for private
respondent Mercator Finance Corp.
Evelyn B. Esparrago Piollo for respondents L.P. Salazar and
Lamec’s Realty & Development Corp.
PUNO, J.:
Petitioners, Spouses Evangelista (“Petitioners”), are before this Court on a
Petition for Review on Certiorari under Rule 45 of the Revised Rules of
Court, assailing the decision of the Court of Appeals dismissing their
petition.
Petitioners filed a complaint1 for annulment of titles against
respondents, Mercator Finance Corporation, Lydia P. Salazar, Lamecs
Realty and Development Corporation, and the Register of Deeds of
Bulacan. Petitioners claimed being the registered owners of five (5) parcels
of land2 contained in the Real Estate Mortgage3executed by them and
Embassy Farms, Inc. (“Embassy Farms”). They alleged that they executed
the Real Estate Mortgage in favor of Mercator Financing Corporation
(“Mercator”) only as officers of Embassy Farms. They did not receive the
proceeds of the loan evidenced by a promissory note, as all of it went to
Embassy Farms. Thus, they contended that the mortgage was without any
consideration as to them since they did not personally obtain any loan or
credit accommodations. There being no principal obligation
_______________
1
RTC of Malolos, Bulacan, Br. 85, Rollo, pp. 23-29.
2
With Transfer Certificates of Title Nos. T-193458, T-193136, T-
193137 and T-193138; Id., at pp. 30-39.
3 Id., at p. 40.
412
412 SUPREME COURT REPORTS ANNOTATED
Evangelista vs. Mercator Finance Corp.
on which the mortgage rests, the real estate mortgage is void.4 With the
void mortgage, they assailed the validity of the foreclosure proceedings
conducted by Mercator, the sale to it as the highest bidder in the public
auction, the issuance of the transfer certificates of title to it, the subsequent
sale of the same parcels of land to respondent Lydia P. Salazar (“Salazar”),
and the transfer of the titles to her name, and lastly, the sale and transfer
of the properties to respondent Lamecs Realty & Development Corporation
(“Lamecs”).
Mercator admitted that petitioners were the owners of the subject
parcels of land. It, however, contended that “on February 16, 1982,
plaintiffs, executed a Mortgage in favor of
defendant Mercator Finance Corporation ‘for and in consideration of
certain loans, and/or other forms of credit accommodations obtained from
the Mortgagee (defendant Mercator Finance Corporation) amounting to
EIGHT HUNDRED FORTY-FOUR THOUSAND SIX HUNDRED
TWENTY-FIVE & 78/100 (P844,625.78) PESOS, Philippine Currency and
to secure the payment of the same and those others that the
MORTGAGEE may extend to the MORTGAGOR (plaintiffs) x x x.’ ”5 It
contended that since petitioners and Embassy Farms signed the
promissory note6 as co-makers, aside from the Continuing Suretyship
Agreement7 subsequently executed to guarantee the indebtedness of
Embassy Farms, and the succeeding promissory notes8 restructuring the
loan, then petitioners are jointly and severally liable with Embassy Farms.
Due to their failure to pay the obligation, the foreclosure and subsequent
sale of the mortgaged properties are valid.
Respondents Salazar and Lamecs asserted that they are innocent
purchasers for value and in good faith, relying on the validity of the title
of Mercator. Lamecs admitted the prior ownership of petitioners of the
subject parcels of land, but alleged that they are the present registered
owner. The respondents likewise assailed the long silence and inaction by
petitioners as it was only after a lapse of almost ten (10) years from the
foreclosure of the property and the subsequent sales that they made their
claim. Thus, Sala-
_______________
4
Id., at p. 26.
5 Id., at p. 63.
6 Id., at p. 71.
7 Id., at pp. 72-73.
8 Id., at pp. 80-83.
413
VOL. 409, AUGUST 21, 2003 413
Evangelista vs. Mercator Finance Corp.
zar and Lamecs averred that petitioners are in estoppel and guilty of
laches.9
During pre-trial, the parties agreed on the following issues:
1. a.Whether or not the Real Estate Mortgage executed by the
plaintiffs in favor of defendant MercatorFinance Corp. is null and
void;
2. b.Whether or not the extra-judicial foreclosure proceedings
undertaken on subject parcels of land to satisfy the indebtedness
of Embassy Farms, Inc. is (sic) null and void;
3. c.Whether or not the sale made by
defendant Mercator Finance Corp. in favor of Lydia Salazar and
that executed by the latter in favor of defendant Lamecs Realty
and Development Corp. are null and void;
4. d.Whether or not the parties are entitled to damages.10
After pre-trial, Mercator moved for summary judgment on the ground that
except as to the amount of damages, there is no factual issue to be
litigated. Mercator argued that petitioners had admitted in their pre-trial
brief the existence of the promissory note, the continuing suretyship
agreement and the subsequent promissory notes restructuring the loan,
hence, there is no genuine issue regarding their liability. The mortgage,
foreclosure proceedings and the subsequent sales are valid and the
complaint must be dismissed.11
Petitioners opposed the motion for summary judgment claiming that
because their personal liability to Mercatoris at issue, there is a need for a
full-blown trial.12
The RTC granted the motion for summary judgment and dismissed the
complaint. It held:
A reading of the promissory notes show (sic) that the liability of the
signatories thereto arc solidary in view of the phrase “jointly and severally.”
On the promissory note appears (sic) the signatures of Eduardo
B. Evangelista, Epifania C. Evangelistaand another signature of Eduardo
B. Evangelista below the words Embassy Farms, Inc. It is crystal clear then
that the plaintiffs-spouses signed the promissory note not only as officers
of Embassy Farms, Inc. but in their personal capacity as well(.) Plaintiffs(,)
by affixing their signatures thereon in a dual capacity have bound
_______________
9
Id., at pp. 85-97.
10
Id., at p. 118.
11 Id., at pp. 119-123.
12 Id., at pp. 128-131.
414
414 SUPREME COURT REPORTS ANNOTATED
Evangelista vs. Mercator Finance Corp.
themselves as solidary debtor(s) with Embassy Farms, Inc. to pay
defendant Mercator Finance Corporation the amount of indebtedness.
That the principal contract of loan is void for lack of consideration, in the
light of the foregoing is untenable.13
Petitioners’ motion for reconsideration was denied for lack of merit.14 Thus,
petitioners went up to the Court of Appeals, but again were unsuccessful.
The appellate court held:
The appellants’ insistence that the loans secured by the mortgage they
executed were not personally theirs but those of Embassy Farms, Inc. is
clearly self-serving and misplaced. The fact that they signed the subject
promissory notes in the(ir) personal capacities and as officers of the said
debtor corporation is manifest on the very face of the said documents of
indebtedness (pp. 118, 128-131, Orig. Rec.). Even
assuming arguendo that they did not, the appellants lose sight of the fact
that third persons who are not parties to a loan may secure the latter by
pledging or mortgaging their own property (Lustan vs. Court of
Appeals, 266 SCRA 663, 675). X x x. In constituting a mortgage over their
own property in order to secure the purported corporate debt of Embassy
Farms, Inc., the appellants undeniably assumed the personality of persons
interested in the fulfillment of the principal obligation who, to save the
subject realities from foreclosure and with a view towards being
subrogated to the rights of the creditor, were free to discharge the same
by payment (Articles 1302 [3] and 1303, Civil Code of the
Philippines).15 (emphases in the original)
The appellate court also observed that “if the appellants really felt
aggrieved by the foreclosure of the subject mortgage and the subsequent
sales of the realties to other parties, why then did they commence the suit
only on August 12, 1997 (when the certificate of sale was issued on
January 12, 1987, and the certificates of title in the name of Mercator on
September 27, 1988)?” Petitioners’ “procrastination for about nine (9)
years is difficult to understand. On so flimsy a ground as lack of
consideration, (w)e may even venture to say that the complaint was not
worth the time of the courts.”16
A motion for reconsideration by petitioners was likewise denied for lack
of merit.17 Thus, this petition where they allege that:
_______________
13
Id., at p. 134, dated May 4, 1998.
14
Id., at p. 159, dated July 17, 1998.
15 Id., at p. 222-223, Decision dated May 12, 2000.
16 Id., at p. 223.
17 Id., at p. 234, dated May 14, 2001.
415
VOL. 409, AUGUST 21, 2003 415
Evangelista vs. Mercator Finance Corp.
THE COURT A QUO ERRED AND ACTED WITH GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION
IN AFFIRMING IN TOTO THE MAY 4, 1998 ORDER OF THE TRIAL
COURT GRANTING RESPONDENT’S MOTION FOR SUMMARY
JUDGMENT DESPITE THE EXISTENCE OF GENUINE ISSUES AS TO
MATERIAL FACTS AND ITS NON-ENTITLEMENT TO A JUDGMENT AS
A MATTER OF LAW, THEREBY DECIDING THE CASE IN A WAY
PROBABLY NOT IN ACCORD WITH APPLICABLE DECISIONS OF THIS
HONORABLE COURT.18
We affirm.
Summary judgment “is a procedural technique aimed at weeding out
sham claims or defenses at an early stage of the litigation.”19 The crucial
question in a motion for summary judgment is whether the issues raised in
the pleadings are genuine or fictitious, as shown by affidavits, depositions
or admissions accompanying the motion. A genuine issue means “an issue
of fact which calls for the presentation of evidence, as distinguished from
an issue which is fictitious or contrived so as not to constitute a genuine
issue for trial.”20 To forestall summary judgment, it is essential for the non-
moving party to confirm the existence of genuine issues where he has
substantial, plausible and fairly arguable defense, i.e., issues of fact calling
for the presentation of evidence upon which a reasonable finding of fact
could return a verdict for the non-moving party. The proper inquiry would
therefore be whether the affirmative defenses offered by petitioners
constitute genuine issue of fact requiring a full-blown trial.21
In the case at bar, there are no genuine issues raised by petitioners.
Petitioners do not deny that they obtained a loan from Mercator. They
merely claim that they got the loan as officers of Embassy Farms without
intending to personally bind themselves or their property. However, a
simple perusal of the promissory note and the continuing suretyship
agreement shows otherwise. These
_______________
18
Id., at p. 12.
19
Evadel Realty and Development Corporation v. Soriano, 357 SCRA
395 (2001).
20 Manufacturers Hanover Trust Co. and/or Chemical Bank v. Rafael
Ma. Guerrero, G.R. No. 136804, February 19, 2003, 397 SCRA 709.
21 Spouses Guillermo Agbada & Maxima Agbada v. Inter-urban
Developers, G.R. No. 144029, September 19, 2002, 389 SCRA 430.
416
416 SUPREME COURT REPORTS ANNOTATED
 Evangelista vs. Mercator Finance Corp. VOL. 409, AUGUST 21, 2003 417
documentary evidence prove that petitioners are solidary obligors with Evangelista vs. Mercator Finance Corp.
Embassy Farms. (3) The obligations hereunder are joint and several and independent of the
The promissory note22 states: obligations of the Principal. A separate action or actions may be brought
For value received, I/We jointly and severally promise to pay to the order and prosecuted against the Surety whether or not the action is also brought
of MERCATOR FINANCE CORPORATION at its office, the principal sum and prosecuted against the Principal and whether or not the Principal be
of EIGHT HUNDRED FORTY-FOUR THOUSAND SIX HUNDRED joined in any such action or actions.
TWENTY-FIVE PESOS & 78/100 (P 844,625.78), Philippine currency, x x xxx xxx x x x.
x, in installments as follows: The agreement was signed by petitioners on February 16, 1982. The
September 16, 1982 – P154,267.87 promissory notes24 subsequently executed by petitioners and Embassy
October 16, 1982 – P154,267.87 Farms, restructuring their loan, likewise prove that petitioners are solidarily
November 16, 1982 – P154,267.87 liable with Embassy Farms.
December 16, 1982 – P154,267.87 Petitioners further allege that there is an ambiguity in the wording of the
January 16, 1983 – P154,267.87 promissory note and claim that since it was Mercator who provided the
February 16, 1983 – P154,267.87 form, then the ambiguity should be resolved against it.
xxx xxx x x x. Courts can interpret a contract only if there is doubt in its letter.25 But,
The note was signed at the bottom by petitioners Eduardo an examination of the promissory note shows no such ambiguity. Besides,
B. Evangelista and Epifania C. Evangelista and Embassy Farms, Inc. with assuming arguendo that there is an ambiguity, Section 17 of the
the signature of Eduardo B. Evangelista below it. Negotiable Instruments Law states, viz:
The Continuing Suretyship Agreement23 also proves the solidary SECTION 17. Construction where instrument is ambiguous.—Where the
obligation of petitioners, viz: language of the instrument is ambiguous or there are omissions therein,
(Embassy Farms, Inc.) the following rules of construction apply:
Principal xxx xxx xxx
(Eduardo B. Evangelista) (g) Where an instrument containing the word “I promise to pay” is
Surety signed by two or more persons, they are deemed to be jointly and severally
(Epifania C. Evangelista) liable thereon.
Surety Petitioners also insist that the promissory note does not convey their true
(Mercator Finance Corporation) intent in executing the document. The defense is unavailing. Even if
Creditor petitioners intended to sign the note merely as officers of Embassy Farms,
To: ERCATOR FINANCE COPORATION still this does not erase the fact that they subsequently executed a
(1) For valuable and/or other consideration, EDUARDO continuing suretyship agreement. A surety is one who is solidarily liable
B. EVANGELISTA and EPIFANIA C. EVANGELISTA(hereinafter called with the principal.26 Petition-
Surety), jointly and severally unconditionally guarantees (sic)
to MERCATOR FINANCE COPORATION (hereinafter called Creditor), _______________
the full, faithful and prompt payment and discharge of any and all
indebtedness of EMBASSY FARMS, INC. (hereinafter called Principal) to 24
Id., at pp. 80-83.
the Creditor. 25
Article 1370. If the terms of a contract are clear and leaves no doubt
xxx xxx xxx upon the intention of the contracting parties, the literal meaning of its
stipulations shall control. (Civil Code of the Philippines); Ong Yong, et al.
_______________ v. David S. Tiu, et al., G.R. Nos. 144476 & 144629, February 1. 2002, 375
SCRA 614.
22 26 Goldenrod, Incorporated v. Court of Appeals, 366 SCRA 217 (2001).
Rollo, p. 71.
23
Id., at pp. 72-73. 418
417 418 SUPREME COURT REPORTS ANNOTATED
 Evangelista vs. Mercator Finance Corp. The term “agreement” includes wills.
29 241 SCRA 254 (1995).
ers cannot claim that they did not personally receive any consideration for
the contract for well-entrenched is the rule that the consideration 419
necessary to support a surety obligation need not pass directly to the VOL. 409, AUGUST 21, 2003 419
surety, a consideration moving to the principal alone being sufficient. A People vs. Sandiganbayan
surety is bound by the same consideration that makes the contract SO ORDERED.
effective between the principal parties thereto.27 Having executed the Panganiban and Sandoval-Gutierrez, JJ., concur.
suretyship agreement, there can be no dispute on the personal liability of Corona and Carpio-Morales, JJ., On Official Leave.
petitioners. Petition dismissed.
Lastly, the parol evidence rule does not apply in this case.28 We held Note.—Adherence to the rules is not a mere nicety. Due process
in Tarnate v. Court of Appeals,29 that where the parties admitted the demands proper obedience to procedural rules, especially when the
existence of the loans and the mortgage deeds and the fact of default on subject matter of the motion to quash is a search warrant (Ong vs. Court
the due repayments but raised the contention that they were misled by of Appeals, 370 SCRA 48 [2001])
respondent bank to believe that the loans were long-term
accommodations, then the parties could not be allowed to introduce ——o0o——
evidence of conditions allegedly agreed upon by them other than those
stipulated in the loan documents because when they reduced their
agreement in writing, it is presumed that they have made the writing the
only repository and memorial of truth, and whatever is not found in the
writing must be understood to have been waived and abandoned.
IN VIEW WHEREOF, the petition is dismissed. Treble costs against the
petitioners.

_______________
27
Charles Lee v. Court of Appeals, G.R. Nos. 117913-14, February 1,
2002, 375 SCRA 579.
28 SEC. 9. Evidence of written agreements.—When the terms of an

agreement have been reduced to writing, it is considered as containing all

the terms agreed upon and there can be, between the parties and their
successors in interest, no evidence of such terms other than the contents
of the written agreement.
However, a party may present evidence to modify, explain or add to the
terms of the written agreement if he puts in issue in his pleading:

1. (a)An intrinsic ambiguity, mistake or imperfection in the written

agreement;
2. (b)The failure of the written agreement to express the true intent
and agreement of the parties thereto;
3. (c)The validity of the written agreement; or
4. (d)The existence of other terms agreed to by the parties of their
successors in interest after the execution of the written
agreement.
 VOL. 478, DECEMBER 16, 2005 365
Ilano vs. Español
G.R. No. 161756. December 16, 2005.*
VICTORIA J. ILANO represented by her Attorney-in-fact, MILO ANTONIO
C. ILANO, petitioners, vs. HON. DOLORES L. ESPAÑOL, in her capacity
as Executive Judge, RTC of Imus, Cavite, Br. 90, and, AMELIA ALONZO,
EDITH CALILAP, DANILO CAMACLANG, ESTELA CAMACLANG, ALLAN
CAMACLANG, LENIZA REYES, EDWIN REYES, JANE BACAREL,
CHERRY CAMACLANG, FLORA CABRERA, ESTELITA LEGASPI,
CARMENCITA GONZALES, NEMIA CASTRO, GLORIA DOMINGUEZ,
ANNILYN C. SABALE and several JOHN DOES, respondents.
Actions; Pleadings and Practice; Complaints; Causes of Action; A
cause of action has three elements—(1) the legal right of the plaintiff, (2)
the correlative obligation of the defendant, and (3) the act or omission of
the defendant in violation of said legal right.—A cause of action has three
elements: (1) the legal right of the plaintiff, (2) the correlative obligation of
the defendant, and (3) the act or omission of the defendant in violation of
said legal right. In determining the presence of these elements, inquiry is
confined to the four corners of the complaint including its annexes, they
being parts thereof. If these elements are absent, the complaint becomes
vulnerable to a motion to dismiss on the ground of failure to state a cause
of action.
_______________
*
THIRD DIVISION.
366
366 SUPREME COURT REPORTS ANNOTATED
Ilano vs. Español
Same; Same; Same; Bill of Particulars; Where the allegations of a
complaint are vague, indefinite, or in the form of conclusion, its dismissal
is not proper for the defendant may ask for more particulars.—While some
of the allegations may lack particulars, and are in the form of conclusions
of law, the elements of a cause of action are present. For even if some are
not stated with particularity, petitioner alleged 1) her legal right not to be
bound by the instruments which were bereft of consideration and to which
her consent was vitiated; 2) the correlative obligation on the part of the
defendantsrespondents to respect said right; and 3) the act of the
defendantsrespondents in procuring her signature on the instruments
through “deceit,” “abuse of confidence” machination,” “fraud,”
“falsification,” “forgery,” “defraudation,” and “bad faith,” and “with malice,
malevolence and selfish intent.” Where the allegations of a complaint are
vague, indefinite, or in the form of conclusion, its dismissal is not proper for
the defendant may ask for more particulars.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Edgardo J. Naoe and Nora Alejo-Buenviaje for petitioner.
Deogenes N. Agellon for respondents.
CARPIO-MORALES, J.:
The Court of Appeals having affirmed the dismissal by Branch 20 of the
Regional Trial Court (RTC) of Cavite at Imus, for lack of cause of action,
Civil Case No. 2079-00, the complaint filed by herein petitioner Victoria J.
Ilano for Revocation/Cancellation of Promissory Notes and Bills of
Exchange (Checks) with Damages and Prayer for Preliminary Injunction or
Temporary Restraining Order (TRO),1 against herein respondents 15
named defendants (and several John Does), a recital of the pertinent
allegations in the complaint, quoted verbatim as follows, is in order:
_______________
1
Records at pp. 2-10.
367
VOL. 478, DECEMBER 16, 2005 367
Ilano vs. Español
xxx
1. 3.That defendant AMELIA O. ALONZO, is a trusted employee of
[petitioner]. She has been with them for several years already,
and through the years, defendant ALONZO was able to gain the
trust and confidence of [petitioner] and her family;
2. 4.That due to these trust and confidence reposed upon defendant
ALONZO by [petitioner], there were occasions when defendant
ALONZO was entrusted with [petitioner’s] METROBANK Check
Book containing either signed or unsigned blank checks,
especially in those times when [petitioner] left for the United
States for medical check-up;
3. 5.Sometime during the second week of December 1999, or
thereabouts, defendant ALONZO by means of deceit and abuse
of confidence succeeded in procuring Promissory Notes
and signed blank checks from [petitioner] who was then
recuperating from illness;
4. 6.That as stated, aside from the said blank checks, defendant
ALONZO likewise succeeded in inducing[petitioner] to sign the
Promissory Notes antedated June 8, 1999 in the amount of
PESOS: ONE MILLION FOUR HUNDRED TWENTY EIGHT
 THOUSAND TWO HUNDRED SEVENTY TWO (Php defendants, FLORA CABRERA, NEMIA CASTRO, EDITH
1,428,272.00) payable to defendants EDITH CALILAP and CALILAP, DANILO CALILAP, GLORIA DOMINGUEZ,
DANILO CALILAP, and another Promissory Noted dated March CARMENCITA GONZALES and ANNILYN C. SABALE and took
1999 in the amount of PESOS: ONE MILLION (Php advantage of the signature of [petitioner] in said blank
1,000,000.00) payable to the same defendants EDITH CALILAP checks which were later on completed by them indicated opposite
and DANILO CALILAP, copies of said Promissory Notes are their respective names and the respective amount thereof, as
hereto attached as Annexes “A” and “A-1” hereof; follows:
5. 7.That another Promissory Note antedated October 1,1999 thru
the machination of defendant ALONZO, was signed by NAME AMOUNT METROBANK
[petitioner] in the amount of PESOS: THREE MILLION FORTY Check No.
SIX THOUSAND FOUR HUNDRED ONE (Php 3,046,401.00) Flora Cabrera Php 337,584.58 0111460
excluding interest, in favor of her co-defendants ESTELA Flora Cabrera 98,000.00 0111514
CAMACLANG, ALLAN CAMACLANG, LENIZA REYES, EDWIN Nemia Castro 100,000.00 0111542
REYES, JANE BACAREL and CHERRY CAMACLANG, a copy Nemia Castro 150,000.00 0084078
of said Promissory Note is hereto attached as Annex “B” hereof;
Edith Calilap/Danilo Calilap 490,000.00 0111513
6. 8.That the Promissory Notes and blank checks were procured thru
Edith Calilap/Danilo Calilap 790,272.00 0111512
fraud and deceit. The consent of the [petitioner] in the issuance
of the two (2) aforementioned Promissory Notes was Edith Calilap/Danilo Calilap 1,220,000.00 0111462
vitiated.Furthermore, the same were issued for Gloria Dominguez/ 1,046,040.00 0111543
Carmencita Gonzales
369
368
VOL. 478, DECEMBER 16, 2005 369
368 SUPREME COURT REPORTS ANNOTATED
Ilano vs. Español
Ilano vs. Español
Annilyn C. Sable 150,000.00 0085134
want of consideration, hence, the same should be cancelled, revoked
or declared null and void; Annilyn C. Sable 250,000.00 0085149
Annilyn C. Sable 186,000.00 0085112
Copy attached as Annexes “D,” “D-1,” “D-2,” “D-3,” “D-4,” “D-5,” “D
1. 9.That as clearly shown heretofore, defendant ALONZO in
collusion with her co-defendants, ESTELA CAMACLANG, ALLAN
CAMACLANG and ESTELITA LEGASPI likewise was able to 1. 6,” “D-7,” “D-8,” “D-9” and “D-10,” respectively; Furthermore,
induce plaintiff to sign several undated blank checks, among defendant ALONZO colluded and conspired with defendant
which are: NEMIA CASTO in procuring the signature of [petitioner] in
documents denominated as “Malayang Salaysay” dated July 22,
1999 in the amount of PESOS: ONE HUNDRED FIFTY
 ● Metrobank Check No. 0111544
THOUSAND (Php 150,000.00) andanother “Malayang Salaysay”
 ● Metrobank Check No. 0111545 dated November 22, 1999 in the amount of PESOS: ONE
 ● Metrobank Check No. 0111546 HUNDRED THOUSAND (Php 100,000.00) Annexes “D-11” and
 ● Metrobank Check No. 0111547 “D-12” hereof;
 ● Metrobank Check No. 0111515 2. 11.That said defendants took undue advantage of thesignature of
[petitioner] in the said blank checks and furthermore forged and
all in the total amount of Php 3,031,600.00, copies of said checks are or falsified the signature of [petitioner] in other unsigned
hereto attached as Annexes “C,” “C-1,” “C-2,” “C-3” and “C-4,” respectively; checksand as it was made to appear that said [petitioner] is under
the obligation to pay them several amounts of money, when in
1. 10.That aside from the checks mentioned heretofore, defendant truth and in fact, said [petitioner] does not owe any of said
ALONZO, confederated and conspired with the following co- defendant any single amount;
 3. 12.That the issuance of the aforementioned checks or Promissory
Notes or the aforementioned “Malayang Salaysay” to herein
defendants were tainted with fraud and deceit, and defendants
conspired with one another to defraud herein [petitioner] as the
aforementioned documents were issued for want of
consideration;
4. 13.That the aforesaid defendants conspiring and confederating
together and helping one another committed acts of falsification
and defraudation which they should be held accountable under
law;
5. 14.The foregoing acts, and transactions, perpetrated by herein
defendants in all bad faith and malice, with malevolence and
selfish intent are causing anxiety, tension, sleepless nights,
wounded feelings, and embarrassment to [petitioner] entitling her
to moral damages of at least in the amount of PESOS: FIVE
HUNDRED THOUSAND (Php 500,000.00);
370
370 SUPREME COURT REPORTS ANNOTATED
Ilano vs. Español
1. 15.That to avoid repetition of similar acts and as a correction for
the public good, the defendants should be held liable to
[petitioner] for exemplary damages in the sum of not less than the
amount of PESOS: TWO HUNDRED THOUSAND (Php
200,000.00);
2. 16.That to protect the rights and interest of the [petitioner] in the
illegal actuations of the defendants, she was forced to engage the
services of counsel for which she was obliged to pay the sum of
PESOS: ONE HUNDRED THOUSAND (Php 100,000.00) by way
of Attorney’s fees plus the amount of PESOS: THREE
THOUSAND (Php 3,000.00) per appearance in court;
x x x (Emphasis and italics supplied)
The named defendants-herein respondents filed their respective Answers
invoking, among other grounds for dismissal, lack of cause of action, for
while the checks subject of the complaint had been issued on account and
for value, some had been dishonored due to “ACCOUNT CLOSED”;
and the allegations in the complaint are bare and general.
By Order2 dated October 12, 2000, the trial court dismissed petitioner’s
complaint for failure “to allege the ultimate facts”—bases of petitioners
claim that her right was violated and that she suffered damages thereby.
On appeal to the Court of Appeals, petitioner contended that the trial
court:
1. A.. . . FAILED TO STATE CLEARLY AND DISTINCTLY THE
FACTS AND LAW ON WHICH THE APPEALED ORDER WAS
BASED, THEREBY RENDERING SAID ORDER NULL AND
VOID.
2. B.. . . ERRED IN HOLDING THAT THE COMPLAINT FAILED TO
ALLEGE ULTIMATE FACTS ON WHICH [PETITIONER] RELIES
ON HER CLAIM THEREBY DISMISSING THE CASE FOR LACK
OF CAUSE OF ACTION.
3. C.. . . ERRED IN GIVING DUE COURSE TO THE MOTION TO
DISMISS THAT CONTAINED A FAULTY NOTICE OF HEAR
_______________
2
Records at pp. 185-186.
371
VOL. 478, DECEMBER 16, 2005 371
Ilano vs. Español
ING AS THE SAME IS MERELY ADDRESSED TO THE BRANCH CLERK
OF COURT.3
In its Decision4 of March 21, 2003 affirming the dismissal order of the trial
court, the appellate court held that the elements of a cause of action are
absent in the case:
xxx
Such allegations in the complaint are only general averments of fraud,
deceit and bad faith. There were no allegations of factsshowing that the
acts complained of were done in the manner alleged. The complaint did
not clearly ascribe the extent of the liability of each of [respondents].
Neither did it state any right or cause of action on the part of [petitioner] to
show that she is indeed entitled to the relief prayed for. In the first place,
the record shows that subject checks which she sought to cancel or revoke
had already been dishonored and stamped “ACCOUNT CLOSED.” In fact,
there were already criminal charges for violation of Batas Pambansa
Blg. 22 filed against [petitioner] previous to the filing of the civil case for
revocation/cancellation. Such being the case, there was actually nothing
more to cancel or revoke. The subject checks could no longer be
negotiated. Thus, [petitioner’s] allegation that the [respondents] were
secretly negotiating with third persons for their delivery and/or assignment,
is untenable.
In the second place, we find nothing on the face of the complaint to
show that [petitioner] denied the genuineness or authenticity of her
signature on the subject promissory notes and the allegedly signed blank
checks. She merely alleged abuse of trust and confidence on the part of
[Alonzo]. Even assuming arguendo that such allegations were true, then
[petitioner] cannot be held totally blameless for her predicament as it was

by her own negligence that subject instruments/signed blank checks fell
into the hands of third persons. Contrary to [petitioner’s] allegations, the
promissory notes show that some of the [respondents] were actually
creditors of [petitioner] and who were issued the subject checks as
securities for the loan/obligation incurred. Having taken the instrument in
good faith and for
_______________
3
Court of Appeals Rollo at p. 19.
4
Rollo at pp. 52-59.
372
372 SUPREME COURT REPORTS ANNOTATED
Ilano vs. Español
value, the [respondents] are therefore considered holders thereof in due
course and entitled to payment.
x x x (Italics supplied)
Hence, the present petition for review on certiorari, petitioner faulting the
appellate court:
1. 1.. . . in sustaining the dismissal of the complaint upon the ground
of failure to state a cause of action when there are other several
causes of action which ventilate such causes of action in the
complaint;
2. 2.. . . in finding that a requirement that a Decision which should
express therein clearly and distinctly the facts and the law on
which it is based does not include cases which had not reached
pretrial or trial stage;
3. 3.. . . in not finding that a notice of hearing which was addressed
to the Clerk of Court is totally defective and that subsequent
action of the court did not cure the flaw.5
In issue then is whether petitioner’s complaint failed to state a cause of
action.
A cause of action has three elements: (1) the legal right of the plaintiff,
(2) the correlative obligation of the defendant, and (3) the act or omission
of the defendant in violation of said legal right. In determining the presence
of these elements, inquiry is confined to the four corners of the
complaint6 including its annexes, they being parts thereof.7 If these
elements are absent, the complaint becomes vulnerable to a motion to
dismiss on the ground of failure to state a cause of action.8
_______________
5
Id., at pp. 32-33.
6 Dabuco v. Court of Appeals, 322 SCRA 853, 863 (2000).
7
Sea-Land Service, Inc. v. Court of Appeals, 327 SCRA 135, 139-140
(2000); Fil-Estate Golf and Development, Inc. v. Court of Appeals, 265
SCRA 614, 637 (1996).
8
Bank of America NT & SA v. Court of Appeals, 400 SCRA 156, 167
(2003).
373
VOL. 478, DECEMBER 16, 2005 373
Ilano vs. Español
As reflected in the above-quoted allegations in petitioner’s complaint,
petitioner is seeking twin reliefs, one for revocation/cancellation of
promissory notes and checks, and the other for damages.
Thus, petitioner alleged, among other things, that respondents, through
“deceit,” “abuse of confidence” “machination,” “fraud,” “falsification,”
“forgery,” “defraudation,” and “bad faith,” and “with malice, malevolence
and selfish intent,” succeeded in inducing her to sign antedated promissory
notes and some blank checks, and “[by taking] undue advantage” of her
signature on some other blank checks, succeeded in procuring them, even
if there was no consideration for all of these instruments on account of
which she suffered “anxiety, tension, sleepless nights, wounded feelings
and embarrassment.”
While some of the allegations may lack particulars, and are in the form
of conclusions of law, the elements of a cause of action are present. For
even if some are not stated with particularity, petitioner alleged 1) her legal
right not to be bound by the instruments which were bereft of consideration
and to which her consent was vitiated; 2) the correlative obligation on the
part of the defendants-respondents to respect said right; and 3) the act of
the defendants-respondents in procuring her signature on the instruments
through “deceit,” “abuse of confidence” machination,” “fraud,”
“falsification,” “forgery,” “defraudation,” and “bad faith,” and “with malice,
malevolence and selfish intent.”
Where the allegations of a complaint are vague, indefinite, or in the form
of conclusions, its dismissal is not proper for the defendant may ask for
more particulars.9
With respect to the checks subject of the complaint, it is gathered that,
except for Check No. 0084078,10 they were
_______________
9
Tantuico, Jr. v. Republic, 204 SCRA 428, 437-438 (1991). Vide Virata
v. Sandiganbayan, 272 SCRA 661, 675-676 (1997).
10 Id., at p. 16.
374
374 SUPREME COURT REPORTS ANNOTATED
Ilano vs. Español
drawn all against petitioner’s Metrobank Account No. 00703955536-7.
Annex “D-8”11 of the complaint, a photocopy of Check No. 0085134,
shows that it was dishonored on January 12, 2000 due to “ACCOUNT
CLOSED.” When petitioner then filed her complaint on March 28, 2000, all
the checks subject hereof which were drawn against the same closed
account were already rendered valueless or non-negotiable, hence,
petitioner had, with respect to them, no cause of action.
With respect to above-said Check No. 0084078, however, which was
drawn against another account of petitioner, albeit the date of issue bears
only the year—1999, its validity and negotiable character at the time the
complaint was filed on March 28, 2000 was not affected. For Section 6 of
the Negotiable Instruments Law provides:
Section 6. Omission; seal; particular money.—The validity and negotiable
character of an instrument are not affected by the fact that—
1. (a)It is not dated; or
2. (b)Does not specify the value given, or that any value had been
given therefor; or
3. (c)Does not specify the place where it is drawn or the place where
it is payable; or
4. (d)Bears a seal; or
5. (e)Designates a particular kind of current money in which payment
is to be made.
x x x (Emphasis supplied)
However, even if the holder of Check No. 0084078 would have filled up
the month and day of issue thereon to be “December” and “31,”
respectively, it would have, as it did, be-
_______________
11
Records at p. 18.
375
VOL. 478, DECEMBER 16, 2005 375
Ilano vs. Español
come stale six (6) months or 180 days thereafter, following current banking
practice.12
It is, however, with respect to the questioned promissory notes that the
present petition assumes merit. For, petitioner’s allegations in the
complaint relative thereto, even if lacking particularity, does not as priorly
stated call for the dismissal of the complaint.
WHEREFORE, the petition is PARTLY GRANTED.
The March 21, 2003 decision of the appellate court affirming the
October 12, 2000 Order of the trial court, Branch 20 of the RTC of Imus,
Cavite, is AFFIRMED with MODIFICATION in light of the foregoing
discussions.
The trial court is DIRECTED to REINSTATE Civil Case No. 2079-00 to
its docket and take further proceedings thereon only insofar as the
complaint seeks the revocation/cancellation of the subject promissory
notes and damages.
Let the records of the case be then REMANDED to the trial court.
SO ORDERED.
Panganiban (Chairman), Sandoval-
Gutierrez, Corona and Garcia, JJ., concur.
Petition partly granted, judgment affirmed with modification.
Notes.—A motion for bill of particulars may not call for matters which
should form part of the proof of the complaint upon trial. (Salita vs.
Magtolis, 233 SCRA 100[1994])
As long as the complaint contains these three elements—(1) a right in
favor of the plaintiff by whatever means and under whatever law it arises
or is created; (2) an obligation on the part of the named defendant to
respect or not to violate
_______________
12
Wong v. Court of Appeals, 351 SCRA 100, 111 (2001); Pacheco v.
Court of Appeals, 319 SCRA 595, 605 (1999).
376
376 SUPREME COURT REPORTS ANNOTATED
Maxi Security and Detective Agency vs. National Labor Relations
Commission
such right; (3) an act or omission on the part of such defendant violative of
the right of the plaintiff or constituting a breach of the obligation of the
defendant to the plaintiff for which the latter may maintain an action for
recovery of damages—a cause of action exists even though the allegations
therein are vague. (Virata vs. Sandiganbayan, 272 SCRA 661 [1997])
The issue of a defective Information, on the ground that it does not
conform substantially to the prescribed form, should be raised in a motion
to quash or a motion for a bill of particulars, and if an accused fails to take
this seasonable step he will be deemed to have waived the defect in the
said information. (People vs. Razonable, 330 SCRA 562 [2000])
——o0o——
466 SUPREME COURT REPORTS ANNOTATED
Sesbreño vs. Court of Appeals
G.R. No. 89252. May 24, 1993.*
RAUL SESBREÑO, petitioner, vs. HON. COURT OF APPEALS, DELTA
MOTORS CORPORATION and PILIPINAS BANK, respondents.
Commercial Law; Non-negotiable Promissory Notes; An instrument
though marked non-negotiable, may nevertheless be assigned or
transferred.—A non-negotiable instrument may, obviously, not be
negotiated; but it may be assigned or transferred, absent an express
prohibition against assignment or transfer written in the face of the
instrument: “The words ‘not negotiable,’ stamped on the face of the bill of
lading, did not destroy its assignability, but the sole effect was to exempt
the bill from the statutory provisions relative thereto, and a bill, though not
negotiable, may be transferred by assignment; the assignee taking subject
to the equities between the original parties.” DMC PN No. 2731, while
marked “non-negotiable,” was not at the same time stamped “non-
transferrable” or “non-assignable.” It contained no stipulation which
prohibited Philfinance from assigning or transferring, in whole or in part,
that Note.
Same; Assignment of Credit; Debtor’s consent not needed to
effectuate assignment.—Apropos Delta’s complaint that the partial
assignment by Philfinance of DMC PN No. 2731 had been effected without
the consent of Delta, we note that such consent was not necessary for the
validity and enforceability of the assignment in favor of petitioner. Delta’s
argument that Philfinance’s sale or assignment of part of its rights to DMC
PN No. 2731 constituted conventional subrogation, which required its
(Delta’s) consent, is quite mistaken.
Same; Same; Agreement prohibiting transfer cannot be invoked
against assignee who, without notice parted with valuable consideration in
good faith.—We find nothing in his “Letter of Agreement” which can be
reasonably construed as a prohibition upon Philfinance assigning or
transferring all or part of DMC PN No. 2731, before the maturity thereof. It
is scarcely necessary to add that, even had this “Letter of Agreement” set
forth an explicit prohibition of transfer upon Philfinance, such a prohibition
cannot be invoked against an assignee or transferee of the Note who
parted with valuable consideration in good faith and without notice of such
prohibition. It is not disputed that
_______________
*
THIRD DIVISION.
467
VOL. 222, MAY 24, 1993 467
Sesbreño vs. Court of Appeals
petitioner was such an assignee or transferee.
Same; Corporations; Grounds for piercing the veil of corporate
fiction.—Secondly, it is not disputed that Philfinance and private
respondents Delta and Pilipinas have been organized as separate
corporate entities. Petitioner asks us to pierce their separate corporate
entities, but has been able only to cite the presence of a common
Director—Mr. Ricardo Silverio, Sr., sitting on the Boards of Directors of all
three (3) companies. Petitioner has neither alleged nor proved that one or
another of the three (3) concededly related companies used the other two
(2) as mere alter egos or that the corporate affairs of the other two (2) were
administered and managed for the benefit of one. There is simply not
enough evidence of record to justify disregarding the separate corporate
personalities of Delta and Pilipinas and to hold them liable for any assumed
or undetermined liability of Philfinance to petitioner.
Same; Civil Law; For the protection of investors, depositary or
custodianship agreements made an integral part of money market
transactions.—We believe and so hold that a contract of deposit was
constituted by the act of Philfinance in designating Pilipinas as custodian
or depositary bank. The depositor was initially Philfinance; the obligation
of the depositary was owed, however, to petitioner Sesbreño as beneficiary
of the custodianship or depositary agreement. We do not consider that this
is a simple case of a stipulation pour autri. The custodianship or depositary
agreement was established as an integral part of the money market
transaction entered into by petitioner with Philfinance. Petitioner bought a
portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited
that Note with Pilipinas in order that the thing sold would be placed outside
the control of the vendor.
Same; Same; Extinguishment of Obligation; Compensation may
defeat assignee’s rights before notice of the assignment is given to the
debtor.—In other words, petitioner notified Delta of his rights as assignee
after compensation had taken place by operation of law because the
offsetting instruments had both reached maturity. It is a firmly settled
doctrine that the rights of an assignee are not any greater than the rights
of the assignor, since the assignee is merely substituted in the place of the
assignor and that the assignee acquires his rights subject to the equities—
i.e., the defenses—which the debtor could have set up against the original
assignor before notice of the assignment was given to the debtor. At the
time that Delta was first put to notice of the assignment in petitioner’s favor
on 14 July 1981, DMC PN No. 2731 had already been discharged by
compensation. Since the assignor
468
468 SUPREME COURT REPORTS ANNOTATED
Sesbreño vs. Court of Appeals
 Philfinance could not have then compelled payment anew by Delta of 2. (c)post-dated checks payable on 13 March 1981 (i.e., the maturity
DMC PN No. 2731, petitioner, as assignee of Philfmance, is similarly date of petitioner’s investment), with petitioner as payee,
disabled from collecting from Delta the portion of the Note assigned to him. Philfinance as drawer, and Insular Bank of Asia and America as
Same; Same; Solidary Liability.—The solidary liability that petitioner drawee, in the total amount of P304,533.33.
seeks to impute to Pilipinas cannot, however, be lightly inferred. Under
Article 1207 of the Civil Code, “there is a solidary liability only when the On 13 March 1981, petitioner sought to encash the postdated checks
obligation expressly so states, or when the law or the nature of the issued by Philfinance. However, the checks were dishonored for having
obligation requires solidarity.” The record here exhibits no express been drawn against insufficient funds.
assumption of solidary liability vis-a-vis petitioner, on the part of Pilipinas. On 26 March 1981, Philfinance delivered to petitioner the DCR No.
Petitioner has not pointed us to any law which imposed such liability upon 10805 issued by private respondent Pilipinas Bank (“Pilipinas”). It read as
Pilipinas nor has petitioner argued that the very nature of the custodianship follows:
assumed by private respondent Pilipinas necessarily implies solidary
liability under the securities, custody of which was taken by Pilipinas. “PILIPINAS BANK
Accordingly, we are unable to hold Pilipinas solidarity liable with Makati Stock Exchange Bldg.,
Philfinance and private respondent Delta under DMC PN No. 2731. Ayala Avenue, Makati,
Metro Manila
PETITION for review on certiorari of the decision of the Court of Appeals.
February 9, 1991
The facts are stated in the opinion of the Court. VALUE DATE
Salva, Villanueva & Associates for Delta Motors Corporation.
Reyes, Salazar & Associates for Pilipinas Bank. TO Raul Sesbreño

FELICIANO, J.: April 6, 1981

MATURITY DATE
On 9 February 1981, petitioner Raul Sesbreño made a money market
placement in the amount of P300,000.00 with the Philippine Underwriters NO. 10805
Finance Corporation (“Philfinance”), Cebu Branch; the placement, with a
term of thirty-two (32) days, would mature on 13 March 1981. Philfinance, DENOMINATED CUSTODIAN RECEIPT
also on 9 February 1981, issued the following documents to petitioner:
‘This confirms that as a duly Custodian Bank, and upon instruction of
1. (a)the Certificate of Confirmation of Sale, “without recourse,” No. PHILIPPINE UNDERWRITERS FINANCE CORPORATION, we have in
20496 of one (1) Delta Motors Corporation Promissory Note our custody the following securities to you [sic] the extent herein indicated.
(“DMC PN”) No. 2731 for a term of 32 days at 17.0% per annum; SERIAL MAT. FACE ISSUED REGISTERED AMOUNT
2. (b)the Certificate of Securities Delivery Receipt No. 16587 NUMBER DATE VALUE BY HOLDER PAYEE
indicating the sale of DMC PN No. 2731 to petitioner, with the 2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33
notation that the said security was in custodianship of Pilipinas UNDERWRITERS
Bank, as per FINANCE CORP.
470
469 470 SUPREME COURT REPORTS ANNOTATED
VOL. 222, MAY 24, 1993 469 Sesbreño vs. Court of Appeals
Sesbreño vs. Court of Appeals We further certify that these securities may be inspected by you or your
duly authorized representative at any time during regular banking hours.
1. Denominated Custodian Receipt (“DCR”) No. 10805 dated 9 Upon your written instructions we shall undertake physical delivery of
February 1981; and the above securities fully assigned to you should this Denominated
Custodianship Receipt remain outstanding in your favor thirty (30) days
after its maturity.’
PILIPINAS BANK
(By Elizabeth De Villa
Illegible Signature)”1
On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private
respondent Pilipinas, Makati Branch, and handed to her a demand letter
informing the bank that his placement with Philfinance in the amount
reflected in the DCR No. 10805 had remained unpaid and outstanding, and
that he in effect was asking for the physical delivery of the underlying
promissory note. Petitioner then examined the original of the DMC PN No.
2731 and found: that the security had been issued on 10 April 1980; that it
would mature on 6 April 1981; that it had a face value of P2,300,833.33,
with Philfinance as “payee” and private respondent Delta Motors
Corporation (“Delta”) as “maker;” and that on face of the promissory note
was stamped “NON-NEGOTIABLE.” Pilipinas did not deliver the Note, nor
any certificate of participation in respect thereof, to petitioner.
Petitioner later made similar demand letters, dated 3 July 1981 and 3
August 1981,2 again asking private respondent Pilipinas for physical
delivery of the original of DMC PN No. 2731. Pilipinas allegedly referred all
of petitioner’s demand letters to Philfinance for written instructions, as had
been supposedly agreed upon in a “Securities Custodianship Agreement”
between Pilipinas and Philfinance. Philfinance never did provide the
appropriate instructions; Pilipinas never released DMC PN No. 2731, nor
any other instrument in respect thereof, to petitioner.
______________
1
Exhibit “C”, Folder of Exhibits, p. 3; TSN, 14 June 1983, p. 41.
2
Records, p. 441; Plaintiff’s Memorandum, p. 3.
471
VOL. 222, MAY 24, 1993 471
Sesbreño vs. Court of Appeals
Petitioner also made a written demand on 14 July 19813upon private
respondent Delta for the partial satisfaction of DMC PN No. 2731,
explaining that Philfinance, as payee thereof, had assigned to him said
Note to the extent of P307,933.33. Delta, however, denied any liability to
petitioner on the promissory note, and explained in turn that it had
previously agreed with Philfinance to offset its DMC PN No. 2731 (along
with DMC PN No. 2730) against Philfinance PN No. 143-A issued in favor
of Delta.
In the meantime, Philfinance, on 18 June 1981, was placed under the
joint management of the Securities and Exchange Commission (“SEC”)
and the Central Bank. Pilipinas delivered to the SEC DMC PN No. 2731,
which to date apparently remains in the custody of the SEC.4
As petitioner had failed to collect his investment and interest thereon,
he filed on 28 September 1982 an action for damages with the Regional
Trial Court (“RTC”) of Cebu City, Branch 21, against private respondents
Delta and Pilipinas.5 The trial court, in a decision dated 5 August 1987,
dismissed the complaint and counterclaims for lack of merit and for lack of
cause of action, with costs against petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV
No. 15195. In a decision dated 21 March 1989, the Court of Appeals denied
the appeal and held: 6
“Be that as it may, from the evidence on record, if there is anyone that
appears liable for the travails of plaintiff-appellant, it is Philfinance. As
correctly observed by the trial court:
‘This act of Philfinance in accepting the investment of plaintiff and charging
it against DMC P.N. No. 2731 when its entire face value was already
obligated or earmarked for set-off or compensation is difficult to
comprehend and may have been
_______________
3
Id., p. 451; Plaintiff’s Memorandum, p. 13.
4
TSN, 14 June 1983, p. 35.
5
Petitioner explained that he did not implead Philfinance as party
defendant because the latter was under rehabilitation by the Securities and
Exchange Commission (TSN of the Pre-trial Conference, pp. 6 and 30,
dated 04 March 1983).
6 Court of Appeals’ Decision, p. 8; Rollo, p. 90.
472
472 SUPREME COURT REPORTS ANNOTATED
Sesbreño vs. Court of Appeals
motivated with bad faith. Philfinance, therefore, is solely and legally
obligated to return the investment of plaintiff, together with its earnings,
and to answer all the damages plaintiff has suffered incident thereto.
Unfortunately for plaintiff, Philfinance was not impleaded as one of the
defendants in this case at bar; hence, this Court is without jurisdiction to
pronounce judgment against it. (p. 11, Decision).’
WHEREFORE, finding no reversible error in the decision appealed
from, the same is hereby affirmed in toto. Cost against plaintiff-appellant.”
Petitioner moved for reconsideration of the above Decision, without
success.
Hence, this Petition for Review on Certiorari.
 After consideration of the allegations contained and issues raised in the
Pleadings, the Court resolved to give due course to the petition and
required the parties to file their respective memoranda.7
Petitioner reiterates the assignment of errors he directed at the trial
court decision, and contends that respondent Court of Appeals gravely
erred: (i) in concluding that he cannot recover from private respondent
Delta his assigned portion of DMC PN No. 2731; (ii) in failing to hold private
respondent Pilipinas solidarity liable on the DMC PN No. 2731 in view of
the provisions stipulated in DCR No. 10805 issued in favor of petitioner;
and (iii) in refusing to pierce the veil of corporate entity between
Philfinance, and private respondents Delta and Pilipinas, considering that
the three (3) entities belong to the “Silverio Group of Companies” under the
leadership of Mr. Ricardo Silverio, Sr.8
There are at least two (2) sets of relationships which we need to
address: firstly, the relationship of petitioner vis-a-vis Delta; secondly, the
relationship of petitioner in respect of Pilipinas. Actually, of course, there is
a third relationship that is of critical importance: the relationship of
petitioner and Philfinance. However, since Philfinance has not been
impleaded in this case, neither the trial court nor the Court of Appeals
acquired jurisdic-
_______________
7
Private respondent Delta adopted as its own the Memorandum filed
by private respondent Pilipinas (Rollo, pp. 269-73).
8 Rollo, p. 6.; Petition, p. 5.
473
VOL. 222, MAY 24, 1993 473
Sesbreño vs. Court of Appeals
tion over the person of Philfinance. It is, consequently, not necessary for
present purposes to deal with this third relationship, except to the extent it
necessarily impinges upon or intersects the first and second relationships.
I
We consider first the relationship between petitioner and Delta.
The Court of Appeals in effect held that petitioner acquired no rights
vis-a-vis Delta in respect of the Delta promissory note (DMC PN No. 2731)
which Philfinance sold “without recourse” to petitioner, to the extent of
P304,533.33. The Court of Appeals said on this point:
“Nor could plaintiff-appellant have acquired any right over DMC P.N. No.
2731 as the same is ‘non-negotiable’ as stamped on its face (Exhibit ‘6’),
negotiation being defined as the transfer of an instrument from one person
to another so as to constitute the transferee the holder of the instrument
(Sec. 30, Negotiable Instruments Law). A person not a holder cannot sue
on the instrument in his own name and cannot demand or receive payment
(Section 51, id.).”9
Petitioner admits that DMC PN No. 2731 was non-negotiable but contends
that that Note had been validly transferred, in part, to him by assignment
and that as a result of such transfer, Delta as debtor-maker of the Note,
was obligated to pay petitioner the portion of that Note assigned to him by
the payee Philfinance.
Delta, however, disputes petitioner’s contention and argues:
1. (1)that DMC PN No. 2731 was not intended to be negotiated or
otherwise transferred by Philfinance as manifested by the word
“non-negotiable” stamp across the face of the Note10 and
because maker Delta and payee Philfinance intended that this
Note would be offset against the outstanding obligation of
Philfinance represented by Philfinance PN No. 143-A issued to
Delta as payee;
2. (2)that the assignment of DMC PN No. 2731 by Philfinance was
without Delta’s consent, if not against its instructions; and
_______________
9
Id., p. 88.
10TSN, 17 August 1983, p. 36.
474
474 SUPREME COURT REPORTS ANNOTATED
Sesbreño vs. Court of Appeals
1. (3)assuming (arguendo only) that the partial assignment in favor of
petitioner was valid, petitioner took that Note subject to the
defenses available to Delta, in particular, the offsetting of DMC
PN No. 2731 against Philfmance PN No. 143-A.11
We consider Delta’s arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of a negotiable
instrument must be distinguished from the assignment or transfer of an
instrument whether that be negotiable or non-negotiable. Only an
instrument qualifying as a negotiable instrument under the relevant statute
may be negotiated either by indorsement thereof coupled with delivery, or
by delivery alone where the negotiable instrument is in bearer form. A
negotiable instrument may, however, instead of being negotiated, also
be assigned or transferred. The legal consequences of negotiation as
distinguished from assignment of a negotiable instrument are, of course,
different. A non-negotiable instrument may, obviously, not be negotiated;
but it may be assigned or transferred, absent an express prohibition
against assignment or transfer written in the face of the instrument:
“The words ‘not negotiable,’ stamped on the face of the bill of lading, did
not destroy its assignability, but the sole effect was to exempt the bill from
the statutory provisions relative thereto, and a bill, though not negotiable,
may be transferred by assignment;the assignee taking subject to the
equities between the original parties.”12 (Italics added)
DMC PN No. 2731, while marked “non-negotiable,” was notat the same
time stamped “non-transferrable” or “non-assignable.” It contained no
stipulation which prohibited Philfinance from assigning or transferring, in
whole or in part, that Note.
Delta adduced the “Letter of Agreement” which it had entered into with
Philfinance and which should be quoted in full:
part of DMC PN No. 2731, before the maturity thereof. It is scarcely
necessary to add that, even had this “Letter of Agreement” set forth an
explicit prohibition of transfer upon Philfinance, such a prohibition cannot
be invoked against an assignee or transferee of the Note who parted with
valuable consideration in good faith and without notice of such prohibition.
It is not disputed that petitioner was such an assignee or transferee. Our
conclusion on this point is reinforced by the fact that what Philfinance and
Delta were doing by their exchange of promissory notes was this: Delta
invested, by making a money market placement with Philfinance,
approximately P4,600,000.00 on 10 April 1980; but promptly, on the same
day,
______________

_______________ 13 Exhibit “3,” Records, p. 240.

476
11
Records, pp. 36-37. 476 SUPREME COURT REPORTS ANNOTATED
12
National Bank of Bristol v. Baltimore & O.R. Co., 59 A. 134, 138. See Sesbreño vs. Court of Appeals
also, in this connection, Consolidated Plywood v. IFC Leasing, 149 SCRA borrowed back the bulk of that placement, i.e., P4,000,000.00, by issuing
449 (1987). its two (2) promissory notes: DMC PN No. 2730 and DMC PN No. 2731,
475 both also dated 10 April 1980. Thus, Philfinance was left with not
VOL. 222, MAY 24, 1993 475 P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta
Sesbreño vs. Court of Appeals promissory notes.
“April 10, 1980 Apropos Delta’s complaint that the partial assignment by Philfinance of
Philippine Underwriters Finance Corp. DMC PN No. 2731 had been effected without the consent of Delta, we note
Benavidez St., Makati that such consent was not necessary for the validity and enforceability of
Metro Manila the assignment in favor of petitioner.14 Delta’s argument that Philfinance’s
Attention: Mr. Alfredo O. Banaria sale or assignment of part of its rights to DMC PN No. 2731 constituted
SVP-Treasurer conventional subrogation, which required its (Delta’s) consent, is quite
GENTLEMEN: mistaken. Conventional subrogation, which in the first place is never lightly
This refers to our outstanding placement of P4,601,666.67 as inferred,15 must be clearly established by the unequivocal terms of the
evidenced by your Promissory Note No. 143-A, dated April 10, 1980, to subtituting obligation or by the evident incompatibility of the new and old
mature on April 6, 1981. obligations on every point.16 Nothing of the sort is present in the instant
As agreed upon, we enclose our non-negotiable Promissory Note No. case.
2730 and 2731 for P2,000,000.00 each, dated April 10, 1980, to be It is in fact difficult to be impressed with Delta’s complaint, since it
offsetted [sic] against your PN No. 143-A upon co-terminal maturity. released its DMC PN No. 2731 to Philfinance, an entity engaged in the
Please deliver the proceeds of our PNs to our representative, Mr. Eric business of buying and selling debt instruments and other securities, and
Castillo. more generally, in money market transactions. In Perez v. Court of
Very Truly Yours, Appeals,17 the Court, speaking through Mme. Justice Herrera, made the
(Sgd.) following important statement:
Florencio B. Biagan “There is another aspect to this case. What is involved here is a money
Senior Vice President”13 market transaction. As defined by Lawrence Smith ‘the money market is a
We find nothing in his “Letter of Agreement” which can be reasonably market dealing in standardized short-term credit instruments (involving
construed as a prohibition upon Philfinance assigning or transferring all or large amounts) where lenders and borrowers do not deal directly with each
other but through a middle man or dealer in the open market.’ It involves
‘commercial papers’ which are instruments ‘evidencing indebtedness of
any person or entity . . . ., which are issued, endorsed, sold or transferred
or in any manner conveyed to another person or entity, with or without
recourse.’ The fundamental
_______________
14
National Investment and Development Corporation v. De los
Angeles, 40 SCRA 487 (1971); Bastida v. Dy Buncio & Co., 93 Phil.
195 (1953). See also Articles 1285 and 1626, Civil Code.
15
Article 1300, Civil Code.
16
Article 1292, id.
17 127 SCRA 636 (1984).
f 478
477
VOL. 222, MAY 24, 1993 477
Sesbreño vs. Court of Appeals
function of the money market device in its operation is to match and bring
together in a most impersonal manner both the ‘fund users’ and the ‘fund
suppliers.’ The money market is an ‘impersonal market’, free from personal
considerations.’ The market mechanism is intended to provide quick
mobility of money and securities.’
The impersonal character of the money market device overlooks the
individuals or entities concerned. The issuer of a commercial paper in the
money market necessarily knows in advance that it would be expeditiously
transacted and transferred to any investor/lender without need of notice to
said issuer. In practice, no notification is given to the borrower or issuer of
commercial paper of the sale or transfer to the investor.
xxx xxx xxx
There is no need to individuate a money market transaction, a relatively
novel institution in the Philippine commercial scene. It has been intended
to facilitate the flow and acquisition of capital on an impersonal basis. And
as specifically required by Presidential Decree No. 678, the investing
public must be given adequate and effective protection in availing of the
credit of a borrower in the commercial paper market.”18 (Citations omitted;
italics supplied)
We turn to Delta’s arguments concerning alleged compensation or
offsetting between DMC PN No. 2731 and Philfinance PN No. 143-A. It is
important to note that at the time Philfinance sold part of its rights under
DMC PN No. 2731 to petitioner on 9 February 1981, no compensation had
as yet taken place and indeed none could have taken place. The essential
requirements of compensation are listed in the Civil Code as follows:
“Art. 1279. In order that compensation may be proper, it is necessary:
1. (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. (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. (3)That the two debts are due;
4. (4)That they be liquidated and demandable;
5. (5)That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to
the debtor.” (Italics supplied)
_______________
18
127 SCRA at 645-646.
478 SUPREME COURT REPORTS ANNOTATED
Sesbreño vs. Court of Appeals
On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No.
143-A was due. This was explicitly recognized by Delta in its 10 April 1980
“Letter of Agreement” with Philfinance, where Delta acknowledged that the
relevant promissory notes were “to be offsetted (sic) against [Philfinance]
PN No. 143-A upon coterminal maturity.”
As noted, the assignment to petitioner was made on 9 February 1981
or from forty-nine (49) days before the “co-terminal maturity” date, that is
to say, before any compensation had taken place. Further, the assignment
to petitioner would have prevented compensation from taking place
between Philfinance and Delta, to the extent of P304,533.33, because
upon execution of the assignment in favor of petitioner, Philfinance and
Delta would have ceased to be creditors and debtors of each other in their
own right to the extent of the amount assigned by Philfinance to petitioner.
Thus, we conclude that the assignment effected by Philfinance in favor of
petitioner was a valid one and that petitioner accordingly became owner of
DMC PN No. 2731 to the extent of the portion thereof assigned to him.
The record shows, however, that petitioner notified Delta of the fact of
the assignment to him only on 14 July 1981,19 that is, after the maturity not
only of the money market placement made by petitioner but also of both
DMC PN No. 2731 and Philfinance PN No. 143-A. In other
words, petitioner notified Delta of his rights as assignee after
compensation had taken place by operation of law because the offsetting
instruments had both reached maturity. It is a firmly settled doctrine that
the rights of an assignee are not any greater than the rights of the assignor,
since the assignee is merely substituted in the place of the assignor20 and
that the assignee acquires his rights subject to the equities—i.e., the
defenses—which the debtor could have set up

_______________
19
Records, p. 451; Plaintiff’s Memorandum, p. 13.
20
Gonzales v. Land Bank of the Philippines, 183 SCRA
520 (1990); Philippine National Bank v. General Acceptance and Finance
Corp., 161 SCRA 449 (1988); National Investment and Development
Corporation v. De los Angeles, 40 SCRA 489 (1971); Montinola v.
Philippine National Bank, 88 Phil. 178 (1951); National Exchange
Company, Ltd. v. Ramos, 51 Phil. 310 (1927); Sison v. Yap-Tico, 37 Phil.
584 (1918).
479
VOL. 222, MAY 24, 1993 479
Sesbreño vs. Court of Appeals
against the original assignor before notice of the assignment was given to
the debtor. Article 1285 of the Civil Code provides that:
“ART. 1285. The debtor who has consented to the assignment of rights
made by a creditor in favor of a third person, cannot set up against the
assignee the compensation which would pertain to him against the
assignor, unless the assignor was notified by the debtor at the time he gave
his consent, that he reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not
consent thereto, the latter may set up the compensation of debts previous
to the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may
set up the compensation of all credits prior to the same and also later ones
until he had knowledge of the assignment.” (Italics supplied)
Article 1626 of the same Code states that: “the debtor who, before having
knowledge of the assignment, pays his creditor shall be released from the
obligation.” In Sison v. Yap-Tico,21 the Court explained that:
“[n]o man is bound to remain a debtor: he may pay to him with whom he
contracted to pay; and if he pay before notice that his debt has been
assigned, the law holds him exonerated, for the reason that it is the duty of
the person who has acquired a title by transfer to demand payment of the
debt, to give his debtor notice.”22
At the time that Delta was first put to notice of the assignment in petitioner’s
favor on 14 July 1981, DMC PN No. 2731 had already been discharged by
compensation. Since the assignor Philfinance could not have then
compelled payment anew by Delta of DMC PN No. 2731, petitioner, as
assignee of Philfinance, is similarly disabled from collecting from Delta the
portion of the Note assigned to him.
It bears some emphasis that petitioner could have notified Delta of the
assignment in his favor as soon as that assignment
_______________
21
37 Phil. 584 (1918).
22 37 Phil. at 589. See also Rodriguez v. Court of Appeals, 207 SCRA
553, 559 (1992). See, generally, Philippine National Bank v. General
Acceptance and Finance Corp., 161 SCRA 449, 457 (1988).
480
480 SUPREME COURT REPORTS ANNOTATED
Sesbreño vs. Court of Appeals
or sale was effected on 9 February 1981. He could have also notified Delta
as soon as his money market placement matured on 13 March 1981
without payment thereof being made by Philfinance; at that time,
compensation had yet to set in and discharge DMC PN No. 2731. Again,
petitioner could have notified Delta on 26 March 1981 when petitioner
received from Philfinance the Denominated Custodianship Receipt
(“DCR”) No. 10805 issued by private respondent Pilipinas in favor of
petitioner. Petitioner could, in fine, have notified Delta at any time before
the maturity date of DMC PN No. 2731. Because petitioner failed to do so,
and because the record is bare of any indication that Philfinance had itself
notified Delta of the assignment to petitioner, the Court is compelled to
uphold the defense of compensation raised by private respondent Delta.
Of course, Philfinance remains liable to petitioner under the terms of the
assignment made by Philfinance to petitioner.
II
We turn now to the relationship between petitioner and private respondent
Pilipinas. Petitioner contends that Pilipinas became solidarily liable with
Philfinance and Delta when Pilipinas issued DCR No. 10805 with the
following words:
“Upon your written instructions, we [Pilipinas] shall undertakephysical
delivery of the above securities fully assigned to you—.”23
The Court is not persuaded. We find nothing in the DCR that establishes
an obligation on the part of Pilipinas to pay petitioner the amount of
P307,933.33 nor any assumption of liability in solidum with Philfinance and
Delta under DMC PN No. 2731. We read the DCR as a confirmation on the
part of Pilipinas that:
1. (1)it has in its custody, as duly constituted custodian bank, DMC
PN No. 2731 of a certain face value, to mature on 6 April 1981
and payable to the order of Philfinance;
2. (2)Pilipinas was, from and after said date of the assignment by
Philfinance to petitioner (9 February) 1981), holding that Note on
_______________
23
Petitioner’s Memorandum, p. 12; Rollo, p. 221.
481
 VOL. 222, MAY 24, 1993 481
Sesbreño vs. Court of Appeals
1. behalf and for the benefit of petitioner, at least to the extent it had
been assigned to petitioner by payee Philfinance;24
2. (3)petitioner may inspect the Note either “personally or by
authorized representative; at any time during regular bank hours;
and
3. (4)upon written instructions of petitioner, Pilipinas would physically
deliver the DMC PN No. 2731 (or a participation therein to the
extent of P307,933.33)“should this Denominated Custodianship
Receipt remain outstanding in [petitioner’s] favor thirty (30) days
after its maturity.”
Thus, we find nothing written in printers ink on the DCR which could
reasonably be read as converting Pilipinas into an obligor under the terms
of DMC PN No. 2731 assigned to petitioner, either upon maturity thereof
or at any other time. We note that both in his complaint and in his testimony
before the trial court, petitioner referred merely to the obligation of private
respondent Pilipinas to effect physical delivery to him of DMC PN No.
2731.25Accordingly, petitioner’s theory that Pilipinas had assumed a
solidary obligation to pay the amount represented by the portion of the Note
assigned to him by Philfinance, appears to be a new theory constructed
only after the trial court had ruled against him. The solidary liability that
petitioner seeks to impute to Pilipinas cannot, however, be lightly inferred.
Under Article 1207 of the Civil Code, “there is a solidary liability only when
the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity.” The record here exhibits no express
assumption of solidary liability vis-a-vis petitioner, on the part of Pilipinas.
Petitioner has not pointed us to any law which imposed such liability upon
Pilipinas nor has petitioner argued that the very nature of the custodianship
assumed by private respondent Pilipinas necessarily implies solidary
liability
_______________
24
The DCR specified the amount of P307,933.33 as the extent to which
DMC PN No. 2731 pertained to petitioner Raul Sesbreño. This amount
probably refers to the placement of P300,000.00 by petitioner plus interest
from 9 February 1981 until the maturity date of DMC PN No. 2731, i.e., 6
April 1981.
25 Complaint, pp. 2-3; Rollo, pp. 23-24; TSN of 11 April 1983, p. 51;
TSN, 9 October 1986, pp. 15-16. See also Minutes of the Pre-trial
Conference, dated 04 March, 1983, p. 9.
482
482 SUPREME COURT REPORTS ANNOTATED
Sesbreño vs. Court of Appeals
under the securities, custody of which was taken by Pilipinas. Accordingly,
we are unable to hold Pilipinas solidarity liable with Philfinance and private
respondent Delta under DMC PN No. 2731.
We do not, however, mean to suggest that Pilipinas has no
responsibility and liability in respect of petitioner under the terms of the
DCR. To the contrary, we find, after prolonged analysis and deliberation,
that private respondent Pilipinas had breached its undertaking under the
DCR to petitioner Sesbreno.
We believe and so hold that a contract of deposit was constituted by
the act of Philfinance in designating Pilipinas as custodian or depositary
bank. The depositor was initially Philfinance; the obligation of the
depositary was owed, however, to petitioner Sesbreno as beneficiary of
the custodianship or depositary agreement. We do not consider that this is
a simple case of a stipulation pour autri. The custodianship or depositary
agreement was established as an integral part of the money market
transaction entered into by petitioner with Philfinance. Petitioner bought a
portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited
that Note with Pilipinas in order that the thing sold would be placed outside
the control of the vendor. Indeed, the constituting of the depositary or
custodianship agreement was equivalent to constructive delivery of the
Note (to the extent it had been sold or assigned to petitioner) to petitioner.
It will be seen that custodianship agreements are designed to facilitate
transactions in the money market by providing a basis for confidence on
the part of the investors or placers that the instruments bought by them are
effectively taken out of the pocket, as it were, of the vendors and placed
safely beyond their reach, that those instruments will be there available to
the placers of funds should they have need of them. The depositary in a
contract of deposit is obliged to return the security or the thing deposited
upon demand of the depositor (or, in the presented case, of the beneficiary)
of the contract, even though a term for such return may have been
established in the said contract.26 Accordingly, any stipulation in the
contract of deposit or custodianship that runs counter to the fundamental
purpose of that agreement or which
______________
26
Article 1988, Civil Code.
483
VOL. 222, MAY 24, 1993 483
Sesbreño vs. Court of Appeals
was not brought to the notice of and accepted by the placer-beneficiary,
cannot be enforced as against such beneficiary-placer.
We believe that the position taken above is supported by considerations
of public policy. If there is any party that needs the equalizing protection of
the law in money market transactions, it is the members of the general
public who place their savings in such market for the purpose of generating
interest revenues.27 The custodian bank, if it is not related either in terms
of equity ownership or management control to the borrower of the funds,
or the commercial paper dealer, is normally a preferred or traditional
banker of such borrower or dealer (here, Philfinance). The custodian bank
would have every incentive to protect the interest of its client the borrower
or dealer as against the placer of funds. The providers of such funds must
be safeguarded from the impact of stipulations privately made between the
borrowers or dealers and the custodian banks, and disclosed to fund-
providers only after trouble has erupted.
In the case at bar, the custodian-depositary bank Pilipinas refused to
deliver the security deposited with it when petitioner first demanded
physical delivery thereof on 2 April 1981. We must again note, in this
connection, that on 2 April 1981, DMC PN No. 2731 had not yet matured
and therefore, compensation or offsetting against Philfinance PN No. 143-
A had not yet taken place. Instead of complying with the demand of
petitioner, Pilipinas purported to require and await the instructions of
Philfinance, in obvious contravention of its undertaking under the DCR to
effect physical delivery of the Note upon receipt of “written
instructions” from petitioner Sesbreño.The ostensible term written into the
DCR (i.e., “should this [DCR] remain outstanding in your favor thirty [30]
days after its maturity”) was not a defense against petitioner’s demand for
physical surrender of the Note on at least three grounds: firstly, such term
was never brought to the attention of petitioner Sesbreño at the time the
money market placement with Philfinance was made; secondly, such term
runs counter to the very purpose of the custodianship
_______________
27
See, in this connection, the second and third “whereas” clauses of
P.D. No. 678, dated 2 April 1975.
484
484 SUPREME COURT REPORTS ANNOTATED
Sesbreño vs. Court of Appeals
or depositary agreement as an integral part of a money market transaction;
and thirdly, it is inconsistent with the provisions of Article 1988 of the Civil
Code noted above. Indeed, in principle, petitioner became entitled to
demand physical delivery of the Note held by Pilipinas as soon as
petitioner’s money market placement matured on 13 March 1981 without
payment from Philfinance.
We conclude, therefore, that private respondent Pilipinas must respond
to petitioner for damages sustained by him arising out of its breach of duty.
By failing to deliver the Note to the petitioner as depositor-beneficiary of
the thing deposited, Pilipinas effectively and unlawfully deprived petitioner
of the Note deposited with it. Whether or not Pilipinas itself benefited from
such conversion or unlawful deprivation inflicted upon petitioner, is of no
moment for present purposes. Prima facie, the damages suffered by
petitioner consisted of P304,533.33, the portion of the DMC PN No. 2731
assigned to petitioner but lost by him by reason of discharge of the Note
by compensation, plus legal interest of six percent (6%) per annum
counting from 14 March 1981.
The conclusion we have here reached is, of course, without prejudice
to such right of reimbursement as Pilipinas may have vis-a-vis Philfinance.
III
The third principal contention of petitioner—that Philfinance and private
respondents Delta and Pilipinas should be treated as one corporate
entity—need not detain us for long.
In the first place, as already noted, jurisdiction over the person of
Philfinance was never acquired either by the trial court nor by the
respondent Court of Appeals. Petitioner similarly did not seek to implead
Philfinance in the Petition before us.
Secondly, it is not disputed that Philfinance and private respondents
Delta and Pilipinas have been organized as separate corporate entities.
Petitioner asks us to pierce their separate corporate entities, but has been
able only to cite the presence of a common Director—Mr. Ricardo Silverio,
Sr., sitting on the Boards of Directors of all three (3) companies. Petitioner
has neither alleged nor proved that one or another of the three (3)
concededly
485
VOL. 222, MAY 24, 1993 485
Sesbreño vs. Court of Appeals
related companies used the other two (2) as mere alter egosor that the
corporate affairs of the other two (2) were administered and managed for
the benefit of one. There is simply not enough evidence of record to justify
disregarding the separate corporate personalities of Delta and Pilipinas
and to hold them liable for any assumed or undetermined liability of
Philfinance to petitioner.28
WHEREFORE, for all the foregoing, the Decision and Resolution of the
Court of Appeals in C.A.-G.R. CV No. 15195 dated 21 March 1989 and 17
July 1989, respectively, are hereby MODIFIED and SET ASIDE, to the
extent that such Decision and Resolution had dismissed petitioner’s
complaint against Pilipinas Bank. Private respondent Pilipinas Bank is
hereby ORDERED to indemnify petitioner for damages in the amount of
P304,533.33, plus legal interest thereon at the rate of six percent (6%) per
annum counted from 2 April 1981. As so modified, the Decision and
Resolution of the Court of Appeals are hereby AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
Bidin, Davide, Jr., Romero and Melo, JJ., concur.
Decision and resolution affirmed with modification.
Notes.—An assignment of credit is the process of transferring the right
of the assignor to the assignee who would then have the right to proceed
against the debtor (Rodriguez vs. Court of Appeals, 207 SCRA 553).
Consent is not necessary in order that assignment may fully produce
legal effects (Rodriguez vs. Court of Appeals,207 SCRA 553).

——o0o——

_______________
28
Pabalan v. National Labor Relations Commission, 184 SCRA
495(1990); Del Rosario v. National Labor Relations Commission, 187
SCRA 777 (1990); Remo, Jr. v. Intermediate Appellate Court, 172 SCRA
405(1989).
486
448 SUPREME COURT REPORTS ANNOTATED
Consolidated Plywood lndustries, Inc. vs. IFC Leasing and
Acceptance Corporation
No. L-72593. April 30, 1987.*
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and
RODOLFO T. VERGARA, petitioners, vs. IFC LEASING AND
ACCEPTANCE CORPORATION, respondent.
Negotiable Instruments Law; Promissory Note must he payable to
order or bearer to be negotiable.—"The instrument in order to be
considered negotiable must contain the so called 'words of negotiability'-
ie., must be payable to 'order' or 'bearer.' These words serve as an
expression of consent that the instrument may be transferred. This consent
is indispensable since a maker assumes greater risks under a negotiable
instrument than under a non-negotiable one.
Same; Same; When instrument is payable to order.—The instrument
is payable to order where it is drawn payable to the order of a specified
person or to him or his order . . . "These are the only two ways by which
an instrument may be made payable to order. There must be always be a
specified person named in the instrument. It means that the bill or note is
to be paid to the person designated in the instrument or to any person to
whom he has indorsed and delivered the same. Without the
words 'or order' or 'to the order of,' the instrument is payable only to the
person designated therein and is therefore non-negotiable. Any
subsequent purchaser thereof will not enjoy the advantages of being a
holder of a negotiable instrument, but will merely 'step into the shoes' of
the person designated in the instrument and will thus be open to all
defenses available against the latter."
Same; Same; Effect if promissory note is non-negotiable.—There
________________
*SECOND DIVISION.
449
VOL. 149, APRIL 30, 1987 449
Consolidated Plywood Industries, Inc, vs. IFC Leasing and
Acceptance Corporation
fore, considering that the subject promissory note is not a negotiable
instrument, it follows that the respondent can never be a holder in due
course but remains a mere assignee of the note in question. Thus, the
petitioner may raise against the respondent all defenses available to it as
against the seller-assignor, Industrial Products Marketing.
PETITION for certiorari to review the decision of the Intermediate
Appellate Court.
The facts are stated in the opinion of the Court.
Carpio, Villaraza & Cruz Law Offices for petitioners.
Europa, Dacanay & Tolentino for respondent.
GUTIERREZ, JR., J.:
This is a petition for certiorari under Rule 45 of the Rules of Court which
assails on questions of law a decision of the Intermediate Appellate Court
in AC-G.R. CV No. 68609dated July 17, 1985, as well as its resolution
dated October 17, 1985, denying the motion f or reconsideration.
The antecedent facts culled from the petition are as follows:
The petitioner is a corporation engaged in the logging business. It had
for its program of logging activities for the year 1978 the opening of
additional roads, and simultaneous logging operations along the route of
said roads, in its logging concession area at Baganga, Manay, and Caraga,
Davao Oriental For this purpose, it needed two (2) additional units of
tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf &
Pacific Company of Manila, through its sister company and marketing arm,
Industrial Products Marketing (the "seller-assignor"), a corporation dealing
in tractors and other heavy equipment business, offered to sell to
petitionercorporation two (2) "Used" Allis Crawler Tractors, one (1) an HD-
21-B and the other an HD-16-B.
In order to ascertain the extent of work to which the tractors were to be
exposed, (t.s.n., May 28, 1980, p. 44) and to determine the capability of
the "Used" tractors being offered,
450
450 SUPREME COURT REPORTS ANNOTATED
Consolidated Plywood Industries, Inc. vs. IFC Leasing and
Acceptance Corporation
petitioner-corporation requested the seller-assignor to inspect the jobsite.
After conducting said inspection, the sellerassignor assured petitioner-
corporation that the "Used" Allis Crawler Tractors which were being offered
were fit for the job, and gave the corresponding warranty of ninety (90)
days performance of the machines and availability of parts. (t.s.n., May
28,1980, pp. 59-66).
With said assurance and warranty, and relying on the sellerassignor's
skill and judgment, petitioner-corporation through petitioners Wee and
Vergara, president and vice-president, respectively, agreed to purchase on
installment said two (2) units of "Used" Allis Crawler Tractors. It also paid
the down payment of Two Hundred Ten Thousand Pesos (P210,000.00).
On April 5, 1978, the seller-assignor issued the sales invoice for the two
(2) units of tractors (Exh. "3-A"). At the same time, the deed of sale with
chattel mortgage with promissory note was executed (Exh. "2").
 Simultaneously with the execution of the deed of sale with chattel
mortgage with promissory note, the seller-assignor, by means of a deed of
assignment (Exh. "1"), assigned its rights and interest in the chattel
mortgage in favor of the respondent.
Immediately thereafter, the seller-assignor delivered said two (2) units
of "Used" tractors to the petitioner-corporation's jobsite and as agreed, the
seller-assignor stationed its own mechanics to supervise the operations of
the machines.
Barely fourteen (14) days had elapsed after their delivery when one of
the tractors broke down and af ter another nine (9) days, the other tractor
likewise broke down (t.s.n., May 28, 1980, pp. 68-69),
On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the
seller-assignor of the fact that the tractors broke down and requested for
the seller-assignor's usual prompt attention under the warranty (Exh, "5").
In response to the formal advice by petitioner Rodolfo T. Vergara,
Exhibit "5," the seller-assignor sent to the jobsite its mechanics to conduct
the necessary repairs (Exhs. "6," "6-A," "6-B," 6-C," "6-C-1," "6-D," and "6-
E"), but the tractors did
451
VOL. 149, APRIL 30, 1987 451
Consolidated Plywood Industries, Inc. vs. IFC Leasing and
Acceptance Corporation
not come out to be what they should be after the repairs were undertaken
because the units were no longer serviceable (t.s.n., May 28, 1980, p.78).
Because of the breaking down of the tractors, the road building and
simultaneous logging operations of petitionercorporation were delayed and
petitioner Vergara advised the seller-assignor that the payments of the
installments as listed in the promissory note would likewise be delayed until
the seller-assignor completely fulfills its obligation under its warranty (t.s.n,
May 28,1980, p. 79).
Since the tractors were no longer serviceable, on April 7, 1979,
petitioner Wee asked the seller-assignor to pull out the units and have them
reconditioned, and thereafter to offer them for sale. The proceeds were to
be given to the respondent and the excess, if any, to be divided between
the seller-assignor and petitioner-corporation which offered to bear one-
half (1/2) of the reconditioning cost (Exh. "7").
No response to this letter, Exhibit "7," was received by the petitioner-
corporation and despite several follow-up calls, the seller-assignor did
nothing with regard to the request, until the complaint in this case was filed
by the respondent against the petitioners, the corporation, Wee, and
Vergara.
The complaint was filed by the respondent against the petitioners for
the recovery of the principal sum of One Million Ninety Three Thousand
Seven Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71), accrued
interest of One Hundred Fifty One Thousand Six Hundred Eighteen
Pesos & 86/100 (P151,618.86) as of August 15, 1979, accruing interest
thereafter at the rate of twelve (12%) percent per annum, attorney's fees
of Two Hundred Forty Nine Thousand Eighty One Pesos & 71/100
(P249,081.71) and costs of suit
The petitioners filed their amended answer praying for the dismissal of
the complaint and asking the trial court to order the respondent to pay the
petitioners damages in an amount at the sound discretion of the court,
Twenty Thousand Pesos (P20,000.00) as and for attorney's fees, and Five
Thousand Pesos (P5,000.00) for expenses of litigation. The petitioners
452
452 SUPREME COURT REPORTS ANNOTATED
Consolidated Plywood Industries, Inc. vs. IFC Leasing and
Acceptance Corporation
likewise prayed for such other and further relief as would be just under the
premises.
In a decision dated April 20, 1981, the trial court rendered the f ollowing
judgment:
"WHEREFORE, judgment is hereby rendered:
1. 1.ordering defendants to pay jointly and severally in their official
and personal capacities the principal sum of ONE MILLION
NINETY THREE THOUSAND SEVEN HUNDRED NINETY
EIGHT PESOS & 71/100 (P1,093,798.71) with accrued interest
of ONE HUNDRED FIFTY ONE THOUSAND SIX HUNDRED
EIGHTEEN PESOS & 86/100 (P151,618.,86) as of August 15,
1979 and accruing interest thereafter at the rate of 12% per
annum;
2. "2)ordering defendants to pay jointly and severally attorney's fees
equivalent to ten percent (10%) of the principal and to pay the
costs of the suit.
"Defendants' counterclaim is disallowed." (pp. 45-46, Rollo)
On June 8, 1981, the trial court issued an order denying the motion f or
reconsideration f iled by the petitioners,
Thus, the petitioners appealed to the Intermediate Appellate Court and
assigned therein the following errors:
I
THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER
ATLANTIC GULF AND PACIFIC COMPANY OF MANILA DID NOT
APPROVE DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.
 II
THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF-
APPELLEE IS A HOLDER IN DUE COURSE OF THE PROMISSORY
NOTE AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE
COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the challenged
decision affirming in toto the decision of the
453
VOL. 149, APRIL 30, 1987 453
Consolidated Plywood Industries, Inc. vs. IFC Leasing and
Acceptance Corporation
trial court. The pertinent portions of the decision are as follows:
xxx xxx xxx
"From the evidence presented by the parties on the issue of warranty,
We are of the considered opinion that aside from the fact that no provision
of warranty appears or is provided in the Deed of Sale of the tractors and
even admitting that in a contract of sale unless a contrary intention
appears, there is an implied warranty, the defense of breach of warranty,
if there is any, as in this case, does not lie in favor of the appellants and
against the plaintiff-appellee who is the assignee of the promissory note
and a holder of the same in due course. Warranty lies in this case only
between Industrial Products Marketing and Consolidated Plywood
Industries, Inc. The plaintiffappellant herein upon application by appellant
corporation granted financing for the purchase of the questioned units of
Fiat-Allis Crawler Tractors.
xxx xxx xxx
"Holding that breach of warranty if any, is not a defense available to
appellants either to withdraw from the contract and/or demand a
proportionate reduction of the price with damages in either case (Art. 1567,
New Civil Code). We now come to the issue as to whether the plaintiff-
appellee is a holder in due course of the promissory note.
'To begin with, it is beyond arguments that the plaintiffappellee is a
financing corporation engaged in financing and receivable discounting
extending credit facilities to consumers and industrial, commercial or
agricultural enterprises by discounting or factoring commercial papers or
accounts receivable duly authorized pursuant to R.A. 5980 otherwise
known as the Financing Act.
"A study of the questioned promissory note reveals that it is a
negotiable instrument which was discounted or sold to the IFC Leasing and
Acceptance Corporation for P800,000.00 (Exh. "A") considering the
following: it is in writing and signed by the maker; it contains an
unconditional promise to pay a certain sum of money payable at a fixed or
determinable future time; it is payable to order (Sec. 1, NIL); the promissory
note was negotiated when it was transferred and delivered by IPM to the
appellee and duly endorsed to the latter (Sec. 30, NIL); it was taken in the
conditions that the note was complete and regular upon its face before the
same was overdue and without
454
454 SUPREME COURT REPORTS ANNOTATED
Consolidated Plywood Industries, Inc. vs. IFC Leasing and
Acceptance Corporation
notice, that it had been previously dishonored and that the note is in good
faith and for value without notice of any infirmity or defect in the title of IPM
(Sec. 52, NIL); that IFC Leasing and Acceptance Corporation held the
instrument free from any defect of title of prior parties and free from
defenses available to prior parties among themselves and may enforce
payment of the instrument for the full amount thereof against all parties
liable thereon (Sec. 57, NIL); the appellants engaged that they would pay
the note according to its tenor, and admit the existence of the payee IPM
and its capacity to endorse (Sec. 60, NIL).
"In view of the essential elements found in the questioned promissory
note, We opine that the same is legally and conclusively enforceable
against the defendants-appellants.
"WHEREFORE, finding the decision appealed from according to law
and evidence, We find the appeal without merit and thus affirm the
decision in toto. With costs against the appellants." (pp. 5055, Rollo)
The petitioners' motion for reconsideration of the decision of July 17, 1985
was denied by the Intermediate Appellate Court in its resolution dated
October 17, 1985, a copy of which was received by the petitioners on
October 21, 1985.
Hence, this petition was filed on the following grounds:
I.
ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A
NEGOTIABLE INSTRUMENT AS DEFINED UNDER THE LAW SINCE IT
IS NEITHER PAYABLE TO ORDER NOR TO BEARER.
II.
THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST,
IT IS A MERE ASSIGNEE OF THE SUBJECT PROMISSORY NOTE.
III.
SINCE THE INSTANT CASE INVOLVES A NONNEGOTIABLE
INSTRUMENT AND THE TRANSFER OF
 455
VOL. 149, APRIL 30, 1987 455
Consolidated Plywood Industries, Inc. vs. IFC Leasing and
Acceptance Corporation
RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE PETITIONERS
MAY RAISE AGAINST THE RESPONDENT ALL DEFENSES THAT ARE
AVAILABLE TO IT AS AGAINST THE SELLER-ASSIGNOR, INDUSTRIAL
PRODUCTS MARKETING.
IV.
THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE
PROMISSORY NOTE BECAUSE:
A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF
WARRANTY UNDER THE LAW;
B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE
SELLER-ASSIGNOR OF THE PROMISSORY NOTE.
V.
THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE
SELLER-ASSIGNOR IN FAVOR OF THE RESPONDENT DOES NOT
CHANGE THE NATURE OF THE TRANSACTION FROM BEING A SALE
ON INSTALLMENTS TO A PURE LOAN.
VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN
EVIDENCE IN ANY COURT BECAUSE THE REQUISITE
DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON OR
CANCELLED.
The petitioners prayed that judgment be rendered setting aside the
decision dated July 17, 1985, as well as the resolution dated October 17,
1985 and dismissing the complaint but granting petitioners' counterclaims
before the court of origin.
On the other hand, the respondent corporation in its comment to the
petition filed on February 20,1986, contended that the petition was filed out
of time; that the promissory note is a negotiable instrument and respondent
a holder in due course; that respondent is not liable for any breach of
warranty; and finally, that the promissory note is admissible in evidence.
456
456 SUPREME COURT REPORTS ANNOTATED
Consolidated Plywood Industries, Inc. vs. IFC Leasing and
Acceptance Corparation
The core issue herein is whether or not the promissory note in question is
a negotiable instrument so as to bar completely all the available defenses
of the petitioner against the respondent-assignee.
Preliminarily, it must be established at the outset that we consider the
instant petition to have been filed on time because the petitioners' motion
for reconsideration actually raised new issues. It cannot, therefore, be
considered pro-forma.
The petition is impressed with merit.
First, there is no question that the seller-assignor breached its express
90-day warranty because the findings of the trial court, adopted by the
respondent appellate court, that "14 days after delivery, the first tractor
broke down and 9 days, thereafter, the second tractor became inoperable"
are sustained by the records. The petitioner was clearly a victim of a
warranty not honored by the maker.
The Civil Code provides that:
"ART. 1561. The vendor shall be responsible for warranty against the
hidden defects which the thing sold may have, should they render it unfit
for the use for which it is intended, or should they diminish its fitness for
such use to such an extent that, had the vendee been aware thereof, he
would not have acquired it or would have given a lower price for it; but said
vendor shall not be answerable for patent defects or those which may be
visible, or for those which are not visible if the vendee is an expert who, by
reason of his trade or profession, should have known them.
"ART. 1562. In a sale of goods, there is an implied warranty or condition
as to the quality or fitness of the goods, as follows:
"(1) Where the buyer, expressly or by implication, makes known to the
seller the particular purpose for which the goods areacquired, and it
appears that the buyer relies on the seller's skill or judg-ment (whether he
be the grower or manufacturer or not), there is an implied warranty that the
goods shall be reasonably fit for such purpose;
xxx xxx xxx
"ART. 1564. An implied warranty or condition as to the quality or fitness
for a particular purpose may be annexed by the
457
VOL. 149, APRIL 30, 1987 457
Consolidated Plywood Industries, Inc. vs. IFC Leasing and
Acceptance Corporation
usage of trade.
xxx xxx xxx
"ART. 1566. The vendor is responsible to the vendee for any hidden
faults or defects in the thing sold, even though he was not aware thereof.
"This provision shall not apply if the contrary has been stipulated, and
the vendor was not aware of the hidden faults or defects in the thing sold."
(Italics supplied).
It is patent then, that the seller-assignor is liable for its breach of warranty
against the petitioner. This liability as a general rule, extends to the
corporation to whom it assigned its rights and interests unless the assignee
is a holder in due course of the promissory note in question, assuming the
note is negotiable, in which case the latter's rights are based on the
negotiable instrument and assuming further that the petitioner's defenses
may not prevail against it.
Secondly, it likewise cannot be denied that as soon as the tractors
broke down, the petitioner-corporation notified the seller-assignor's sister
company, AG & P, about the breakdown based on the seller-assignor's
express 90-day warranty, with which the latter complied by sending its
mechanics. However, due to the seller-assignor's delay and its failure to
comply with its warranty, the tractors became totally unserviceable and
useless for the purpose f or which they were purchased
Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its
contract with the seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:
"ART. 1191. The power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with what is incumbent
upon him.
"The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in either
case. He may also seek rescission, even after he has chosen fulfillment, if
the latter should become impossible.
xxx xxx xxx
458
458 SUPREME COURT REPORTS ANNOTATED
Consolidated Plywood Industries, Inc. vs. IFC Leasing and
Acceptance Corporation
"ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the
vendee may elect between withdrawing from the contract and demanding
a proportionate reduction of the price, with damages in either case." (Italics
supplied)
Petitioner, having unilaterally and extrajudicially rescinded its contract with
the seller-assignor, necessarily can no longer sue the seller-assignor
except by way of counterclaim if the seller-assignor sues it because of the
rescission.
In the case of the University of the Philippines v De los Angeles (35
SCRA 102) we held:
"In other words, the party who deems the contract violated may consider it
resolved or rescinded, and act accordingly, without previous
court action, but it proceeds at its own risk. For it is only the final judgment
of the corresponding court that will conclusively and finally settle whether
the action taken was or was not correct in law. But the law definitely does
not require that the contracting party who believes itself injured must first
file suit and wait for a judgment before taking extrajudicial steps to protect
its interest. Otherwise, the party injured by the other's breach will have to
passively sit and watch its damages accumulate during the pendency of
the suit until the final judgment of rescission is rendered when the law itself
requires that he should exercise due diligence to minimize its own
damages (Civil Code, Article 2203)." (Italics supplied)
Going back to the core issue, we rule that the promissory note in question
is not a negotiable instrument
The pertinent portion of the note is as f ollows:
"FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the
INDUSTRIAL PRODUCTS MARKETING, the sum of ONE MILLION
NINETY THREE THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS
& 71/100 only (P1,093,789.71), Philippine Currency, the said principal
sum, to be payable in 24 monthly installments starting July 15, 1978 and
every 15th of the month thereafter until fully paid. x x x."
Considering that paragraph (d), Section 1 of the Negotiable Instruments
Law requires that a promissory note "must be
459
VOL. 149, APRIL 30, 1987 459
Consolidated Plywood Industries, Inc. vs. IFC Leasing and
Acceptance Corporation
payable to order or bearer," it cannot be denied that the promissory note
in question is not a negotiable instrument.
"The instrument in order to be considered negotiable must contain the so-
called 'words of negotiability'—i.e., must be payable to 'order' or 'bearer'.
These words serve as an expression of consent that the instrument may
be transferred. This consent is indispensable since a maker assumes
greater risk under a negotiable instrument than under a non-negotiable
one. x x x.
xxx xxx xxx
"When instrument is payable to order.—
"SEC. 8. WHEN PAYABLE TO ORDER.—The instrument is payable to
order where it is drawn payable to the order of a specified person or to him
or his order. . . .
xxx xxx xxx
"These are the only two ways by which an instrument may be made
payable to order. There must always be a specified person named in the
instrument. It means that the bill or note is to be paid to the person
designated in the instrument or to any person to whom he has indorsed
and delivered the same. Without the words 'or order' or 'to the order of,' the
instrument is payable only to the person designated therein and is
therefore non-negotiable. Any subsequent purchaser thereof will not enjoy
the advantages of being a holder of a negotiable instrument, but will
merely 'step into the shoes' of the person designated in the instrument and
will thus be open to all defenses available against the latter." (Campos and
Campos, Notes and Selected Cases on Negotiable Instruments Law, Third
Edition, page 38). (Italics supplied)
Therefore, considering that the subject promissory note is not a negotiable
instrument, it follows that the respondent can never be a holder in due
course but remains a mere assignee of the note in question. Thus, the
petitioner may raise against the respondent all defenses available to it as
against the sellerassignor, Industrial Products Marketing.
This being so, there was no need for the petitioner to implead the seller-
assignor when it was sued by the respondentassignee because the
petitioner's defenses apply to both or either of them.
460
460 SUPREME COURT REPORTS ANNOTATED
Consolidated Plywood Industries, Inc. vs. IFC Leasing and
Acceptance Corporation
Actually, the records show that even the respondent itself admitted to being
a mere assignee of the promissory note in question, to wit:
"ATTY. PALACA:
"Did we get it right from the counsel that what is being assigned is the Deed
of Sale with Chattel Mortgage with the promissory note which is as testified
to by the witness was indorsed? (Counsel for Plaintiff nodding his head.)
Then we have no further questions on cross.
"COURT:
"You confirm his manifestation? You are nodding your head? Do you
confirm that?
"ATTY. ILAGAN:
"The Deed of Sale cannot be assigned. A deed of sale is a transaction
between two persons; what is assigned are rights, the rights of the
mortgagee were assigned to the IFC Leasing & Acceptance Corporation.
"COURT:
"He puts it in a simple way,—as one—deed of sale and chattel
mortgage were assigned;. . . you want to make a distinction, one is an
assignment of mortgage right and the other one is indorsement of the
promissory note. What counsel for defendants wants is that you stipulate
that it is contained in one single transaction?
"ATTY. ILAGAN:
"We stipulate it is one single transaction." (pp. 27-29, TSN., February
13, 1980).
Secondly, even conceding for purposes of discussion that the promissory
note in question is a negotiable instrument, the respondent cannot be a
holder in due course for a more significant reason.
The evidence presented in the instant case shows that prior to the sale
on installment of the tractors, there was an arrangement between the
seller-assignor, Industrial Products Market-
461
VOL. 149, APRIL 30, 1987 461
Consolidated Plywood lndustries, Inc. vs. IFC Leasing and
Acceptance Corporation
ing, and the respondent whereby the latter would pay the seller-assignor
the entire purchase price and the sellerassignor, in turn, would assign its
rights to the respondent which acquired the right to collect the price from
the buyer, herein petitioner Consolidated Plywood Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage with
Promissory Note, the Deed of Assignment and the Disclosure of
Loan/Credit Transaction shows that said documents evidencing the sale
on installment of the tractors were all executed on the same day by and
among the buyer, which is herein petitioner Consolidated Plywood
Industries, Inc.; the sellerassignor which is the Industrial Products
Marketing; and the assignee-financing company, which is the respondent.
Therefore, the respondent had actual knowledge of the fact that the seller-
assignor's right to collect the purchase price was not unconditional and that
it was subject to the condition that the tractors sold were not defective. The
respondent knew that when the tractors turned out to be defective, it would
be subject to the defense of failure of consideration and cannot recover the
purchase price from the petitioners. Even assuming for the sake of
argument that the promissory note is negotiable, the respondent, which
took the same with actual knowledge of the foregoing facts so that its action
in taking the instrument amounted to bad faith, is not a holder in due
course. As such, the respondent is subject to all defenses which the
petitioners may raise against the seller-assignor. Any other interpretation
would be most inequitous to the unfortunate buyer who is not only saddled
with two useless tractors but must also face a lawsuit from the assignee
for the entire purchase price and all its incidents without being able to raise
valid defenses available as against the assignor.
Lastly, the respondent failed to present any evidence to prove that it
had no knowledge of any fact, which would justify its act of taking the
promissory note as not amounting to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law provide that:
 462
462 SUPREME COURT REPORTS ANNOTATED
Consolidated Plywood lndustries, Inc. vs. IFC Leasing and
Acceptance Corporation
"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:
xxx xxx xxx
xxx xxx xxx
"(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
xxx xxx xxx
"SEC. 56. WHAT CONSTITUTES NOTICE OF DEFECT.—To
constitute notice of an infirmity in the instrument or defect in the title of the
person negotiating the same, the person to whom it is negotiated must
have had actual knowledge of the infirmity or defect, or knowledge of such
facts that his action in taking the instrument amounts to bad faith." (Italics
supplied)
We subscribe to the view of Campos and Campos that a financing
company is not a holder in good faith as to the buyer, to wit:
"In installment sales, the buyer usually issues a note payable to the seller
to cover the purchase price. Many times, in pursuance of a previous
arrangement with the seller, a finance company pays the full price and the
note is indorsed to it, subrogating it to the right to collect the price from the
buyer, with interest. With the increasing frequency of installment buying in
this country, it is most probable that the tendency of the courts in the United
States to protect the buyer against the finance company will find judicial
approval here. Where the goods sold turn out to be defective, the finance
company will be subject to the defense of failure of consideration and
cannot recover the purchase price from the buyer. As against the argument
that such a rule would seriously affect 'a certain mode of transacting
business adopted throughout the State,' a court in one case stated:
" 'lt may be that our holding here will require some changes in business
methods and will impose a greater burden on the finance companies. We
think the buyer—Mr. & Mrs. General Public—should have some protection
somewhere along the line. We believe the finance company is better able
to bear
463
VOL. 149, APRIL 30, 1987 463
Consolidated Plywood lndustries, Inc. vs. IFC Leasing and
Acceptance Corporation
the risk of the dealer's insolvency than the buyer and in a far better position
to protect his interests against unscrupulous and insolvent dealers. . . .
" 'lf this opinion imposes great burdens on finance companies it is a
potent argument in favor of a rule which will afford public protection to the
general buying public against unscrupulous dealers in personal property. .
. .' (Mutual Finance Co. v. Martin, 63 So. 2d 649, 44 ALR 2d 1 [1953])"
(Campos and Campos, Notes and Selected Cases on Negotiable
Instruments Law, Third Edition, p. 128).' "
In the case of Commercial Credit Corporation v. Orange Country Machine
Works (34 Cal. 2d 766) involving similar facts, it was held that in a very real
sense, the finance company was a moving force in the transaction from its
very inception and acted as a party to it. When a finance company actively
participates in a transaction of this type from its inception, it cannot be
regarded as a holder in due course of the note given in the transaction.
In like manner, therefore, even assuming that the subject promissory
note is negotiable, the respondent, a financing company which actively
participated in the sale on installment of the subject two Allis Crawler
tractors, cannot be regarded as a holder in due course of said note. It
follows that the respondent's rights under the promissory note involved in
this case are subject to all defenses that the petitioners have against the
seller-assignor, Industrial Products Marketing. For Section 58 of the
Negotiable Instruments Law provides that "in the hands of any holder other
than a holder in due course, a negotiable instrument is subject to the same
defenses as if it were non-negotiable. x x x."
Prescinding from the foregoing and setting aside other peripheral
issues, we find that both the trial and respondent appellate court erred in
holding the promissory note in question to be negotiable, Such a ruling
does not only violate the law and applicable jurisprudence, but would result
in unjust enrichment on the part of both the seller-assignor and respondent
assignee at the expense of the petitioner-corporation
464
464 SUPREME COURT REPORTS ANNOTATED
People vs. Rosas
which rightfully rescinded an inequitable contract. We note, however, that
since the seller-assignor has not been impleaded herein, there is no
obstacle for the respondent to file a civil suit and litigate its claims against
the seller-assignor in the rather unlikely possibility that it so desires.
WHEREFORE, in view of the foregoing, the decision of the respondent
appellate court dated July 17, 1985, as well as its resolution dated October
17, 1986, are hereby ANNULLED and SET ASIDE. The complaint against
the petitioner before the trial court is DISMISSED.
SO ORDERED.
Fernan, Paras, Padilla, Bidin and Cortes, JJ.,concur.
Decision annulled and set aside.
——o0o——
374 SUPREME COURT REPORTS ANNOTATED
De la Victoria vs. Burgos
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. SESBREÑO,
respondents.
Judgments; Garnishment; Words and Phrases; 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.—
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. Emphasis is laid on the phrase “belonging to the judgment
debtor” since it is the focal point in resolving the issues raised.
Same; Same; Same; Administrative Law; Public Officers; Negotiable
Instruments Law; 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.—As
Assistant City Fiscal, the source of the salary of Mabanto, Jr., is public
funds. He receives his compensation in the form of checks from the
Department of Justice through petitioner as City Fiscal of Mandaue City
and head of office. Under Sec. 16 of the Negotiable Instruments Law, every
contract on a negotiable instrument is incomplete and revocable
until delivery of the instrument for the purpose of giving effect thereto. As
ordinarily understood, delivery means the transfer of the possession of the
instrument by the maker or drawer with intent to transfer title to the payee
and recognize him as the holder thereof.
Same; Same; Same; Same; Same; Same; Where checks due a
government employee have not yet been delivered to him, they do not
belong to him and still have the character of public funds.—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
_______________
*
FIRST DIVISION.
375
VOL. 245, JUNE 27, 1995 375
De la Victoria vs. Burgos
funds and presumed delivered to the payee based on the last
sentence of Sec. 16 of the Negotiable Instruments Law which states: “And
where the instrument is no longer in the possession of a party whose
signature appears thereon, a valid and intentional delivery by him is
presumed.” Yet, the presumption is not conclusive because the last portion
of the provision says “until the contrary is proved.” However this phrase
was deleted by the trial court for no apparent reason. Proof to the contrary
is its own finding that the checks were in the custody of petitioner.
Inasmuch as said checks had not yet been delivered to Mabanto, Jr.,
they did not belong to him and still had the character of public funds. In Tiro
v. Hontanosas 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.
Same; Same; Same; Same; Same; Same; Checks due a
government employee may not be garnished to satisfy a judgment.—As a
necessary consequence of being public fund, the checks may not be
garnished to satisfy the judgment. The rationale behind this doctrine is
obvious consideration of public policy. The Court succinctly stated
in Commissioner of Public Highways v. San Diego 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.
Same; Same; Same; Same; Same; Same; It is incumbent upon the
garnishee to inquire into the validity of the notice of garnishment where he
has actual knowledge of the non-entitlement of garnisher to the checks in
his possession.—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.
DAVIDE, JR., J., Separate opinion:
Judgments; Garnishment; Administrative Law; Public Officers; If the
salary and RATA checks correspond to a payroll period and to a month
which had already lapsed at the time the notice of garnishment is served,
the garnishment would be valid, as the checks would then cease
376
376 SUPREME COURT REPORTS ANNOTATED
De la Victoria vs. Burgos
 to be property of the Government and would become the property of
the employee.—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.
PETITION for review of a decision of the Regional Trial Court of Cebu
City, Br. 18.
The facts are stated in the opinion of the Court.
BELLOSILLO, J.:
RAUL H. SESBREÑO 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 garnish-
_______________
1
Rollo, p. 12.
377
VOL. 245, JUNE 27, 1995 377
De la Victoria vs. Burgos
ees, 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 receipt2 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
_______________
2
Id., p. 18.
3
Id., p. 115.
378
378 SUPREME COURT REPORTS ANNOTATED
De la Victoria vs. Burgos
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.
_______________
4 8 No. L-32312, 25 November 1983, 125 SCRA 697.
Id., p. 114.
5
Id., p. 129.
6 Engineering Construction, Inc. v. National Power Corporation, No. L-
34589, 29 June 1988, 163 SCRA 9; Rizal Commercial Banking
Corporation v. de Castro, No. L-34548, 29 November 1988, 168 SCRA 49;
Sec. 8, Rule 57 of the Rules of Court.
379
VOL. 245, JUNE 27, 1995 379
De la Victoria vs. Burgos
As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is public
funds. He receives his compensation in the form of checks from the
Department of Justice through petitioner as City Fiscal of Mandaue City
and head of office. Under Sec. 16 of the Negotiable Instruments Law, every
contract on a negotiable instrument is incomplete and revocable
until delivery of the instrument for the purpose of giving effect thereto. As
ordinarily understood, delivery means the transfer of the possession of the
instrument by the maker or drawer with intent to transfer title to the payee
and recognize him as the holder thereof.7
According to the trial court, the checks of Mabanto, Jr., were already
released by the Department of Justice duly signed by the officer concerned
through petitioner and upon service of the writ of garnishment by the sheriff
petitioner was under obligation to hold them for the judgment creditor. It
recognized the role of petitioner 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 him and still had the
character of public funds. In Tiro v. Hontanosas 8 we ruled that—
The salary check of a government officer or employee such as a teacher
does not belong to him before it is physically delivered to him. Until that
time the check belongs to the government. Accordingly, before there is
actual delivery of the check, the payee has no power over it; he cannot
assign it without the consent of the Government.
_______________
7 Hector S. de Leon, The Law on Negotiable Instruments, 1989 Ed., p.
48; People v. Yabut, Jr., No. L-42902, 29 April 1977, 76 SCRA 624.
380
380 SUPREME COURT REPORTS ANNOTATED
De la Victoria vs. Burgos
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,
_______________
9
Republic v. Palacio, No. L-20322, 29 May 1968, 23 SCRA
899; Director of the Bureau of Commerce and Industry v. Concepcion, 43
Phil. 384(1922); Traders Royal Bank v. IAC, G.R. No. 68514, 17
December 1990, 192 SCRA 305.
10 No. L-30098, 18 February 1970, 31 SCRA 616.
11 G.R. No. 84526, 28 January 1991, 193 SCRA 452.
381
VOL. 245, JUNE 27, 1995 381
De la Victoria vs. Burgos
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.
Padilla, (J., Chairman), I join Mr. Justice Davide, Jr. in his separate
opinion.
Davide, Jr., J., Please see separate opinion.
SEPARATE OPINION
DAVIDE, JR., J.:
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
382
382 SUPREME COURT REPORTS ANNOTATED
De la Victoria vs. Burgos
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 2
23 SCRA 899 [1968].
3
all times it would be found embarrassing, and under some circumstances 192 SCRA 305 [1990].
4
it might be fatal to the public service. *** So long as money remains in the 31 SCRA 616 [1970].
5 125 SCRA 697 [1983].
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 384
of the government to the person entitled to it, the fund cannot, in any 384 SUPREME COURT REPORTS ANNOTATED
Greenhills Airconditioning and Services, Inc. vs. National Labor
_______________ Relations Commission
their future salaries which were still public funds. That assignment or
1
43 Phil. 384 [1922]. waiver was contrary to public policy.
383 I would therefore vote to grant the petition only if the salary and RATA
VOL. 245, JUNE 27, 1995 383 checks garnished corresponds to an unexpired payroll period and RATA
De la Victoria vs. Burgos month, respectively.
legal sense, be considered a part of his effects.” (See, further, 12 R.C.L., Petition granted.
p. 841; Keene vs. Smith [1904], 44 Ore., 525; Wild vs. Ferguson [1871], 23 Notes.—In legal contemplation, garnishment is a forced novation by the
La. Ann., 752; Bank of Tennessee vs. Dibrell [1855], 3 Sneed [Tenn.], substitution of creditors. The judgment debtor, who is the original creditor
379). (emphasis supplied) of the garnishee is, through service of the writ of garnishment, substituted
The authorities cited in the ponencia are inapplicable. Garnished or levied by the judgment creditor who thereby becomes creditor of the garnishee.
on therein were public funds, to wit: (a) the pump irrigation trust fund (Perla Compania de Seguros, Inc. vs. Ramolete, 203 SCRA 487 [1991])
deposited with the Philippine National Bank (PNB) in the account of the The delivery of checks in payment of an obligation does not constitute
Irrigation Service Unit in Republic vs. Palacio;2 (b) the deposits of the payment unless they are cashed or their value is impaired through the fault
National Media Production Center in Traders Royal Bank vs. Intermediate of the creditor.(Development Bank of Rizal vs. Sima Wei, 219 SCRA
Appellate Court;3 and (c) the deposits of the Bureau of Public Highways 736[1993])
with the PNB under a current account, which may be expended only for
their legitimate object as authorized by the corresponding legislative ———o0o———
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
736 SUPREME COURT REPORTS ANNOTATED
Development Bank of Rizal vs. Sima Wei
G.R. No. 85419. March 9, 1993.*
DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner, vs.SIMA WEI
and/or LEE KIAN HUAT, MARY CHENG UY, SAMSON TUNG, ASIAN
INDUSTRIAL PLASTIC CORPORATION and PRODUCERS BANK OF
THE PHILIPPINES, defendants-respondents.
Remedial Law; Action; Definition and essential elements of a cause
of action.—A cause of action is defined as an act or omission of one party
in violation of the legal right or rights of another. The essential elements
are: (1) legal right of the plaintiff; (2) correlative obligation of the defendant;
and (3) an act or omission of the defendant in violation of said legal right.
Commercial Law; Negotiable Instruments Law; A negotiable
instrument of which a check is, is not only a written evidence of a contract
right but is also a species of property.—Courts have long recognized the
business custom of using printed checks where blanks are provided for the
date of issuance, the name of the payee, the amount payable and the
drawer's signature. All the drawer has to do when he wishes to issue a
check is to properly fill up the blanks and sign it. However, the mere fact
that he has done these does not give rise to any liability on his part, until
and unless the check is delivered to the payee or his representative. A
negotiable instrument, of which a check is, is not only a written evidence
of a contract right but is also a species of property. Just as a deed to a
piece of land must be delivered in order to convey title to the grantee, so
must a negotiable instrument be delivered to the payee in order to evidence
its existence as a binding contract.
__________________
*
SECOND DIVISION.
737
VOL. 219, MARCH 9, 1993 737
Development Bank of Rizal vs. Sima Wei
Same; Same; Same; The payee of a negotiable instrument acquires
no interest with respect thereto until its delivery to him.—Thus, the payee
of a negotiable instrument acquires no interest with respect thereto until its
delivery to him. Delivery of an instrument means transfer of possession,
actual or constructive, from one person to another. Without the initial
delivery of the instrument from the drawer to the payee, there can be no
liability on the instrument. Moreover, such delivery must be intended to
give effect to the instrument.
Same; Same; Same; Same; The delivery of checks in payment of an
obligation does not constitute payment unless they are cashed or their
value is impaired through the fault of the creditor.—Notwithstanding the
above, it does not necessarily follow that the drawer Sima Wei is freed from
liability to petitioner Bank under the loan evidenced by the promissory note
agreed to by her. Her allegation that she has paid the balance of her loan
with the two checks payable to petitioner Bank has no merit for, as We
have earlier explained, these checks were never delivered to petitioner
Bank. And even granting, without admitting, that there was delivery to
petitioner Bank, the delivery of checks in payment of an obligation does not
constitute payment unless they are cashed or their value is impaired
through the fault of the creditor. None of these exceptions were alleged by
respondent Sima Wei.
PETITION for review by certiorari of the decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Yngson & Associates for petitioner.
Henry A. Reyes & Associates for Samso Tung & Asian Industrial
Plastic Corporation.
Eduardo G. Castelo for Sima Wei.
Monsod, Tamargo & Associates for Producers Bank.
Rafael S. Santayana for Mary Cheng Uy.
CAMPOS, JR., J.:
On July 6, 1986, the Development Bank of Rizal (petitioner Bank for
brevity) filed a complaint for a sum of money against respondents Sima
Wei and/or Lee Kian Huat, Mary Cheng
738
738 SUPREME COURT REPORTS ANNOTATED
Development Bank of Rizal vs. Sima Wei
Uy, Samson Tung, Asian Industrial Plastic Corporation (Plastic
Corporation for short) and the Producers Bank of the Philippines, on two
causes of action:
1. (1)To enforce payment of the balance of P1,032,450.02 on a
promissory note executed by respondent Sima Wei on June 9,
1983; and
2. (2)To enforce payment of two checks executed by Sima Wei,
payable to petitioner, and drawn against the China Banking
Corporation, to pay the balance due on the promissory note.
Except for Lee Kian Huat, defendants filed their separate Motions to
Dismiss alleging a common ground that the complaint states no cause of
action. The trial court granted the defendants' Motions to Dismiss. The
Court of Appeals affirmed this decision,** to which the petitioner Bank,
represented by its Legal Liquidator, filed this Petition for Review by
Certiorari, assigning the following as the alleged errors of the Court of
Appeals:1
1. (1)THE COURT OF APPEALS ERRED IN HOLDING THAT THE
PLAINTIFF-PETITIONER HAS NO CAUSE OF ACTION
AGAINST DEFENDANTS-RESPONDENTS HEREIN.
2. (2)THE COURT OF APPEALS ERRED IN HOLDING THAT
SECTION 13, RULE 3 OF THE REVISED RULES OF COURT
ON ALTERNATIVE DEFENDANTS IS NOT APPLICABLE TO
HEREIN DEFENDANTS-RESPONDENTS.
The antecedents facts of this case are as follows:
In consideration for a loan extended by petitioner Bank to respondent
Sima Wei, the latter executed and delivered to the former a promissory
note, engaging to pay the petitioner Bank or order the amount of
P1,820,000.00 on or before June 24, 1983 with interest at 32% per annum.
Sima Wei made partial payments on the note, leaving a balance of
P1,032,450.02. On
_________________
**
CA G.R. CV No. 11980 dated October 12, 1988. Penned by
Associate Justice Venancio D. Aldecoa, Jr. with Associate Justices
Ricardo P. Tensuan and Luis L. Victor, concurring.
1 Petition, p. 7, Rollo, p. 20.
739
VOL. 219, MARCH 9, 1993 739
Development Bank of Rizal vs. Sima Wei
November 18, 1983, Sima Wei issued two crossed checks payable to
petitioner Bank drawn against China Banking Corporation, bearing
respectively the serial numbers 384934, for the amount of P550,000.00
and 384935, for the amount of P500,000.00. The said checks were
allegedly issued in full settlement of the drawer's account evidenced by the
promissory note. These two checks were not delivered to the petitioner-
payee or to any of its authorized representatives. For reasons not shown,
these checks came into the possession of respondent Lee Kian Huat, who
deposited the checks without the petitioner-payee's indorsement (forged
or otherwise) to the account of respondent Plastic Corporation, at the
Balintawak branch, Caloocan City, of the Producers Bank. Cheng Uy,
Branch Manager of the Balintawak branch of Producers Bank, relying on
the assurance of respondent Samson Tung, President of Plastic
Corporation, that the transaction was legal and regular, instructed the
cashier of Producers Bank to accept the checks for deposit and to credit
them to the account of said Plastic Corporation, inspite of the fact that the
checks were crossed and payable to petitioner Bank and bore no
indorsement of the latter. Hence, petitioner filed the complaint as
aforestated.
The main issue before Us is whether petitioner Bank has a cause of
action against any or all of the defendants, in the alternative or otherwise.
A cause of action is defined as an act or omission of one party in
violation of the legal right or rights of another. The essential elements are:
(1) legal right of the plaintiff; (2) correlative obligation of the defendant; and
(3) an act or omission of the defendant in violation of said legal right.2
The normal parties to a check are the drawer, the payee and the
drawee bank. Courts have long recognized the business custom of using
printed checks where blanks are provided for the date of issuance, the
name of the payee, the amount payable and the drawer's signature. All the
drawer has to do when he wishes to issue a check is to properly fill up the
________________
2
Caseñas vs. Rosales, et al., 19 SCRA 462 (1967); Remitere, et al. vs.
Vda. de Yulo, et al., 16 SCRA 251 (1966).
740
740 SUPREME COURT REPORTS ANNOTATED
Development Bank of Rizal vs. Sima Wei
blanks and sign it. However, the mere fact that he has done these does
not give rise to any liability on his part, until and unless the check is
delivered to the payee or his representative. A negotiable instrument, of
which a check is, is not only a written evidence of a contract right but is
also a species of property. Just as a deed to a piece of land must be
delivered in order to convey title to the grantee, so must a negotiable
instrument be delivered to the payee in order to evidence its existence as
a binding contract. Section 16 of the Negotiable Instruments Law, which
governs checks, provides in part:
"Every contract on a negotiable instrument is incomplete and revocable
until delivery of the instrument for the purpose of giving effect thereto. x x
x."
Thus, the payee of a negotiable instrument acquires no interest with
respect thereto until its delivery to him.3Delivery of an instrument means
transfer of possession, actual or constructive, from one person to
another.4Without the initial delivery of the instrument from the drawer to the
payee, there can be no liability on the instrument. Moreover, such delivery
must be intended to give effect to the instrument.
The allegations of the petitioner in the original complaint show that the
two (2) China Bank checks, numbered 384934 and 384935, were not
delivered to the payee, the petitioner herein. Without the delivery of said
checks to petitionerpayee, the former did not acquire any right or interest
therein and cannot therefore assert any cause of action, founded on said
checks, whether against the drawer Sima Wei or against the Producers
Bank or any of the other respondents.
In the original complaint, petitioner Bank, as plaintiff, sued respondent
Sima Wei on the promissory note, and the alternative defendants, including
Sima Wei, on the two checks. On appeal from the orders of dismissal of
the Regional Trial Court, petitioner Bank alleged that its cause of action
was not based on collecting the sum of money evidenced by the nego-
_________________
3
In re Martens' Estate, 226 lowa 162, 283 N.W. 885 (1939); Shriver vs.
Danby, 113 A. 612 (1921).
4 Negotiable Instruments Law, Sec. 191, par. 6.
741
VOL. 219, MARCH 9, 1993 741
Development Bank of Rizal vs. Sima Wei
tiable instruments stated but on quasi-delict—a claim for damages on the
ground of fraudulent acts and evident bad faith of the alternative
respondents. This was clearly an attempt by the petitioner Bank to change
not only the theory of its case but the basis of his cause of action. It is well-
settled that a party cannot change his theory on appeal, as this would in
effect deprive the other party of his day in court.5
Notwithstanding the above, it does not necessarily follow that the
drawer Sima Wei is freed from liability to petitioner Bank under the loan
evidenced by the promissory note agreed to by her. Her allegation that she
has paid the balance of her loan with the two checks payable to petitioner
Bank has no merit for, as We have earlier explained, these checks were
never delivered to petitioner Bank. And even granting, without admitting,
that there was delivery to petitioner Bank, the delivery of checks in payment
of an obligation does not constitute payment unless they are cashed or
their value is impaired through the fault of the creditor.6 None of these
exceptions were alleged by respondent Sima Wei.
Therefore, unless respondent Sima Wei proves that she has been
relieved from liability on the promissory note by some other cause,
petitioner Bank has a right of action against her for the balance due
thereon.
However, insofar as the other respondents are concerned, petitioner
Bank has no privity with them. Since petitioner Bank never received the
checks on which it based its action against said respondents, it never
owned them (the checks) nor did it acquire any interest therein. Thus,
anything which the respondents may have done with respect to said
checks could not have prejudiced petitioner Bank. It had no right or interest
in the checks which could have been violated by said respondents.
Petitioner Bank has therefore no cause of action against said respondents,
in the alternative or otherwise. If at
__________________
5 Ganzon vs. Court of Appeals, 161 SCRA 646 (1988). See also 1 M
MORAN COMMENTS ON THE RULES OF COURT 715 (1957 ed )
citing San Agustin vs. Barrios, 68 Phil. 475 (1939), Toribio vs. Decasa, 55
Phil. 461 (1930), American Express Co. vs. Natividad, 46 Phil.
207 (1924), Agoncillo vs. Javier, 38 Phil. 424 (1918).
6
CIVIL CODE, Art. 1249, par. 2.
742
742 SUPREME COURT REPORTS ANNOTATED
Development Bank of Rizal vs. Sima Wei
all, it is Sima Wei, the drawer, who would have a cause of action against
her co-respondents, if the allegations in the complaint are found to be true.
With respect to the second assignment of error raised by petitioner
Bank regarding the applicability of Section 13, Rule 3 of the Rules of Court,
We find it unnecessary to discuss the same in view of Our finding that the
petitioner Bank did not acquire any right or interest in the checks due to
lack of delivery. It therefore has no cause of action against the
respondents, in the alternative or otherwise.
In the light of the foregoing, the judgment of the Court of Appeals
dismissing the petitioner's complaint is AFFIRMED insofar as the second
cause of action is concerned. On the first cause of action, the case is
REMANDED to the trial court for a trial on the merits, consistent with this
decision, in order to determine whether respondent Sima Wei is liable to
the Development Bank of Rizal for any amount under the promissory note
allegedly signed by her.
SO ORDERED.
Narvasa (C.J., Chairman), Padilla, Regalado and Nocon,
JJ., concur.
Judgment affirmed as to the second cause of action and remanded to
trial court as to the first cause of action for trial on the merits.
Note.—A check whether a manager's check or ordinary check is not a
legal tender and an offer of a check in payment of a debt is not a valid
tender of payment and may be refused receipt by the obligee or
creditor (Roman Catholic Bishop of Malolos lnc. vs. Intermediate Appellate
Court, 191 SCRA 411).
——o0o——
743
864 SUPREME COURT REPORTS ANNOTATED
Metropol (Bacolod) Financing & Investment Corp. vs. Sambok Motors
Co.
No. L-39641. February 28, 1983.*
METROPOL (BACOLOD) FINANCING & INVESTMENT CORPORATION,
plaintiff-appellee, vs. SAMBOK MOTORS COMPANY and NG SAMBOK
SONS MOTORS CO., LTD., defendants-appellants.
Mercantile Law; Negotiable Instruments; Indorsements;Qualified
indorsement constitutes indorser a mere assignor of title to the instrument
and relieves indorser of general obligation to pay instrument if instrument
is dishonored.—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 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.
Same; Same; Same; Interpretation; “Recourse,” meaning of;Words
“with recourse” in indorsement of promissory note means a general
indorsement or an indorsement without a qualification as to liability of
indorser on the note; Words added in the note “notice of demand, dishonor,
protest and presentment are hereby waived” confirm a party’s obligation
as a general indorser.—“Recourse” means resort to a person who is
secondarily liable after the default of the person who is primarily liable.
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
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 all waived. The words added by said appellant do not
limit his liability, but rather confirm his obligation as a general indorser.
________________
* SAMBOK MOTORS CO. (BACOLOD)
SECOND DIVISION.
865
VOL. 120, FEBRUARY 28, 1983 865
Metropol (Bacolod) Financing & Investment Corp. vs. Sambok
Motors Co.
Same; Same; Same; Same; Same; After dishonor of the note, a
person secondarily liable becomes a principal debtor.—Lastly, the lower
court did not err in not declaring appellants 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. His liability becomes the same as that of the original obligor.
Consequently, the holder need not even proceed against the maker before
suing the indorser.
APPEAL from the decision of the Court of First Instance of Iloilo, Br. I.
The facts are stated in the opinion of the Court.
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 raised 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 non-payment 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.
866
866 SUPREME COURT REPORTS ANNOTATED
Metropol (Bacolod) Financing & Investment Corp. vs. Sambok Motors
Co.
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:
1. “(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;
2. “(b)Ordering same defendant to pay to plaintiff the sum equivalent
to 25% of P15,939.00 plus interest thereon until fully paid; and
_______________
1 Sec. 21. Where claim does not survive.—When the action is for
recovery of money, debt or interest thereon, and the defendant dies before
final judgment in the Court of First Instance, it shall be dismissed to be
prosecuted in the manner especially provided in these rules.
867
VOL. 120, FEBRUARY 28, 1983 867
Metropol (Bacolod) Financing & Investment Corp. vs. Sambok Motors
Co.
1. “(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.3 Appellant, by indorsing the
note “with recourse” does not
_____________
2
Section 38, The Negotiable Instruments Law.
3
Ogden, The Law of Negotiable Instruments, p. 200 citing Industrial
Bank and Trust Company vs. Hesselberg, 195 S.W. (2d) 470.
868
868 SUPREME COURT REPORTS ANNOTATED
Metropol (Bacolod) Financing & Investment Corp. vs. Sambok Motors
Co.
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 all 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.5 His liability 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.
Makasiar (Chairman), Concepcion, Jr., Guerreroand Escolin, JJ.,
concur.
Aquino, J., is on leave.
Abad Santos, J., I concur and wish to add the observation that the
appeal could have been treated as a petition for review under R. A. 5440
and dismissed by minute resolution.
Decision affirmed.

______________
4
Ang Tiong vs. Ting, 22 SCRA 715.
5
Pittsburg Westmoreland Coal, Co. vs. Kerr, 115 N.E.
6
American Bank vs. Macondray & Co., 4 Phil. 695.
869
682 SUPREME COURT REPORTS ANNOTATED
Gempesaw vs. Court of Appeals
G.R. No. 92244. February 9, 1993.*
NATIVIDAD GEMPESAW, petitioner, vs. THE
HONORABLE COURT OF APPEALS and PHILIPPINE
BANK OF COMMUNICATIONS, respondents.
Negotiable Instruments Law; Checks; Forged Indorsements; Effect of
drawer's negligence.—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. 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 the forged indorsement. In other words, he is precluded from using
forgery as a basis for his claim for recrediting of his account.
Same; Same; Same; Same.—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
___________
* Gempesaw vs. Court of Appeals
SECOND DIVISION.
683
VOL. 218, FEBRUARY 9, 1993 683
Gempesaw vs. Court of Appeals
employee or a ent 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 oftentimes
have 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.
Same; Same; No legal obligation on drawee not to honor crossed
checks.—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.
Banks and Banking; Contractual relation between depositor as
obligee and drawee bank as obligor; Violation of rule on non-acceptance
of second indorsements without approval of branch manager.—There is
no question that there is a contractual relation between petitioner as
depositor (obligee) and the respondents 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
684
684 SUPREME COURT REPORTS ANNOTATED
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 correspondents with the
circumstance of the persons, of the time and of the place. x x x." 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.
PETITION for review of the decision of the Court ofAppeals.
The facts are stated in the opinion of the Court.
L.B. Camins for petitioner.
Angara, Abello, Concepcion, Regala & Cruz for private respondent.
CAMPOS, JR., J.:
From the adverse decision** of the Court of Appeals (CA-G.R. CV No.
16447), petitioner, Natividad Gempesaw, appealed to this Court in a
Petition for Review, on the issue of the right of the drawer to recover from
the drawee bank who pays a check with a forged indorsement of the
payee, debiting the same against the drawer's account.
The records show that on January 23, 1985, petitioner filed a Complaint
against the private respondent Philippine Bank of Communications
(respondent drawee Bank) for recovery of the money value of eighty-two
(82) checks charged against the petitioner's account with respondent
drawee Bank on the ground
____________
** Penned by Associate' Justice Celso L. Magsino, Associate Justices
Nathanael P. De Pano, Jr. and Cezar D. Francisco, concurring.
685
VOL. 218, FEBRUARY 9, 1993 685
Gempesaw vs. Court of Appeals
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 plaintiffs
(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 ofCourt setting forth
the following as the alleged errors ofthe 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 OFTHE 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 RECREDIT
THE CHECKING ACCOUNT OF PETITIONER IN THE
___________
1
Rollo, p. 11.
686
686 SUPREME COURT REPORTS ANNOTATED
Gempesaw vs. Court of Appeals
CALOOCAN CITY BRANCH BY THE VALUE OF THE EIGHTY TWO (82)
CHECKS WHICH IS IN THE AMOUNT OFP1,208,606.89 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,
both in 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 ofthe respondent
drawee Bank. To facilitate payment ofdebts 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
actually 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 the 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 num-
687
VOL. 218, FEBRUARY 9, 1993 687
Gempesaw vs. Court of Appeals
bered 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:
"x x x (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 ofSenson Enterprises
in the amount of P1 1,041.20 (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 P 1,672.47 (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 P1 1,335.60 (Exh. A-66), her
obligation was only P1,335.60 (Exh. E and E-1); (7) in Check No. 589019
dated March 17, 1984 in favor of Sophy Products in the
amount of P11,648.00 (Exh. A-78), her obligation was only P648.00 (Exh.
G); (8) in Check No. 589028 dated March 10, 1984 for the
amount of P11,520.00 in favor of the Yakult Philippines (Exh. A-73), the
latter's invoice was only P520.00 (Exh. H-2); (9) in Check No. 62033 dated
May 24, 1984 in the amount ofP11,504.00 in favor of Monde Denmark
Biscuit (Exh. A-34), her obligation was only P504.00 (Exhs. 1-1 and I-2)."2
Practically, all the checks issued and honored by the respondent drawee
Bank were crossed checks.3 Aside from the daily
_____________
2
Rollo, pp. 20-21; CA Decision, pp. 2-3. See Notes 2-6 thereof.
3 A crossed check is defined as a check crossed with two (2) lines,
between which are either the name of a bank or the words "and company,"
in full or abbreviated. In the former case, the banker on whom it is drawn
must not pay the money for the check to any other than the banker named;
in the latter case, he must not pay it to any other than a banker. Black's
Law Dictionary 301 (4th Ed.), citing 2 Steph. Comm. 118, note C; 7 Exch.
389; [1903] A.C. 240; Farmers' Bank v. Johnson, King & Co., 134 Ga. 486,
68 S.E. 85, 30 L.R.A., N.S. 697.
688
688 SUPREME COURT REPORTS ANNOTATED
Gempesaw vs. Court of Appeals
notice given to the petitioner by the respondent drawee Bank, the latter
also furnished her with a monthly statement of her bank 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
than two (2) years that petitioner found out about the fraudulent
manipulations of her bookkeeper.
All the eighty-two (82) checks with forged signatures ofthe 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 Elcano 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 periodical 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 Elcano 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 P 1,208,606.89 for
689
VOL. 218, FEBRUARY 9, 1993 689
Gempesaw vs. Court of Appeals
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 ofthose 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
Law4 (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
___________
4
Act No. 2031, enacted on February 3, 1911.
690
690 SUPREME COURT REPORTS ANNOTATED
Gempesaw vs. Court of Appeals
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 drawer 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 the forged indorsement.6 In other words, he is precluded from
____________
5 Britton, Bills and Notes, Sec. 143, pp. 663-664.
6 City of New York vs. Bronx County Trust Co., 261 N.Y. 64,184 N.E.
495 (1933); Detroit Piston Ring Co. vs. Wayne County & Home
691
VOL. 218, FEBRUARY 9, 1993 691
Gempesaw vs. Court of Appeals
using forgery as a basis for his claim for recrediting 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 later 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.8Without 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 ofAlfredo 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 Elcano branches ofthe same bank. The total
amount of Savings Bank, 252 Mich. 163, 233 N.W. 185 (1930); C.E.
Erickson Co. vs. lowa Nat. Bank, 211 lowa 495, 230 N.W. 342 (1930).
___________
7
NIL, Sec, 16.
8 Ibid., Sec. 191, par. 10.
692
692 SUPREME COURT REPORTS ANNOTATED
Gempesaw vs. Court of Appeals
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 oftentimes have 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 ofthe 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 the 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 sales 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
693
VOL. 218, FEBRUARY 9, 1993 693
Gempesaw vs. Court of Appeals
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 time she notified the respondent drawee bank.
It is highly improbable that in a period of two years, not
one of petitioner's suppliers complained of non-payment. Assuming that
even one single complaint had been made, petitioner would have been
duty-bound, as far as the respondent drawee Bank was concerned, to
make an adequate investigation on the matter. Had this been done, the
discrepancies would have been discovered, sooner or later. Petitioner's
failure to make such adequate inquiry constituted negligence which
resulted in the bank's honoring of the subsequent checks with forged
indorsements. On the other hand, since the record mentions nothing about
such a complaint, the possibility exists that the checks in question covered
inexistent sales. But even in such a case, considering the length of a
period of two (2) years, it is hard to believe that petitioner did not know or
realize that she was paying much 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 such 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 perti-
____________
9 Detroit Piston Ring Co. vs. Wayne County & Home Savings
Bank, supra, note 3.
694
694 SUPREME COURT REPORTS ANNOTATED
Gempesaw vs. Court of Appeals
nent 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 on her issued checks, or at least made random
scrutiny ofher 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 on her account.
The doctrine in the case of Great Eastern Life Insurance Co. us.
Hongkong & Shanghai Bank11 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
____________
10
Defiance Lumber Co. vs. Bank of California, N.A., 180 Wash. 533,
41 P. 2d 135 (1935); National Surety Co. vs. President and Directors of
Manhattan Co., et al, 252 N.Y. 247, 169 N.E. 372 (1929); Erickson Co. vs.
lowa National Bank, supra, note 3
11 43 Phil. 678 (1922).
695
VOL. 218, FEBRUARY 9, 1993 695
Gempesaw vs. Court of Appeals
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 ofchecks 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 X X x."
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 it 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
696
696 SUPREME COURT REPORTS ANNOTATED
Gempesaw vs. Court of Appeals
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 ofher 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 ofquasi-
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 her 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 offraud,
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
____________
12 NIL, Sec. 37.
697
VOL. 218, FEBRUARY 9, 1993 697
Gempesaw vs. Court of Appeals
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 ofthat
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. x x x."
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 ofdiligence, if not the utmost diligence. Surely, respondent drawee
Bank cannot claim it exercised such a degree ofdiligence 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 1172 which provides:
"Responsibility arising from negligence in the performance ofevery
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
698
698 SUPREME COURT REPORTS ANNOTATED
Gempesaw vs. Court of Appeals
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 ofcontract under
Article 1173, due diligence on the part ofthe defendant is not a defense.
PREMISES CONSIDERED, the case is hereby ordered REMANDED
to the trial court for the reception ofevidence 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 ofwhich one half must be paid by respondent
drawee bank to herein petitioner.
SO ORDERED.
Narvasa (C.J., Chairman), Feliciano, Regalado and Nocon,
JJ., concur.
Case remanded to trial court for reception of evidence.
Note.—Respondent bank is not guilty of negligence for it had no way of
ascertaining the authenticity of the endorsements in the checks, and
because it caused the checks to pass through the clearing house, before
allowing withdrawal of the proceeds thereof (Manila Lighter Transportation,
Inc. vs. Court of Appeals, 182 SCRA 251).

—o0o—

699
596 SUPREME COURT REPORTS ANNOTATED
Vicente R. de Ocampo & Co. vs. Gatchalian
No. L-15126. November 30, 1961.
VICENTE R. DE OCAMPO & Co., plaintiff-appellee, vs. ANITA
GATCHALIAN, ET AL., defendants-appellants.
Bills, notes and checks; Negotiable instruments; Holder in due
course.—Section 52(c) provides that a holder in due course is one who
takes the instrument “in good faith and for value”;
597
VOL. 3, NOVEMBER 30, 1961 597
Vicente R. de Ocampo & Co. vs. Gatchalian
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 x x x defect in the title of the person
negotiating it”; and lastly Section 59, that every holder is deemed prima
facie to be a holder in due course.
Same; Same; When a holder is not a holder in due course.—Where
a holder’s title is defective or suspicious, it cannot be stated that the payee
acquired the check without the 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.
Same; Same; Holder in due course; When proof of good faith
required.—Where the payee required 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 developed upon it to prove
that it actually acquired said check in good faith.
APPEAL from a judgment of the Court of First Instance of Manila.
Velasquez, J.
The facts are stated in the opinion of the Court.
Vicente Formoso, Jr. for plaintiff-appellee.
Reyes & Pangalañgan 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.
598
598 SUPREME COURT REPORTS ANNOTATED
Vicente R. de Ocampo & Co. vs. Gatchalian
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 defendant 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 Gon-zales
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 known
599
VOL. 3, NOVEMBER 30, 1961 599
Vicente R. de Ocampo & Co. vs. Gatchalian
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)
600
600 SUPREME COURT REPORTS ANNOTATED
Vicente R. de Ocampo & Co. vs. Gatchalian
No other evidence was submitted and upon said stipulation the court
rendered the judgment already alluded to 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 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, the 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 plaintiff-appellee’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).
601
VOL. 3, NOVEMBER 30, 1961 601
Vicente R. de Ocampo & Co. vs. Gatchalian
“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 of 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 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
602
602 SUPREME COURT REPORTS ANNOTATED
Vicente R. de Ocampo & Co. vs. Gatchalian
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 plaintiff-appellee 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 of 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
603
VOL. 3, NOVEMBER 30, 1961 603
Vicente R. de Ocampo & Co. vs. Gatchalian
instrument under the following conditions:
1. (a)That it is complete and regular upon its face;
 2. (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;
3. (c)That he took it in good faith and for value;
4. (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
604
604 SUPREME COURT REPORTS ANNOTATED
Vicente R. de Ocampo & Co. vs. Gatchalian
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 to 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 of 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 facieto 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 x x x
defect in the title of the person negotiating it;” and lastly Section 59, that
every holder is deemed prima facie to be a holder in due course.
In the case at bar the rule that a possessor of the instrument is prima
facie a 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
605
VOL. 3, NOVEMBER 30, 1961 605
Vicente R. de Ocampo & Co. vs. Gatchalian
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
606
606 SUPREME COURT REPORTS ANNOTATED
Vicente R. de Ocampo & Co. vs. Gatchalian
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 defen-
607
VOL. 3, NOVEMBER 30, 1961 607
Vicente R. de Ocampo & Co. vs. Gatchalian
dants are absolved from the complaint. With costs against plaintiff-
appellee.
Padilla, Bautista Angelo, Concepcion, Reyes,
J.B.L., Barrera, Paredes, Dizon and De Leon, JJ., concur.
Bengzon, C.J., concurs in the result.
Decision reversed.
ANNOTATION
HOLDER IN DUE COURSE UNDER THE NEGOTIABLE
INSTRUMENTS LAW
Every holder of a negotiable instrument is deemed prima facie a holder in
due course. However, this presumption arises only in favor of a person
who is a holder of the negotiable instrument as defined in Section 191 of
the Negotiable Instruments Law (Fossum vs. Fernandez, 44 Phil. 713).
Under Section 191 of the said law, a holder means a payee or indorsee of
a bill or note who is in pos-session of it or the bearer thereof. Therefore,
one who is not a payee or indorsee of a check can not be considered a
holder and invoke the presumption. (Montinola vs. Philippine National
Bank, 88 Phil. 178). The presumption does not arise in favor of a person
who is no longer in possession of the instrument (Fossum v.
Fernandez, supra).
Since Section 191 of the Negotiable Instruments Law defines “holder”
as the payee or indorsee of a bill or note, one who received a check by
indorsement to him of only part of its face value, and who was not the
payee, could not be considered a holder of the instrument. An indorsement
which purports to transfer to the indorsee only a part of the amount payable
does not operate as a negotiation of the instrument. The transferee could
not be considered an indorsee and at most was a mere assignee subject
to all the defenses available to the drawer. (Montinola vs. Philippine
National Bank, supra). Where, however, the transferee receives notice of
any infirmity in the instrument or defect in the title of the person negotiating
the same before he has paid the full amount agreed to be paid therefor,
the transferee will be deemed a holder in due
608
608 SUPREME COURT REPORTS ANNOTATED
Vicente R. de Ocampo & Co. vs. Gatchalian
course to the extent of the amount therefor paid by him (Sec. 54,
Negotiable Instruments Law).
Where an instrument payable on demand is negotiated an
unreasonable length of time after its issue, the holder thereof is not
deemed a holder in due course (Section 53, Negotiable Instruments Law).
Where a check was issued by the provincial treasurer on May 2, 1942 as
drawer and the check was transferred to plaintiff about the last days of
December 1944, or about two and one half years later, it was held that
since the check was already overdue when it fell into the hands of the
plaintiff, he could not be considered a holder in due course (Montinola vs.
Philippine National Bank, supra). Also, one who purchased two promissory
notes without the necessary indorsement on the part of the holder, after
payment thereof had already been one year overdue, and without having
made inquiries about the solvency of their makers, was not been
considered a holder in due course (Santos vs. Reyes and Reyes, 64 Phil.
383).
A person who had not paid the full amount of the check and who should
have known that the check could not have been issued to the indorser in
his private capacity but as a government official was not considered a
holder in good faith; hence, not a holder in due course (Montinola vs. Phil-
ippine National Bank, supra).
The relinquishment by a bank of its possession of and lien on several
pounds of rubber in consideration for the sight draft delivered to it is a
valuable consideration. Value may be some right, interest, profit or benefit
to the party who makes the contract or some forbearance, detriment, loss,
responsibility, on the other side. (Walker Rubber Corporation vs.
Redulandsel Indische & Handels Bank, Nos. L-12502 and L-12513, May
29, 1959). One who accepted checks that had passed the clearing office
but were unpaid and returned because the drawee had no funds, some of
them stamped “account closed”, was not a holder in due course, since he
knew upon taking them up that the checks had already been dishonored
(Chan Wan vs. Tan Kim, No. L-15380, September 30, 1960).
609
VOL. 3, NOVEMBER 30, 1961 609
Vicente R. de Ocampo & Co. vs. Gatchalian
It does not follow that simply because a holder of a bearer note is not a
holder in due course, he can not recover on the checks. If B purchases an
overdue negotiable note signed by A, he is not a holder in due course; but
he may recover from A if the latter has no valid excuse for refusing
payment. The only disadvantage of a holder who is not a holder in due
course is that the negotiable instrument is subject to defenses as if it was
non-negotiable. Therefore if the overdue checks were issued in payment
for shoes that were never delivered, A would have a good defense as
against a holder who is not so in due course (Chan Wan v. Tan Kim, L-
15380, September 30, 1960).
A holder of a negotiable instrument not in due course, but who derives
title through a holder in due course, may, therefore, recover against the
person primarily liable, though consideration for the same instrument has
failed; but the holder must have to prove as an independent matter of fact
that the previous holder was so in due course (Fossum vs.
Fernandez, supra).
Any promissory note, check, or order for the payment of money given
for money with which to gamble or for money lost at gambling or as stake,
is void (Section 9. Act 1757). It was held that in the absence of the consent
of the payor, promissory notes representing gambling debts were
unenforceable in the hands of an assignee (Palma vs. Canizares, 1 Phil.
602). However, in the hands of one purchasing the same for a valuable
consideration in good faith before maturity and not knowing and having no
knowledge of facts sufficient to put them upon notice that such promissory
note, check or order for the payment of money was given in consideration
of a gambling debt for money lost at gambling or as a stake, is the same is
valid. (Section 9, Act 1757).
All covenants and stipulations contained in bonds bills, notes, etc.
whereupon or whereby there shall be stipulated, charged, demanded,
reserved, secured, taken, or received directly or indirectly, a higher rate or
greater sum of value for the loan or renewal or forbearance of money
goods, credits than is allowed by the Usury Law shall be void, except as to
an innocent purchaser for a valuable consider-
610
610 SUPREME COURT REPORTS ANNOTATED
National Power Corporation vs. Valera
ation before maturity, when there has been no intention on the part of said
purchaser to evade the provisions of the Usury Law and said purchaser
was not a part of the original usurious transaction (Sec. 7, Act 2655).—
CAMILO D. QUIASON.
Notes.—The preponderant weight of authority, both by cases and by
jurisdiction, sustains the view that a “payee” may be a holder in due course
(Merchants’ Nat. Bank v. Smith, 59 Mont. 280, 196 Pa. 523, 15 A.L.R.
430). An illustration of this view may be found in Boston Steel & Iron
Co. v. Stener (183 Mass. 140, 66 N.E. 646, 97 Am. St. Rep. 426) where a
woman delivered to her husband a check made payable to a certain
creditor, with instructions to pay her debt with it. The husband gave the
check to the creditor in payment of his own debt to the same creditor who
accepted it as such in good faith. The creditor was held to be a holder in
due course. (Reyes, Notes on Negotiable Instruments Law, pp. 72-73).
If the holder had actual knowledge of suspicious circumstances,
coupled with the means of readily informing himself of the facts, and he
wilfully abstains from making inquiries, his intentional ignorance may
amount to bad faith (Hess v. Iowa Bankers’ Mortg. Co., 1924, 198 Ia. 1365,
201 N.W. 91; Marion Nat. Bank v. Harden, 1918, 83 W. Va. 119, 97 S.E.
600, 6 A.L.R. 240).

________________
596 SUPREME COURT REPORTS ANNOTATED
Vicente R. de Ocampo & Co. vs. Gatchalian
No. L-15126. November 30, 1961.
VICENTE R. DE OCAMPO & Co., plaintiff-appellee, vs. ANITA
GATCHALIAN, ET AL., defendants-appellants.
Bills, notes and checks; Negotiable instruments; Holder in due
course.—Section 52(c) provides that a holder in due course is one who
takes the instrument “in good faith and for value”;
597
VOL. 3, NOVEMBER 30, 1961 597
Vicente R. de Ocampo & Co. vs. Gatchalian
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 x x x defect in the title of the person
negotiating it”; and lastly Section 59, that every holder is deemed prima
facie to be a holder in due course.
Same; Same; When a holder is not a holder in due course.—Where
a holder’s title is defective or suspicious, it cannot be stated that the payee
acquired the check without the 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.
Same; Same; Holder in due course; When proof of good faith
required.—Where the payee required 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 developed upon it to prove
that it actually acquired said check in good faith.
APPEAL from a judgment of the Court of First Instance of Manila.
Velasquez, J.
The facts are stated in the opinion of the Court.
Vicente Formoso, Jr. for plaintiff-appellee.
Reyes & Pangalañgan 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.
598
598 SUPREME COURT REPORTS ANNOTATED
Vicente R. de Ocampo & Co. vs. Gatchalian
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 defendant 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 Gon-zales
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 known
599
VOL. 3, NOVEMBER 30, 1961 599
Vicente R. de Ocampo & Co. vs. Gatchalian
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)
600
600 SUPREME COURT REPORTS ANNOTATED
Vicente R. de Ocampo & Co. vs. Gatchalian
No other evidence was submitted and upon said stipulation the court
rendered the judgment already alluded to 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 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, the 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 plaintiff-appellee’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).
601
VOL. 3, NOVEMBER 30, 1961 601
Vicente R. de Ocampo & Co. vs. Gatchalian
“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 of 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 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
602
602 SUPREME COURT REPORTS ANNOTATED
Vicente R. de Ocampo & Co. vs. Gatchalian
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 plaintiff-appellee 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 of 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
603
VOL. 3, NOVEMBER 30, 1961 603
Vicente R. de Ocampo & Co. vs. Gatchalian
instrument under the following conditions:
1. (a)That it is complete and regular upon its face;
 2. (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;
3. (c)That he took it in good faith and for value;
4. (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
604
604 SUPREME COURT REPORTS ANNOTATED
Vicente R. de Ocampo & Co. vs. Gatchalian
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 to 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 of 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 facieto 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 x x x
defect in the title of the person negotiating it;” and lastly Section 59, that
every holder is deemed prima facie to be a holder in due course.
In the case at bar the rule that a possessor of the instrument is prima
facie a 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
605
VOL. 3, NOVEMBER 30, 1961 605
Vicente R. de Ocampo & Co. vs. Gatchalian
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
606
606 SUPREME COURT REPORTS ANNOTATED
Vicente R. de Ocampo & Co. vs. Gatchalian
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 defen-
607
VOL. 3, NOVEMBER 30, 1961 607
Vicente R. de Ocampo & Co. vs. Gatchalian
dants are absolved from the complaint. With costs against plaintiff-
appellee.
Padilla, Bautista Angelo, Concepcion, Reyes,
J.B.L., Barrera, Paredes, Dizon and De Leon, JJ., concur.
Bengzon, C.J., concurs in the result.
Decision reversed.
ANNOTATION
HOLDER IN DUE COURSE UNDER THE NEGOTIABLE
INSTRUMENTS LAW
Every holder of a negotiable instrument is deemed prima facie a holder in
due course. However, this presumption arises only in favor of a person
who is a holder of the negotiable instrument as defined in Section 191 of
the Negotiable Instruments Law (Fossum vs. Fernandez, 44 Phil. 713).
Under Section 191 of the said law, a holder means a payee or indorsee of
a bill or note who is in pos-session of it or the bearer thereof. Therefore,
one who is not a payee or indorsee of a check can not be considered a
holder and invoke the presumption. (Montinola vs. Philippine National
Bank, 88 Phil. 178). The presumption does not arise in favor of a person
who is no longer in possession of the instrument (Fossum v.
Fernandez, supra).
Since Section 191 of the Negotiable Instruments Law defines “holder”
as the payee or indorsee of a bill or note, one who received a check by
indorsement to him of only part of its face value, and who was not the
payee, could not be considered a holder of the instrument. An indorsement
which purports to transfer to the indorsee only a part of the amount payable
does not operate as a negotiation of the instrument. The transferee could
not be considered an indorsee and at most was a mere assignee subject
to all the defenses available to the drawer. (Montinola vs. Philippine
National Bank, supra). Where, however, the transferee receives notice of
any infirmity in the instrument or defect in the title of the person negotiating
the same before he has paid the full amount agreed to be paid therefor,
the transferee will be deemed a holder in due
608
608 SUPREME COURT REPORTS ANNOTATED
Vicente R. de Ocampo & Co. vs. Gatchalian
course to the extent of the amount therefor paid by him (Sec. 54,
Negotiable Instruments Law).
Where an instrument payable on demand is negotiated an
unreasonable length of time after its issue, the holder thereof is not
deemed a holder in due course (Section 53, Negotiable Instruments Law).
Where a check was issued by the provincial treasurer on May 2, 1942 as
drawer and the check was transferred to plaintiff about the last days of
December 1944, or about two and one half years later, it was held that
since the check was already overdue when it fell into the hands of the
plaintiff, he could not be considered a holder in due course (Montinola vs.
Philippine National Bank, supra). Also, one who purchased two promissory
notes without the necessary indorsement on the part of the holder, after
payment thereof had already been one year overdue, and without having
made inquiries about the solvency of their makers, was not been
considered a holder in due course (Santos vs. Reyes and Reyes, 64 Phil.
383).
A person who had not paid the full amount of the check and who should
have known that the check could not have been issued to the indorser in
his private capacity but as a government official was not considered a
holder in good faith; hence, not a holder in due course (Montinola vs. Phil-
ippine National Bank, supra).
The relinquishment by a bank of its possession of and lien on several
pounds of rubber in consideration for the sight draft delivered to it is a
valuable consideration. Value may be some right, interest, profit or benefit
to the party who makes the contract or some forbearance, detriment, loss,
responsibility, on the other side. (Walker Rubber Corporation vs.
Redulandsel Indische & Handels Bank, Nos. L-12502 and L-12513, May
29, 1959). One who accepted checks that had passed the clearing office
but were unpaid and returned because the drawee had no funds, some of
them stamped “account closed”, was not a holder in due course, since he
knew upon taking them up that the checks had already been dishonored
(Chan Wan vs. Tan Kim, No. L-15380, September 30, 1960).
609
VOL. 3, NOVEMBER 30, 1961 609
Vicente R. de Ocampo & Co. vs. Gatchalian
It does not follow that simply because a holder of a bearer note is not a
holder in due course, he can not recover on the checks. If B purchases an
overdue negotiable note signed by A, he is not a holder in due course; but
he may recover from A if the latter has no valid excuse for refusing
payment. The only disadvantage of a holder who is not a holder in due
course is that the negotiable instrument is subject to defenses as if it was
non-negotiable. Therefore if the overdue checks were issued in payment
for shoes that were never delivered, A would have a good defense as
against a holder who is not so in due course (Chan Wan v. Tan Kim, L-
15380, September 30, 1960).
A holder of a negotiable instrument not in due course, but who derives
title through a holder in due course, may, therefore, recover against the
person primarily liable, though consideration for the same instrument has
failed; but the holder must have to prove as an independent matter of fact
that the previous holder was so in due course (Fossum vs.
Fernandez, supra).
Any promissory note, check, or order for the payment of money given
for money with which to gamble or for money lost at gambling or as stake,
is void (Section 9. Act 1757). It was held that in the absence of the consent
of the payor, promissory notes representing gambling debts were
unenforceable in the hands of an assignee (Palma vs. Canizares, 1 Phil.
602). However, in the hands of one purchasing the same for a valuable
consideration in good faith before maturity and not knowing and having no
knowledge of facts sufficient to put them upon notice that such promissory
note, check or order for the payment of money was given in consideration
of a gambling debt for money lost at gambling or as a stake, is the same is
valid. (Section 9, Act 1757).
All covenants and stipulations contained in bonds bills, notes, etc.
whereupon or whereby there shall be stipulated, charged, demanded,
reserved, secured, taken, or received directly or indirectly, a higher rate or
greater sum of value for the loan or renewal or forbearance of money
goods, credits than is allowed by the Usury Law shall be void, except as to
an innocent purchaser for a valuable consider-
610
610 SUPREME COURT REPORTS ANNOTATED
National Power Corporation vs. Valera
ation before maturity, when there has been no intention on the part of said
purchaser to evade the provisions of the Usury Law and said purchaser
was not a part of the original usurious transaction (Sec. 7, Act 2655).—
CAMILO D. QUIASON.
Notes.—The preponderant weight of authority, both by cases and by
jurisdiction, sustains the view that a “payee” may be a holder in due course
(Merchants’ Nat. Bank v. Smith, 59 Mont. 280, 196 Pa. 523, 15 A.L.R.
430). An illustration of this view may be found in Boston Steel & Iron
Co. v. Stener (183 Mass. 140, 66 N.E. 646, 97 Am. St. Rep. 426) where a
woman delivered to her husband a check made payable to a certain
creditor, with instructions to pay her debt with it. The husband gave the
check to the creditor in payment of his own debt to the same creditor who
accepted it as such in good faith. The creditor was held to be a holder in
due course. (Reyes, Notes on Negotiable Instruments Law, pp. 72-73).
If the holder had actual knowledge of suspicious circumstances,
coupled with the means of readily informing himself of the facts, and he
wilfully abstains from making inquiries, his intentional ignorance may
amount to bad faith (Hess v. Iowa Bankers’ Mortg. Co., 1924, 198 Ia. 1365,
201 N.W. 91; Marion Nat. Bank v. Harden, 1918, 83 W. Va. 119, 97 S.E.
600, 6 A.L.R. 240).

________________
 VOL. 409, AUGUST 15, 2003 159
Yang vs. Court of Appeals
G.R. No. 138074. August 15, 2003.*
CELY YANG, petitioner, vs. HON. COURT OF APPEALS, PHILIPPINE
COMMERCIAL INTERNATIONAL BANK, FAR EAST BANK & TRUST
CO., EQUITABLE BANKING CORPORATION, PREM CHANDIRAMANI
and FERNANDO DAVID, respondents.
Negotiable Instrument Law; Every holder of a negotiable instrument
is deemed prima facie a holder in due course; Definition of a holder in due
course; Presumption rebuttable.—Every holder of a negotiable instrument
is deemed prima facie a holder in due course. However, this presumption
arises only in favor of a person who is a holder as defined in Section 191
of the Negotiable Instruments Law, meaning a “payee or indorsee of a bill
or note, who is in possession of it, or the bearer thereof.” In the present
case, it is not disputed that David was the payee of the checks in question.
The weight of authority sustains the view that a payee may be a holder in
due course. Hence, the presumption that he is a prima facie holder in due
course applies in his favor. However, said presumption may be rebutted.
Hence, what is vital to the resolution of this issue is whether David took
possession of the checks under the conditions provided for in Section 52
of the Negotiable Instruments Law. All the requisites provided for in Section
52 must concur in David’s case; otherwise he cannot be deemed a holder
in due course.
Same; Section 24 of the Negotiable Instruments Law creates a
presumption that every party to an instrument acquired the same for a
consideration or for value; Petitioner must present convincing evidence to
overthrow the presumption.—With respect to consideration, Section 24 of
the Negotiable Instruments Law creates a presumption that every party to
an instrument acquired the same for a consideration or for value. Thus, the
law itself creates a presumption in David’s favor that he gave valuable
_______________
* 1 Penned by Associate Justice Bernardo P. Abesamis with Associate
SECOND DIVISION.
160
160 SUPREME COURT REPORTS ANNOTATED
Yang vs. Court of Appeals
consideration for the checks in question. In alleging otherwise, the
petitioner has the onus to prove that David got hold of the checks absent
said consideration. In other words, the petitioner must present convincing
evidence to overthrow the presumption. Our scrutiny of the records,
however, shows that the petitioner failed to discharge her burden of proof.
The petitioner’s averment that David did not give valuable consideration
when he took possession of the checks is unsupported, devoid of any
concrete proof to sustain it.
Same; Court has taken judicial cognizance of the practice that a
check with two parallel lines in the upper left hand corner means that it
could only be deposited and not converted into cash.—The Negotiable
Instruments Law is silent with respect to crossed checks, although the
Code of Commerce makes reference to such instruments. Nonetheless,
this Court has taken judicial cognizance of the practice that a check with
two parallel lines in the upper left hand corner means that it could only be
deposited and not converted into cash. The effects of crossing a check,
thus, relates to the mode of payment, meaning that the drawer had
intended the check for deposit only by the rightful person, i.e., the payee
named therein.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Don P. Porciuncula for petitioner.
Victor N. Alimurong and Siguion Reyna, Monticillo &
Ongsiako and Curato, Divina & Associates for FEBTC Bank.
Recto Law Offices for private respondent Chandiramani.
Fortun, Narvasa & Salazar for respondent David.
Pacis, Ramirez & Bacorro Law Offices for respondent PCI Bank.
QUISUMBING, J.:
For review on certiorari is the decision1 of the Court of Appeals, dated
March 25, 1999, in CA-G.R. CV No. 52398, which affirmed with
modification the joint decision of the Regional Trial Court (RTC) of Pasay
City, Branch 117, dated July 4, 1995, in Civil Cases
_______________
Justices Jainal D. Rasul and Conchita Carpio Morales (now a member of
this Court) concurring. See Rollo, pp. 95-108.
161
VOL. 409, AUGUST 15, 2003 161
Yang vs. Court of Appeals
Nos. 54792 and 5492.3 The trial court dismissed the complaint against
herein respondents Far East Bank & Trust Company (FEBTC), Equitable
Banking Corporation (Equitable), and Philippine Commercial International
Bank (PCIB) and ruled in favor of respondent Fernando David as to the
proceeds of the two cashier’s checks, including the earnings
thereof pendente lite. Petitioner Cely Yang was ordered to pay David moral
damages of P100,000.00 and attorney’s fees also in the amount of
P100,000.00.
The facts of this case are not disputed, to wit:
On or before December 22, 1987, petitioner Cely Yang and private
respondent Prem Chandiramani entered into an agreement whereby the
latter was to give Yang a PCIB manager’s check in the amount of P4.2
million in exchange for two (2) of Yang’s manager’s checks, each in the
amount of P2.087 million, both payable to the order of private respondent
Fernando David. Yang and Chandiramani agreed that the difference of
P26,000.00 in the exchange would be their profit to be divided equally
between them.
Yang and Chandiramani also further agreed that the former would
secure from FEBTC a dollar draft in the amount of US$200,000.00,
payable to PCIB FCDU Account No. 4195-01165-2, which Chandiramani
would exchange for another dollar draft in the same amount to be issued
by Hang Seng Bank Ltd. of Hong Kong.
Accordingly, on December 22, 1987, Yang procured the following:
1. a)Equitable Cashier’s Check No. CCPS 14-009467 in the sum of
P2,087,000.00, dated December 22, 1987, payable to the order
of Fernando David;
2. b)FEBTC Cashier’s Check No. 287078, in the amount of
P2,087,000.00, dated December 22, 1987, likewise payable to
the order of Fernando David; and
3. c)FEBTC Dollar Draft No. 4771, drawn on Chemical Bank, New
York, in the amount of US$200,000.00, dated December 22,
1987, payable to PCIB FCDU Account No. 4195-01165-2.
_______________
2 The case is entitled “Cely Yang v. Equitable Banking Corporation,
Prem Chandiramani and Fernando David.” See Rollo, pp. 38-41.
3 Entitled “Cely Yang v. Far East Bank & Trust Company, Philippine
Commercial and International Bank, Prem Chandiramani and Fernando
David.” See Rollo, pp. 42-46.
162
162 SUPREME COURT REPORTS ANNOTATED
Yang vs. Court of Appeals
At about one o’clock in the afternoon of the same day, Yang gave the
aforementioned cashier’s checks and dollar drafts to her business
associate, Albert Liong, to be delivered to Chandiramani by Liong’s
messenger, Danilo Ranigo. Ranigo was to meet Chandiramani at
Philippine Trust Bank, Ayala Avenue, Makati City, Metro Manila where he
would turn over Yang’s cashier’s checks and dollar draft to Chandiramani
who, in turn, would deliver to Ranigo a PCIB manager’s check in the sum
of P4.2 million and a Hang Seng Bank dollar draft for US$200,000.00 in
exchange.
Chandiramani did not appear at the rendezvous and Ranigo allegedly
lost the two cashier’s checks and the dollar draft bought by petitioner.
Ranigo reported the alleged loss of the checks and the dollar draft to Liong
at half past four in the afternoon of December 22, 1987. Liong, in turn,
informed Yang, and the loss was then reported to the police.
It transpired, however, that the checks and the dollar draft were not lost,
for Chandiramani was able to get hold of said instruments, without
delivering the exchange consideration consisting of the PCIB manager’s
check and the Hang Seng Bank dollar draft.
At three o’clock in the afternoon or some two (2) hours after
Chandiramani and Ranigo were to meet in Makati City, Chandiramani
delivered to respondent Fernando David at China Banking Corporation
branch in San Fernando City, Pampanga, the following: (a) FEBTC
Cashier’s Check No. 287078, dated December 22, 1987, in the sum of
P2.087 million; and (b) Equitable Cashier’s Check No. CCPS 14-009467,
dated December 22, 1987, also in the amount of P2.087 million. In
exchange, Chandiramani got US$360,000.00 from David, which
Chandiramani deposited in the savings account of his wife, Pushpa
Chandiramani; and his mother, Rani Reynandas, who held FCDU Account
No. 124 with the United Coconut Planters Bank branch in Greenhills, San
Juan, Metro Manila. Chandiramani also deposited FEBTC Dollar Draft No.
4771, dated December 22, 1987, drawn upon the Chemical Bank, New
York for US$200,000.00 in PCIB FCDU Account No. 4195-01165-2 on the
same date.
Meanwhile, Yang requested FEBTC and Equitable to stop payment on
the instruments she believed to be lost. Both banks complied with her
request, but upon the representation of PCIB, FEBTC subsequently lifted
the stop payment order on FEBTC
163
VOL. 409, AUGUST 15, 2003 163
Yang vs. Court of Appeals
Dollar Draft No. 4771, thus enabling the holder of PCIB FCDU Account No.
4195-01165-2 to receive the amount of US$200,000.00.
On December 28, 1987, herein petitioner Yang lodged a Complaint4 for
injunction and damages against Equitable, Chandiramani, and David, with
prayer for a temporary restraining order, with the Regional Trial Court of
Pasay City. The Complaint was docketed as Civil Case No. 5479. The
Complaint was subsequently amended to include a prayer for Equitable to
return to Yang the amount of P2.087 million, with interest thereon until fully
paid.5
 On January 12, 1988, Yang filed a separate case for injunction and
damages, with prayer for a writ of preliminary injunction against FEBTC,
PC1B, Chandiramani and David, with the RTC of Pasay City, docketed
as Civil Case No. 5492. This complaint was later amended to include a
prayer that defendants therein return to Yang the amount of P2.087 million,
the value of FEBTC Dollar Draft No. 4771, with interest at 18% annually
until fully paid.6
On February 9, 1988, upon the filing of a bond by Yang, the trial court
issued a writ of preliminary injunction in Civil Case No. 5479. A writ of
preliminary injunction was subsequently issued in Civil Case No.
5492 also.
Meanwhile, herein respondent David moved for dismissal of the cases
against him and for reconsideration of the Orders granting the writ of
preliminary injunction, but these motions were denied. David then elevated
the matter to the Court of Appeals in a special civil action for certiorari
docketed as CA-G.R. SP No. 14843, which was dismissed by the appellate
court.
As Civil Cases Nos. 5479 and 5492 arose from the same set of facts,
the two cases were consolidated. The trial court then conducted pre-trial
and trial of the two cases, but the proceedings had to be suspended after
a fire gutted the Pasay City Hall and destroyed the records of the courts.
After the records were reconstituted, the proceedings resumed and the
parties agreed that the money in dispute be invested in Treasury Bills to
be awarded in favor of the prevailing side. It was
_______________
4
Records, Vol. I, pp. 1-4.
5
Id., at p. 8.
6 Id., at p. 141.
164
164 SUPREME COURT REPORTS ANNOTATED
Yang vs. Court of Appeals
also agreed by the parties to limit the issues at the trial to the following:
1. 1.Who, between David and Yang, is legally entitled to the proceeds
of Equitable Banking Corporation (EBC) Cashier’s Check No.
CCPS 14-009467 in the sum of P2,087,000.00 dated December
22, 1987, and Far East Bank and Trust Company (FEBTC)
Cashier’s Check No. 287078 in the sum of P2,087,000.00 dated
December 22, 1987, together with the earnings derived
therefrom pendente lite?
2. 2.Are the defendants FEBTC and PCIB solidarily liable to Yang for
having allowed the encashment of FEBTC Dollar Draft No. 4771,
in the sum of US$200,000.00 plus interest thereon despite the
stop payment order of Cely Yang?7
On July 4, 1995, the trial court handed down its decision in Civil Cases
Nos. 5479 and 5492, to wit:
“WHEREFORE, the Court renders judgment in favor of defendant
Fernando David against the plaintiff Cely Yang and declaring the former
entitled to the proceeds of the two (2) cashier’s checks, together with the
earnings derived therefrom pendente lite; ordering the plaintiff to pay the
defendant Fernando David moral damages in the amount of P100,000.00;
attorney’s fees in the amount of P100,000.00 and to pay the costs. The
complaint against Far East Bank and Trust Company (FEBTC), Philippine
Commercial International Bank (PCIB) and Equitable Banking Corporation
(EBC) is dismissed. The decision is without prejudice to whatever action
plaintiff Cely Yang will file against defendant Prem Chandiramani for
reimbursement of the amounts received by him from defendant Fernando
David.
SO ORDERED.”8
In finding for David, the trial court ratiocinated:
The evidence shows that defendant David was a holder in due course for
the reason that the cashier’s checks were complete on their face when they
were negotiated to him. They were not yet overdue when he became the
holder thereof and he had no notice that said checks were previously
dishonored; he took the cashier’s checks in good faith and for value. He
parted some $200,000.00 for the two (2) cashier’s checks which were
given to defendant Chandiramani; he had also no notice of any infirmity in
the cashier’s checks or defect in the title of the drawer. As a matter of fact,
he
_______________
7
Rollo, p. 84.
8
CA Rollo, p. 131.
165
VOL. 409, AUGUST 15, 2003 165
Yang vs. Court of Appeals
asked the manager of the China Banking Corporation to inquire as to the
genuineness of the cashier’s checks (tsn, February 5, 1988, p. 21,
September 20, 1991, pp. 13-14). Another proof that defendant David is a
holder in due course is the fact that the stop payment order on [the] FEBTC
cashier’s check was lifted upon his inquiry at the head office (tsn,
September 20, 1991, pp. 24-25). The apparent reason for lifting the stop
payment order was because of the fact that FEBTC realized that the
checks were not actually lost but indeed reached the payee defendant The appellate court awarded P25,000.00 in attorney’s fees to PCIB as it
David.9 found the action filed by Yang against said bank to be “clearly unfounded
Yang then moved for reconsideration of the RTC judgment, but the trial and baseless.” Since PCIB was compelled to litigate to protect itself, then
court denied her motion in its Order of September 20, 1995. it was entitled under Article 220812 of the Civil Code to attorney’s fees and
In the belief that the trial court misunderstood the concept of a holder litigation expenses.
in due course and misapprehended the factual milieu, Yang seasonably
filed an appeal with the Court of Appeals, docketed as CA-G.R. CV No. _______________
52398.
11
On March 25, 1999, the appellate court decided CA-G.R. CV No. Id., at p. 456.
52398 in this wise: 12
ART. 2208. In the absence of stipulation, attorney’s fees and
“WHEREFORE, this court AFFIRMS the judgment of the lower court with expenses of litigation, other than judicial costs, cannot be recovered,
modification and hereby orders the plaintiff-appellant to pay defendant- except:
appellant PCIB the amount of Twenty-Five Thousand Pesos (P25,000.00).
SO ORDERED.”10 1. (1)When exemplary damages are awarded;
In affirming the trial court’s judgment with respect to herein respondent 2. (2)When the defendant’s act or omission has compelled the plaintiff
David, the appellate court found that: to litigate with third persons or to incur expenses to protect his
In this case, defendant-appellee had taken the necessary precautions to interest;
verify, through his bank, China Banking Corporation, the genuineness of 3. (3)In criminal cases of malicious prosecution against the plaintiff;
whether (sic) the cashier’s checks he received from Chandiramani. As no 4. (4)In case of a clearly unfounded civil action or proceeding against
stop payment order was made yet (at) the time of the inquiry, defendant- the plaintiff;
appellee had no notice of what had transpired earlier between the plaintiff- 5. (5)Where the defendant acted in gross and evident bad faith in
appellant and Chandiramani. All he knew was that the checks were issued refusing the plaintiffs plainly valid, just, and demandable claim;
to Chandiramani with whom he was he had (sic) a transaction. Further on, 6. (6)In actions for legal support;
David received the checks in question in due course because 7. (7)In actions for the recovery of wages of household helpers,
Chandiramani, who at the time the checks were delivered to David, was laborers, and skilled workers;
acting as Yang’s agent. 8. (8)In actions for indemnity under workmen’s compensation and
David had no notice, real or constructive, cogent for him to make further employer’s liability laws;
inquiry as to any infirmity in the instrument(s) and defect of title of 9. (9)In a separate civil action to recover civil liability arising from a
crime;
_______________ 10. (10)When at least double judicial costs are awarded;
11. (11)In any other case where the court deems it just and equitable
9
Id., at pp. 195-196. that attorney’s fees and expenses of litigation should be
10
Id., at p. 462. recovered.
166
166 SUPREME COURT REPORTS ANNOTATED In all cases, the attorney’s fees and expenses of litigation must be
Yang vs. Court of Appeals reasonable.
the holder. To mandate that each holder inquire about every aspect on how 167
the instrument came about will unduly impede commercial transactions, VOL. 409, AUGUST 15, 2003 167
Although negotiable instruments do not constitute legal tender, they often Yang vs. Court of Appeals
take the place of money as a means of payment. Hence, the instant recourse wherein petitioner submits the following issues
The mere fact that David and Chandiramani knew one another for a for resolution:
long time is not sufficient to establish that they connived with each other to
defraud Yang. There was no concrete proof presented by Yang to support
1. a.WHETHER THE CHECKS WERE ISSUED TO PREM
her theory.11
CHANDIRAMANI BY PETITIONER;
 2. b.WHETHER THE ALLEGED TRANSACTION BETWEEN PREM
CHANDIRAMANI AND FERNANDO DAVID IS LEGITIMATE OR
A SCHEME BY BOTH PRIVATE RESPONDENTS TO SWINDLE
PETITIONER;
3. c.WHETHER FERNANDO DAVID GAVE PREM CHANDIRAMANI
US$360,000.00 OR JUST A FRACTION OF THE AMOUNT
REPRESENTING HIS SHARE OF THE LOOT;
4. d.WHETHER PRIVATE RESPONDENTS FERNANDO DAVID
AND PCIB ARE ENTITLED TO DAMAGES AND ATTORNEY’S
FEES.13
At the outset, we must stress that this is a petition for review under Rule
45 of the 1997 Rules of Civil Procedure. It is basic that in petitions for
review under Rule 45, the jurisdiction of this Court is limited to reviewing
questions of law, questions of fact are not entertained absent a showing
that the factual findings complained of are totally devoid of support in the
record or are glaringly erroneous.14Given the facts in the instant case,
despite petitioner’s formulation, we find that the following are the pertinent
issues to be resolved:
1. a)Whether the Court of Appeals erred in holding herein respondent
Fernando David to be a holder in due course; and
2. b)Whether the appellate court committed a reversible error in
awarding damages and attorney’s fees to David and PCIB.
On the first issue, petitioner Yang contends that private respondent
Fernando David is not a holder in due course of the checks in question.
While it is true that he was named the payee thereof, David failed to inquire
from Chandiramani about how the latter acquired possession of said
checks. Given his failure to do so, it cannot be said that David was unaware
of any defect or infirmity in the title of Chandiramani to the checks at the
time of their nego-
_______________
13
Rollo, p. 230.
14
Producers Bank of the Phil. v. Court of Appeals, 417 Phil. 646,
656; 365 SCRA 326 (2001).
168
168 SUPREME COURT REPORTS ANNOTATED
Yang vs. Court of Appeals
tiation. Moreover, inasmuch as the checks were crossed, then David
should have, pursuant to our ruling in Bataan Cigar & Cigarette Factory,
Inc. v. Court of Appeals, G.R. No. 93048, March 3, 1994, 230 SCRA 643,
been put on guard that the checks were issued for a definite purpose and
accordingly, made inquiries to determine if he received the checks
pursuant to that purpose. His failure to do so negates the finding in the
proceedings below that he was a holder in due course.
Finally, the petitioner argues that there is no showing whatsoever that
David gave Chandiramani any consideration of value in exchange for the
aforementioned checks.
Private respondent Fernando David counters that the evidence on
record shows that when he received the checks, he verified their
genuineness with his bank, and only after said verification did he deposit
them. David stresses that he had no notice of previous dishonor or any
infirmity that would have aroused his suspicions, the instruments being
complete and regular upon their face. David stresses that the checks in
question were cashier’s checks. From the very nature of cashier’s checks,
it is highly unlikely that he would have suspected that something was
amiss. David also stresses negotiable instruments are presumed to have
been issued for valuable consideration, and he who alleges otherwise must
controvert the presumption with sufficient evidence. The petitioner failed to
discharge this burden, according to David. He points out that the checks
were delivered to him as the payee, and he took them as holder and payee
thereof. Clearly, he concludes, he should be deemed to be their holder in
due course.
We shall now resolve the first issue.
Every holder of a negotiable instrument is deemed prima facie a holder
in due course. However, this presumption arises only in favor of a person
who is a holder as defined in Section 191 of the Negotiable Instruments
Law,15 meaning a “payee or indorsee of a bill or note, who is in possession
of it, or the bearer thereof.”
In the present case, it is not disputed that David was the payee of the
checks in question. The weight of authority sustains the view that a payee
may be a holder in due course.16 Hence, the presump-
_______________
15
Fossum v. Fernandez Hermanos, 44 Phil. 713, 716 (1923).
16
Merchants’ National Bank v. Smith, 59 Mont. 280, 196 p. 523, 15 ALR
430; Boston Steel & Iron Co. v. Steur, 183 Mass. 140, 66 NE 646.
169
VOL. 409, AUGUST 15, 2003 169
Yang vs. Court of Appeals
tion that he is a prima facie holder in due course applies in his favor.
However, said presumption may be rebutted. Hence, what is vital to the
resolution of this issue is whether David took possession of the checks
under the conditions provided for in Section 5217 of the Negotiable
Instruments Law. All the requisites provided for in Section 52 must concur
in David’s case; otherwise he cannot be deemed a holder in due course.
We find that the petitioner’s challenge to David’s status as a holder in
due course hinges on two arguments: (1) the lack of proof to show that
David tendered any valuable consideration for the disputed checks; and
(2) David’s failure to inquire from Chandiramani as to how the latter
acquired possession of the checks, thus resulting in David’s intentional
ignorance tantamount to bad faith. In sum, petitioner posits that the last
two requisites of Section 52 are missing, thereby preventing David from
being considered a holder in due course. Unfortunately for the petitioner,
her arguments on this score are less than meritorious and far from
persuasive.
First, with respect to consideration, Section 2418 of the Negotiable
Instruments Law creates a presumption that every party to an instrument
acquired the same for a consideration19 or for
_______________
17SEC. 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:
1. (a)That it is complete and regular upon its face;
2. (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;
3. (c)That he took it in good faith and for value;
4. (d)That at the time it was negotiated to him, he had no notice of
any infirmity in the instrument or defect of the title of the person
negotiating it.
18 SEC. 24. Presumption of consideration.—Every negotiable
instrument is deemed prima facie to have been issued for valuable
consideration; and every person whose signature appears thereon to have
become a party thereto, for value.
19 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 such whether the instrument is payable
on demand or at a future date.
170
170 SUPREME COURT REPORTS ANNOTATED
Yang vs. Court of Appeals
value.20 Thus, the law itself creates a presumption in David’s favor that he
gave valuable consideration for the checks in question. In alleging
otherwise, the petitioner has the onus to prove that David got hold of the
checks absent said consideration. In other words, the petitioner must
present convincing evidence to overthrow the presumption. Our scrutiny of
the records, however, shows that the petitioner failed to discharge her
burden of proof. The petitioner’s averment that David did not give valuable
consideration when he took possession of the checks is unsupported,
devoid of any concrete proof to sustain it. Note that both the trial court and
the appellate court found that David did not receive the checks gratis, but
instead gave Chandiramani US$360,000.00 as consideration for the said
instruments. Factual findings of the Court of Appeals are conclusive on the
parties and not reviewable by this Court; they carry great weight when the
factual findings of the trial court are affirmed by the appellate court.21
Second, petitioner fails to point any circumstance which should have
put David on inquiry as to the why and wherefore of the possession of the
checks by Chandiramani. David was not privy to the transaction between
petitioner and Chandiramani. Instead, Chandiramani and David had a
separate dealing in which it was precisely Chandiramani’s duty to deliver
the checks to David as payee. The evidence shows that Chandiramani
performed said task to the letter. Petitioner admits that David took the step
of asking the manager of his bank to verify from FEBTC and Equitable as
to the genuineness of the checks and only accepted the same after being
assured that there was nothing wrong with said checks. At that time, David
was not aware of any “stop payment” order. Under these circumstances,
David thus had no obligation to ascertain from Chandiramani what the
nature of the latter’s title to the checks was, if any, or the nature of his
possession. Thus, we cannot hold him guilty of gross neglect amounting to
legal absence of good faith, absent any showing that there was something
amiss about Chandiramani’s acquisition or possession of the checks.
David did
_______________
20 SEC. 191. Definitions and meaning of terms.—In this Act, unless the
context otherwise requires:
xxx
“Value” means valuable consideration.
21 See Fernandez v. Fernandez, 416 Phil. 322, 337; 363 SCRA
811(2001).
171
VOL. 409, AUGUST 15, 2003 171
Yang vs. Court of Appeals
not close his eyes deliberately to the nature or the particulars of a fraud
allegedly committed by Chandiramani upon the petitioner, absent any
knowledge on his part that the action in taking the instruments amounted
to bad faith.22
Belatedly, and we say belatedly since petitioner did not raise this matter
in the proceedings below, petitioner now claims that David should have
been put on alert as the instruments in question were crossed checks.
Pursuant to Bataan Cigar & Cigarette Factory, Inc. v. Court of Appeals,
David should at least have inquired as to whether he was acquiring said
checks for the purpose for which they were issued, according to petitioner’s
submission.
Petitioner’s reliance on the Bataan Cigar case, however, is misplaced.
The facts in the present case are not on all fours with Bataan Cigar. In the
latter case, the crossed checks were negotiated and sold at a discount by
the payee, while in the instant case, the payee did not negotiate further the
checks in question but promptly deposited them in his bank account.
The Negotiable Instruments Law is silent with respect to crossed
checks, although the Code of Commerce23 makes reference to such
instruments. Nonetheless, this Court has taken judicial cognizance of the
practice that a check with two parallel lines in the upper left hand corner
means that it could only be deposited and not converted into cash.24 The
effects of crossing a check, thus, relates to the mode of payment, meaning
that the drawer had intended the check for deposit only by the rightful
person, i.e.,the payee named therein. In Bataan Cigar, the rediscounting
of the check by the payee knowingly violated the avowed intention of
crossing the check. Thus, in accepting the cross checks and paying cash
for them, despite the warning of the crossing, the subsequent holder could
not be considered in good faith and thus, not a holder
_______________
22 See Ozark Motor Co. v. Horton, 196 SW 395. See also Davis v. First
National Bank, 26 Ariz. 621, 229 p. 391.
23 ART. 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.”
24 State Investment House v. Intermediate Appellate Court, G.R. No.
72764, 13 July 1989, 175 SCRA 310, 315.
172
172 SUPREME COURT REPORTS ANNOTATED
Yang vs. Court of Appeals
in due course. Our ruling in Bataan Cigar reiterates that in De Ocampo &
Co. v. Gatchalian.25
The factual circumstances in De Ocampo and in Bataan Cigar are not
present in this case. For here, there is no dispute that the crossed checks
were delivered and duly deposited by David, the payee named therein, in
his bank account. In other words, the purpose behind the crossing of the
checks was satisfied by the payee.
Proceeding to the issue of damages, petitioner merely argues that
respondents David and PCIB are not entitled to damages, attorney’s fees,
and costs of suit as both acted in bad faith towards her, as shown by her
version of the facts which gave rise to the instant case.
Respondent David counters that he was maliciously and
unceremoniously dragged into this suit for reasons which have nothing to
do with him at all, but which arose from petitioner’s failure to receive her
share of the profit promised her by Chandiramani. Moreover, in filing this
suit which has lasted for over a decade now, the petitioner deprived David
of the rightful enjoyment of the two checks, to which he is entitled, under
the law, compelled him to hire the services of counsel to vindicate his
rights, and subjected him to social humiliation and besmirched reputation,
thus harming his standing as a person of good repute in the business
community of Pampanga. David thus contends that it is but proper that
moral damages, attorney’s fees, and costs of suit be awarded him.
For its part, respondent PCIB stresses that it was established by both
the trial court and the appellate court that it was needlessly dragged into
this case. Hence, no error was committed by the appellate court in
declaring PCIB entitled to attorney’s fees as it was compelled to litigate to
protect itself.
_______________
25
113 Phil. 574 (1961). We held that under the following
circumstances: (1) the drawer had no account with the payee; (2) the check
was crossed; (3) the crossed check was used to pay an obligation which
did not correspond to the amount of the check; and (4) the holder did not
show or tell the payee why he had the check in his possession and why he
was using to pay his personal account, then the payee had the duty to
ascertain from the holder what the nature of the latter’s title to the check
was or the nature of his possession.
173
VOL. 409, AUGUST 15, 2003 173
Yang vs. Court of Appeals
We have thoroughly perused the records of this case and find no reason
to disagree with the finding of the trial court, as affirmed by the appellate
court, that:
[D]efendant David is entitled to [the] award of moral damages as he has
been needlessly and unceremoniously dragged into this case which should
have been brought only between the plaintiff and defendant
Chandiramani.26
A careful reading of the findings of facts made by both the trial court and ——o0o——
appellate court clearly shows that the petitioner, in including David as a
party in these proceedings, is barking up the wrong tree. It is apparent from
the factual findings that David had no dealings with the petitioner and was
not privy to the agreement of the latter with Chandiramani. Moreover, any
loss which the petitioner incurred was apparently due to the acts or
omissions of Chandiramani, and hence, her recourse should have been
against him and not against David. By needlessly dragging David into this
case all because he and Chandiramani knew each other, the petitioner not
only unduly delayed David from obtaining the value of the checks, but also
caused him anxiety and injured his business reputation while waiting for its
outcome. Recall that under Article 221727 of the Civil Code, moral
damages include mental anguish, serious anxiety, besmirched reputation,
wounded feelings, social humiliation, and similar injury. Hence, we find the
award of moral damages to be in order.
The appellate court likewise found that like David, PCIB was dragged
into this case on unfounded and baseless grounds. Both were thus
compelled to litigate to protect their interests, which makes an award of
attorney’s fees justified under Article 2208 (2)28 of the Civil Code. Hence,
we rule that the award of attorney’s fees to David and PCIB was proper.

_______________
26
CA Rollo, p. 130.
27 ART. 2217. Moral damages include physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation and similar injury. Though incapable of
pecuniary computation, moral damages may be recovered if they are the
proximate result of the defendant’s wrongful act or omission.
28 See note 12.

174
174 SUPREME COURT REPORTS ANNOTATED
Camacho vs. Gloria
WHEREFORE, the instant petition is DENIED. The assailed decision of the
Court of Appeals, dated March 25, 1999, in CA-G.R. CV No. 52398 is
AFFIRMED. Costs against the petitioner.
SO ORDERED.
Bellosillo (Chairman), Austria-Martinez and Tinga, JJ., concur.
Callejo, Sr., J., On leave.
Petition denied, assailed judgment affirmed.
Note.—Where a signature is so placed upon the instrument that it is
not clear in what capacity the person making the same intended to sign,
he is deemed an indorser (Sapiera vs. Court of Appeals, 314 SCRA
370[1999])
 VOL. 145, NOVEMBER 13, 1986 497
Mesina vs. Intermediate Appellate Court
No. L-70145. November 13,1986.*
MARCELO A. MESINA, petitioner, vs. THE HONORABLE
INTERMEDIATE APPELLATE COURT, HON. ARSENIO M. GONONG, in
his capacity as Judge of Regional Trial Court-Manila (Branch VIII), JOSE
GO, and ALBERT UY, respondents.
Banks; Checks; Negotiable Instruments; A person who became the
holderofa cashier’s check as endorsed by the person who stole it and who
refused to say how and why it was passed to him is not a holder in due
course.—Petitioner’s allegations hold no water. Theories and examples
advanced by petitioner on causes and effects of a cashier’s check such as
1) it cannot be countermanded in the hands of a holder in due course and
2) a cashier’s check is a bill of exchange drawn by the bank against itself—
are general principles which cannot be aptiy appiied to the case at bar,
without considering other things. Petitioner failed to substantiate his claim
that he is a holder in due course and for consideration or value as shown
by the established facts of the case. Admittedly, petitioner became the
holder of the cashier’s check as endorsed by Alexander Lim who stole the
check. He refused to say how and why it was passed to him. He had
therefore notice of the defect of his title over the check from the start. The
holder of a cashier’s check who is not a holder in due course cannot
enforce such check against the issuing bank which dishonors the same.
Same; Same; Same; The bank from whom a cashier’s check was
bought and which is aivare of the facts surrounding its loss has the right to
refuse to pay the same when presented by a holder who was not the one
who bought the check from the bank.—If a payee of a cashier’s check
obtained it from the issuing bank by fraud, or if there is some other reason
why the payee is not entitled to collect the check, the respondent bank
would, of course, have the right to refuse
_______________
*
SECOND DIVISION.
498
498 SUPREME COURT REPORTS ANNOTATED
Mesina vs. Intermediate Appellate Court
payment of the check when presented by the payee. since
respondent bank was aware of the facts surrounding the loss of the check
in question. Moreover, there is no similarity in the cases cited by petitioner
since respondent bank did not issue the cashier’s check in payment of its
obligation. Jose Go bought it from respondent bank for purposes of
transfering his funds from respondent bank to another bank near his
establishment realizing that carrying money in this form is safer than if it
were in cash. The check was Jose Go’s property when it was misplaced or
stolen, hence he stopped its paymerit. At the outset, respondent bank knew
it was Jose Go’s check and no one else since Go had not paid or indorsed
it to anyone. The bank was therefore liable to nobody on the check but
Jose Go. The bank had no intention to issue it to petitiorier but only to buyer
Jose Go. When payment on it was therefore stopped, respondent bank
was not the one who did it but Jose Go, the owner of the check.
Respondent bank could not be drawer and drawee for clearly, Jose Go
owns the money it represents and he is therefore the drawer and the
drawee in the same manner as if he has a current account and he issued
a check against it; and from the moment said cashier’s check was lost
and/or stolen no one outside of Jose Go can be termed a holder in due
course because Jose Go had not indorsed it in due course. The check in
question suffers from the infirmity of not having been properly negotiated
and for value by respondent Jose Go who as already been said is the real
owner of said instrument
Same; Same; Same; Interpleader; Interpleader is an issuing bank’s
proper remedy where purchaser of cashier’s check claims it was lost and
another has presented it for payment—In his second assignment of error,
petitioner stubbornly insists that there is no showing of conflicting claims
and interpleader is out of the question. There is enough evidence to
establish the contrary. Considering the aforementioned facts and
circumstances, respondent bank merely took the necessary precaution not
to make a mistake as to whom to pay and therefore interpleader was its
proper remedy. It has been shown that the interpieader suit was filed by
respondent bank because petitioner and Jose Go were both laying their
claims on the check, petitioner asking payment thereon and Jose Go as
the purchaser or owner. The allegation of petitioner that respondent bank
had effectively relieved itself of its primary liability under the check by
simply filing a complaint for interpleader is belied by the willingness of
respondent bank to issue a certificate of time deposit in the amount of
P800,000 representing the cashier’s check in question in the name of the
Clerk of Court of Manila to be awarded to whoever
499
VOL. 145, NOVEMBER 13, 1986 499
Mesina vs. Intermediate Appellate Court
will be found by the court as validly entitled to it. Said validity will
depend on the strength of the parties’ respective rights and titles thereto.
Bank filed the interpleader suit not because petitioner sued it but because
petitioner is laying claim to the same check that Go is claiming. On the very
day that the bank instituted the case in interpleader, it was not aware of
any suit for damages filed by petitioner against it as supported by the fact
that the interpleader case was first entitled Associated Bank vs. Jose Go
and John Doe, but later on changed to Marcelo A. Mesina for John Doe
when his name became known to respondent bank.
Interpleader; Pre-trial; Actions; Default; An order to the parties
named in a petition for interpleader to file answer is an order to interpiead.
Non-answering party liable to be declared in default—In his third
assignment of error, petitioner assails the then respondent IAC in
upholding the trial court’s order declaring petitioner in default when there
was no proper order for him to plead in the interpleader case. Again, such
contention is untenable. The trial court issued an order, compelling
petitioner and respondent Jose Go to file their Answers setting forth their
respective clahns. Subsequently, a PreTrial Conference was set with
notice to parties to submit position papers. Petitioner argues in his
memorandum that this order requiring petitioner to file his answer was
issued without jurisdiction alleging that since he is presumably a holder in
due course and for value, how can he be compelled to litigate against Jose
Go who is not even a party to the check? Such argument is trite and
ridiculous if we have to consider that neither his name or Jose Go’s name
appears on the check. Following such line of argument, petitioner is not a
party to the check either and therefore has no valid claim to the Check.
Furthermore, the Order of the trial court requiring the parties to file their
answers is to all intents and purposes an order to interplead, substantially
and essentially and therefore in compliance with the provisions of Rule 63
of the Rules of Court. What else is the purpose of a law suit but to litigate?
Certiorari; IAC can make findings of facts in a certiorari case to enable
it to rule whether or not the trial court committed a grave abuse of
diseretion.—The reeords of the case show that respondent bank had to
resort to details in support of its action for Interpleader. Before it resorted
to Interpleader, respondent bank took all precautionary and necessary
measures to bring out the truth. On the other hand, petitioner concealed
the circumstances known to him and now that private respondent bank
brought these circumstances out in
500
500 SUPREME COURT REPORTS ANNOTATED
Mesina vs. Intermediate Appellate Court
court (which eventually rendered its decision in the light of these
facts), petitioner charges it with “gratuitous excursions into these non-
issues.” Respondent IAC cannot rule on whether respondent RTC
committed an abuse of discretion or not, without being apprised of the facts
and reasons why respondent Associated Bank instituted the Interpleader
case. Both parties were given an opportunity to present their sides.
Petitioner chose to withhold substantial facts. Respondents were not
forbidden to present their side—this is the purpose of the Comment of
respondent to the petition. IAC decided the question by considering both
the facts submitted by petitioner and those given by respondents. IAC did
not act therefore beyond the scope of the remedy sought in the petition.
APPEAL by certiorari to review the decision of the Intermediate Appellate
Court.
The facts are stated in the opinion of the Court.
PARAS, J.:
This is an appeal by certiorari from the decision of the then Intermediate
Appellate Court (IAC for short), now the Court of Appeals (CA) in AC-G.R.
S.P. 04710, dated Jan. 22, 1985, which dismissed the petition for certiorari
and prohibition filed by Marcelo A. Mesina against the trial court in Civil
Case No. 84–22515. Said case (an Interpleader) was filed by Associated
Bank against Jose Go and Marcelo A. Mesina regarding their conflicting
claims over Associated Bank Cashier’s Check No. 011302 for
P800,000.00, dated December 29,1983.
Briefly, the facts and statement of the case are as follows:
Respondent Jose Go, on December 29,1983, purchased from
Associated Bank Cashier’s Check No. 011302 for P800,000.00.
Unfortunately, Jose Go left said check on the top of the desk of the bank
manager when he left the bank. The bank manager entrusted the check
for safekeeping to a bank official, a certain Albert Uy, who had then a visitor
in the person of Alexander Lim. Uy had to answer a phone call on a nearby
telephone af ter which he proceeded to the men’s room. When he returned
to his desk, his visitor Lim was already gone. When Jose Go inquired for
his cashier’s check from Albert Uy, the check was not in his folder and
nowhere to be found. The latter advised Jose Go to
501
VOL. 145, NOVEMBER 13, 1986 501
Mesina vs. Intermediate Appellate Court
go to the bank to accomplish a “STOP PAYMENT" order, which suggestion
Jose Go immediately followed. He also executed an affidavit of loss. Albert
Uy went to the police to report the loss of the check, pointing to the person
of Alexander Lim as the one who could shed light on it.
The records of the police show that Associated Bank received the lost
check for clearing on December 31> 1983, coming from Prudential Bank,
Escolta Branch. The check was immediately dishonored by Associated
Bank by sending it back to Prudential Bank, with the words “Payment
Stopped” stamped on it. However, the same was again returned to
Associated Bank on January 4, 1984 and for the second time it was
dishonored. Several days later, respondent Associated Bank received a
letter, dated January 9, 1984, from a certain Atty. Lorenzo Navarro
demanding payment on the cashier’s check in question, which was being
held by his client. He however refused to reveal the name of his client and
threatened to sue, if payment is not made. Respondent bank, in its letter,
dated January 20, 1984, replied saying the check belonged to Jose Go
who lost it in the bank and is laying claim to it.
On February 1, 1984, police sent a letter to the Manager of the
Prudential Bank, Escolta Branch, requesting assistance in identifying the
person who tried to encash the check but said bank refused saying that it
had to protect its client’s interest ahd the identity could only be revealed
with the client’s conformity. Unsure of what to do on the matter, respondent
Associated Bank on February 2, 1984 filed an action for Interpleader
naming as respondent, Jose Go and one John Doe, Atty. Navarro’s then
unnamed elient. On even date, respondent bank received summons and
copy of the complaint for damages of a certain Marcelo A. Mesina from the
Regional Trial Court (RTC) of Caloocan City filed on January 23, 1984
bearing the number C-l 1139. Respondent bank moved to amend its
complaint, having been notified for the first time of the name of Atty.
Navarro’s client and substituted Marcelo A. Mesina for John Doe.
Simultaneously, respondent bank, thru representative Albert Uy, informed
Cpl. Gimao of the Western Police District that the lost check of Jose Go is
in the possession of Marcelo Mesina, herein petitioner. When Cpl. Gimao
went to
502
502 SUPREME COURT REPORTS ANNOTATED
Mesina vs. Intermediate Appellate Court
Marcelo Mesina to ask how he came to possess the check, he said it was
paid to him by Alexander Lim in a “certain transaction” but refused to
elucidate further. An information for theft (Annex J) was instituted against
Alexander Lim and the corresponding warrant for his arrest was issued
(Annex 6-A) which up to the date of the filing of this instant petition remains
unserved because of Alexander Lim’s successful evasion thereof.
Meanwhile, Jose Go filed his answer on February 24,1984 in the
Interpleader Case and moved to participate as intervenor in the cornplaint
for damages. Albert Uy filed a motion for intervention and answer in the
complaint for Interpleader. On the scheduled date of pretrial conference in
the interpleader case, it was disclosed that the “John Doe” impleaded as
one of the defendants is actually petitioner Marcelo A. Mesina. Petitioner
instead of filing his answer to the complaint in the interpleader filed on May
17, 1984 an Omnibus Motion to Dismiss Ex Abudante Cautela alleging
lack of jurisdiction in view of the absence of an order to litigate, failure to
state a cause of action and lack of personality to sue. Respondent bank in
the other civil case (CC-11139) for damages moved to dismiss suit in view
of the existence already of the Interpleader case.
The trial court in the interpleader case issued an order dated July 13,
1984, denying the motion to dismiss of petitioner Mesina and ruling that
respondent bank’s complaint sufficiently pleaded a cause of action for
interpleader. Petitioner filed his motion for reconsideration which was
denied by the trial court on September 26,1984. Upon motion for
respondent Jose Go dated October 31, 1984, respondent judge issued an
order on November 6,1984 declaring petitioner in default since his period
to answer has already expired and set the ex-partepresentation of
respondent bank’s evidence on November 7 1984.
Petitioner Mesina filed a petition for certiorari with preliminary injunction
with IAC to set aside 1) order of respondent court denying his omnibus
Motion to Dismiss 2) order of respondent court denying his Motion for
Reconsideration and 3) the order of default against him.
On January 22, 1985, IAC rendered its decision dismissing the petition
for certiorari. Petitioner Mesina filed his Motion
503
VOL. 145, NOVEMBER 13, 1986 503
Mesina vs. Intermediate Appellate Court
for Reconsideration which was also denied by the same court in its
resolution dated February 18,1985.
Meanwhile, on same date (February 18, 1985), the trial court in Civil
Case #84–22515 (Interpleader) rendered a decision, the dispositive
portion reading as follows:
“WHEREFORE, in view of the foregoing, judgment is hereby rendered
ordering plaintiff Associate Bank to replace Cashier’s Check No. 011302
in favor of Jose Go or its cash equivalent with legal rate of interest from
date of complaint, and with costs of suit against the latter.
SO ORDERED."
On March 29, 1985, the trial court in Civil Case No. C-11139, for damages,
issued an order, the pertinent portion of which states:
“The records of this case show that on August 20, 1984 proceedings in this
case was (were) ordered suspended because the main issue in Civil Case
No- 84–22515 and in this instant case are the same which is: who between
Marcelo Mesina and Jose Go is entitled to payment of Associated Bank’s
Cashier’s Check No, CC-011302? Said issue having been resolveu
already in Civil Case No. 84–22515, reaiiy this instant case has become
moot and academic.
WHEREFORE, in view of the foregoing, the motion should be as it is
hereby granted and this case is ordered dismissed.
In view of the foregoing ruling no more action should be taken on the
“Motion For Reconsideration (of the Order admitting the Intervention)"
dated June 21,1984 as well as the Motion For Reconsideration dated
September 10,1984.
SO ORDERED."
Petitioner now comes to Us, alleging that:
 1. 1.IAC erred in ruling that a cashier’s check can be countermanded
even in the hands of a holder in due course.
2. 2.IAC erred in countenancing the filing and maintenance of an
interpleader suit by a party who had earlier been sued on the
same claim.
3. 3.IAC erred in upholding the trial court’s order declaring petitioner
as in default when there was no proper order for him
504
504 SUPREME COURT REPORTS ANNOTATED
Mesina vs. Intermediate Appellate Court
1. to plead in the interpleader complaint.
2. 4.IAC went beyond the scope of its certiorari jurisdiction by making
findings of facts in advance of trial.
Petitioner now interposes the following prayer:
1. 1.Reverse the decision of the IAC, dated January 22,1985 and set
aside the February 18,1985 resolution denying the Motion f or
Reconsideration.
2. 2.Annul the orders of respondent Judge of RTC Manila giving due
course to the interpleader suit and declaring petitioner in default.
Petitioner’s allegations hold no water. Theories and examples advanced
by petitioner on causes and effects of a cashier’s check such as 1) it cannot
be countermanded in the hands of a holder in due course and 2) a cashier’s
check is a bill of exchange drawn by the bank against itself—are general
principles which cannot be aptly applied to the case at bar, without
considering other things. Petitioner failed to substantiate his claim that he
is a holder in due course and for consideration or value as shown by the
established facts of the case. Admittedly, petitioner became the holder of
the cashier’s check as endorsed by Alexander Lim who stole the check.
He refused to say how and why it was passed to him. He had therefore
notice of the defect of his title over the check from the start. The holder of
a cashier’s check who is not a holder in due course cannot enforce such
check against the issuing bank which dishonors the same. If a payee of a
cashier’s check obtained it from the issuing bank by fraud, or if there is
some other reason why the payee is not entitled to collect the check, the
respondent bank would, of course, have the right to refuse payment of the
check when presented by the payee, since respondent bank was aware of
the facts surrounding the loss of the check in question. Moreover, there is
no similarity in the cases cited by petitioner since respondent bank did not
issue the cashier’s check in payment of its obligation, Jose Go bought it
from respondent bank for purposes of transferring his funds from
respondent bank to another bank near his establishment realizing that
carrying money in this form is safer than if it wererin cash. The check was
Jose Go’s property
505
VOL. 145, NOVEMBER 13, 1986 505
Mesina vs. Intermediate Appellate Court
when it was misplaced or stolen, hence he stopped its payment. At the
outset, respondent bank knew it was Jose Go’s check and no one else
since Go had not paid or indorsed it to anyone. The bank was therefore
liable to nobody on the check but Jose Go. The bank had no intention to
issue it to petitioner but only to buyer Jose Go/When payment on it was
therefore stopped, respondent bank was not the one who did it but Jose
Go, the owner of the check. Respondent bank could not be drawer and
drawee for clearly, Jose Go owns the money it represents and he is
therefore the drawer and the drawee in the same manner as if he has a
current account and he issued a check against it; and from the moment
said cashier’s check was lost and/or stolen no one outside of Jose Go can
be termed a holder in due course because Jose Go had not indorsed it in
due course. The check in question suffers from the infirmity of not having
been properly negotiated and for value by respondent Jose Go who as
already been said is the real owner of said instrument.
In his second assignment of error, petitioner stubbornly insists that
there is no showing of conflicting claims and interpleader is out of the
question. There is enough evidence to establish the contrary. Considering
the aforementioned facts and circumstances, respondent bank mereiy took
the necessary precaution not to make a mistake as to whom to pay and
therefore interpleader was its proper remedy. It has been shown that the
interpleader suit was filed by respondent bank because petitioner and Jose
Go were both laying their claims on the check, petitioner asking payment
thereon and Jose Go as the purchaser or owner. The allegation of
petitioner that respondent bank had effectively relieved itself of its primary
liability under the check by simply filing a complaint for interpleader is
belied by the willingness of respondent bank to issue a certificate of time
deposit in the amount of P800,000 representing the cashier’s check in
question in the name of the Clerk of Court of Manila to be awarded to
whoever will be found by the court as validly entitled to it. Said validity will
depend on the strength of the parties’ respective rights and titles thereto.
Bank filed the interpleader suit not because petitioner sued it but because
petitioner is laying claim to the same check that Go is claiming. On the very
day that the bank in-
506
506 SUPREME COURT REPORTS ANNOTATED
 Mesina vs. Intermediate Appellate Court WHEREFORE, finding that the instant petition is merely dilatory, the
stituted the case in interpleader, it was not aware of any suit for damages same is hereby denied and the assailed orders of the respondent court are
filed by petitioner against it as supported by the fact that the interpleader hereby AFFIRMED in toto.
case was first entitled Associated Bank vs. Jose Go and John Doe, but SO ORDERED.
later on changed to Marcelo A. Mesina for John Doe when his name Feria (Chairman), Fernan, Alampay and Gutierrez, Jr.,
became known to respondent bank. JJ., concur.
In his third assignment of error, petitioner assails the then respondent Petition denied, orders affirmed.
IAC in upholding the trial court’s order declaring petitioner in default when Notes.—Section 66 of the Negotiable Instruments Law ordains that
there was no proper order for him to plead in the interpleader case. Again, “every indorser who indorses without qualification, warrants to all
such contention is untenable. The trial court issued an order, compelling subsequent holders in due course” (a) that the instrument is genuine and
petitioner and respondent Jose Go to file their Answers setting forth their in all respects what it purports to be; (b) that he has a good title to it; (c)
respective claims. Subsequently, a Pre-Trial Conference was set with that all prior parties have capacity to contract; and (d) that the instrument
notice to parties to submit position papers. Petitioner argues in his is at the time of his indorsement valid and subsisting. (Ang Tiong vs.
memorandum that this order requiring petitioner to file his answer was Ting, 22 SCRA 713.)
issued without jurisdiction alleging that since he is presumably a holder in A bank check is indisputably a negotiable instrument and should be
due course and for value, how can he be compelled to litigate against Jose governed solely by the Negotiable Instruments Law. (Ang Tiong vs.
Go who is not even a party to the check? Such argument is trite and Ting, 22 SCRA 713.)
ridicuious if we have to consider that neither his name or Jose Go’s name
appears on the check. Following such line of argument, petitioner is not a ——o0o——
party to the check either and therefore has no valid claim to the Check.
Furthermore, the Order of the trial court requiring the parties to file their 508
answers is to all intents and purposes an order to interplead, substantially
and essentially and therefore in compliance with the provisions of Rule 63
of the Rules of Court. What else is the purpose of a law suit but to litigate?
The records of the case show that respondent bank had to resort to
details in support of its action for Interpleader. Before it resorted to
Interpleader, respondent bank took all precautionary and necessary
measures to bring out the truth. On the other hand, petitioner concealed
the circumstances known to him and now that private respondent bank
brought these circumstances out in court (which eventually rendered its
decision in the light of these facts), petitioner charges it with “gratuitous
excursions into these non-issues.” Respondent IAC cannot rule on whether
respondent RTC committed an abuse of discretion or not, without being
apprised of the
507
VOL. 145, NOVEMBER 13, 1986 507
Mesina vs. Intermediate Appellate Court
facts and reasons why respondent Associated Bank instituted the
Interpleader case. Both parties were given an opportunity to present their
sides. Petitioner chose to withhold substantial facts. Respondents were not
forbidden to present their side—this is the purpose of the Comment of
respondent to the petition. IAC decided the question by considering both
the facts submitted by petitioner and those given by respondents. IAC did
not act therefore beyond the scope of the remedy sought in the petition.
 [No. 18751. September 26, 1922] affected by the fact that the merchandise shipped by him, which
THE PHILIPPINE NATIONAL BANK, plaintiff and constituted the consideration for the drawing of the bill, was or
appellee, vs. BARTOLOME PICORNELL ET AL., defendants. was not of inferior quality.
BARTOLOME PICORNELL, appellant.
[No. 18915. September 26, 1922] 1. 3.ID.; ID.; DELIVERY OF DOCUMENTS UPON PAYMENT;
THE PHILIPPINE NATIONAL BANK, plaintiff and PHILIPPINE NATIONAL BANK.—In a bill of exchange drawn in
appellee, vs. BARTOLOME PICORNELL ET AL., defendants. JOAQUIN favor of the Philippine National Bank, it was stated, by the well-
PARDO DE TAVERA, appellant. known formula "D/P," that the documents of the merchandise,
that constituted the consideration of the bill, should not be
1. 1.NEGOTIABLE INSTRUMENTS; BILL OF delivered until the bill was paid. Held: That by virtue of such a
EXCHANGE; LIABILITY OF ACCEPTOR; WANT OF condition the merchandise stood as a security in favor of the bank,
CONSIDERATION BETWEEN DRAWER AND AC-CEPTOR.— and the latter had the right to sell it without the necessity of any
The drawee, by accepting unconditionally the bill, becomes liable notice for the purpose of obtaining payment of the value of the bill
to the holder, and cannot allege want of consideration between after the same had been dishonored by the drawee. (Sec. 33, Act
him and the drawer. The holder is a stranger as regards the No. 2938.)
transaction between the drawer and the drawee, and if he has
given value to the drawer and has no knowledge of any equity APPEAL from a judgment of the Court of First Instance of Manila.
between the drawer and the drawee, he is in the same situation Concepcion, J.
as an indorsee in good faith. Hence in an action brought by the The facts are stated in the opinion of the court.
holder against the acceptor it is no defense that the merchandise Recto, Casal & Ozaeta for appellant Picornell.
sent by the drawer,, and which constituted the consideration for Camus & Delgado for appellant Pardo de Tavera.
the drawing of the bill, is of inferior quality than was ordered by Roman J. Lacson for appellee.
the drawee to such a degree that it is not worth the value of the
bill. ROMUALDEZ, J.:

717 In a decision rendered January 9,1922, and amended by an order of

VOL. 46, SEPTEMBER 26, 1922 717
National Bank vs. Picornell
1. 2.ID.; ID.; LIABILITY OF DRAWER; RELATION OF PRINCIPAL
AND AGENT BETWEEN DRAWEE AND DRAWER; DEFECT
OF CONSIDERATION OF THE BILL.—The drawer of the bill by
drawing it warrants that it will be accepted on due presentment
and paid in due course; hence if it is not paid, he becomes liable
for the payment of its value to the holder. (Sec. 61, Negotiable
Instruments Law.) The fact that the drawer was a commission
agent of the drawee in the purchase of the merchandise covered
by the bill does not necessarily make him an agent of the drawee
in his obligations emanating from the bill drawn by him. His acts
in negotiating the bill constitute a contract distinct from that made
by his having purchased the merchandise on behalf of the
drawee, unless at the. time of signing the bill he should have
added to his signature some expression to indicate it. (Sec. 20,
Negotiable Instruments Law.) Nor is his liability as drawer
February 18th next, the Court of First In-
718
718 PHILIPPINE REPORTS ANNOTATED
National Bank vs. Picornell
stance of Manila sentenced the defendants to pay solidarily to the plaintiff
bank the sum of P28,790.72 with interest at the rate of 9 per centum per
annum from May 3, 1921, and costs; and the defendant Bartolome
Picornell, to pay said plaintiff the sum of P10,739.11 with interest at 9 per
centum per annum, all as aforesaid, deducting the sum of P6,708.82 from
such amounts to be paid by the defendants.
This total sum which the def endants are required to pay represents the
value of a bill of exchange drawn by Bartolome Picornell in favor of the
National Bank, plaintiff, against the firm of Hyndman, Tavera & Ventura,
now dissolved, its only successor being the defendant Joaquin Pardo de
Tavera. The sum of P6,708.82, which the trial court ordered deducted from
the value of the bill of exchange, is the proceeds received by the bank from
the sale of a part of a certain quantity of tobacco shipped by Picornell at
Cebu to the Hyndman, Tavera & Ventura company at Manila, the price of
which, together with his commission, was received by him from the branch
of the plaintiff bank in Cebu, and in consideration whereof he drew the bill
in favor of the central office of said bank in Manila and against the said
Hyndman, Tavera & Ventura company, the consignee of the tobacco.
The P28,790.72, which the defendants are sentenced to pay solidarily
to the plaintiff bank, constitutes the value of the tobacco at the date when
the bill fell due, as appraised for the purpose.
The reasoning of the trial court for fixing the respective responsibilities
of the defendants is given in its decision and is as follows:
"* * * The defendant Pardo de Tavera, successor to Hyndman, Tavera
& Ventura, by his having accepted the bill and denied payment thereof,
notwithstanding the existence of a consideration which is the real value of
the
719
VOL. 46, SEPTEMBER 26, 1922 719
National Bank vs. Picornell
tobacco, and the defendant Picornell by his having drawn such bill and
received its value from the branch of the plaintiff bank in Cebu, became
liable upon the same bill, the defendant Picornell to its full value, and the
defendant Pardo de Tavera to the extent of the value of the tobacco."
From this judgment the defendants appealed.
Joaquin Pardo de Tavera alleged that the bill in question was without
consideration and that judgment should not have been rendered against
him. The appellant Picornell contended that it should have been taken into
account that he merely acted as an agent of Hyndman, Tavera & Ventura
in all these transactions; that the tobacco was not of inferior quality, as
alleged by the said company; that the condition "D/P" attached to the
transaction was not modified; that he had the right to complain because
the bank consented to the said company taking possession of the tobacco
before the payment of the bill; that the bank held the tobacco as a deposit;
that the bank was not authorized to sell the tobacco, said sale not being
allowed either by law or by the circumstances; that he should not have
been ordered to pay the value of the bill without proof that he was notified
of its dishonor, as required by section 89 of the Negotiable Instruments
Law.
The appellee bank maintains that the appellants have no right to
discuss issues of fact in this instance for not having complied with the
requirements enumerated in paragraph (a) of Rule 16 of the Rules of the
Courts of First Instance. The rule cited refers to special proceedings.
Moreover, we believe that the necessary requirements in order that this
court may pass upon questions of f act have been complied with by the
appellants.
The following facts are proved: That Bartolome Picornell, following
instruction of Hyndman, Tavera & Ventura, bought in Cebu 1,735 bales of
tobacco; that Picornell obtained f rom the branch of the National Bank in
Cebu the
720
720 PHILIPPINE REPORTS ANNOTATED
National Bank vs. Picornell
sum of P39,529.83, the value of the tobacco, together with his commission
of 1 real per quintal (according to stipulation Exhibit 4), having, in turn,
drawn the following bill of exchange, Exhibit A:
"No. 2-A. CEBU, 28 febrero, 1920. For P39,529.83
"At treinta (30) days sight please pay this first of exchange (secondunpaid)
to the order of Philippine National Bank treinta y nueve mil quinientos
veintinueve pesos con 83/100. Value received.
"To Sres. HYNDMAN, TAVERA Y VENTURA,
"Calle Soler 26 y 28.
(Sgd.) "B. PICORNELL"
This instrument was delivered to the branch of the National Bank in Cebu,
together with the invoice and bill of lading of the tobacco, which was
shipped in the boat Don Ildefonso, on February 27, 1920, consigned to
Hyndman, Tavera & Ventura at Manila. The invoice and bill of lading were
delivered to the National Bank with the understanding that the bank should
not deliver them to Hyndman, Tavera & Ventura except upon payment of
the bill; which condition was expressed by the well-known formula "D/P"
(documents for [against] payment).
The central office of the National Bank in Manila received the bill and
the aforesaid documents annexed thereto; and on March 3, 1920,
presented the bill to Hyndman, Tavera & Ventura, who accepted it, stating
on the face thereof the following:
"Accepted, 3d March, 1920. Due, 2d April, 1920. Hyndman, Tavera &
Ventura, by (Sgd.) J. Pardo de Tavera, member of the firm."
The tobacco having arrived at Manila, the firm of Tambunting, owner of
the ship Don Ildefonso, that brought the shipment, requested Hyndman,
Tavera & Ventura to send for the goods, which was done by the company
without
721
VOL. 46, SEPTEMBER 26, 1922 721
National Bank vs. Picornell
the knowledge of the National Bank which retained and always had in its
possession the invoice and bill of lading of the tobacco, until it presented
them as evidence at the trial.
Hyndman, Tavera & Ventura proceeded to the examination of the
tobacco, which was deposited in their warehouses, and wrote and cabled
to Bartolome Picornell, notifying him that of the tobacco received, there
was a certain portion which was of no use and was damaged. To these "Accepted for thirty days. Due May 2d, 1920. Hyndman, Tavera &
communications, Picornell answered, sending the following letter: Ventura, By (Sgd.) J. Pardo de Tavera, member of the firm."
"CEBU, March 13, 1920. May 2, 1920, arrived and the bill was not paid. On the 4th of the same
month, Hyndman, Tavera & Ventura sent a letter to the plaintiff bank as
"Messrs. HYNDMAN, TAVERA & VENTURA, follows:
"Manila. "DEAR SIRS: We very much regret to have to inform you that we
absolutely refuse to pay draft No. 2 for thirtynine thousand five hundred
"TABACO and twenty-nine pesos and eighty-three cents (P39,529.83), referring to
1,871,235 quintals of Leaf Tobacco Barili, owing to noncompliance of the
"DEAR SIRS: Your letters of the 3d and 9th, and your telegram of the 5th, contract by the drawer.
inst. received, and the sample of tobacco sent through the captain of the "We, therefore, beg to notify you that the said Leaf Tobacco is at the
boat Don Ildefonso. disposal of your goodselves at our go-down No. 26-36 Calle Soler."
"I wired to the seller asking him to come over and I hope he will do so The bank protested the bill, took possession of the tobacco, and had it
at the first opportunity. appraised on the 12th of the same month, its value having been fixed at
"It would be well that you should inform me of the exact number of bales P28,790.72. That this valuation was just, reasonable and exact is not
deteriorated and useless, and if possible that said information should be questioned by the parties.
furnished by the Bureau of Internal Revenue. Moreover, it would be well 723
also that you should not sell any bale of said shipment until the matter is VOL. 46, SEPTEMBER 26, 1922 723
settled. National Bank vs. Picornell
Yours very truly, The bank brought this action, and about September, 1921, sold the
(Sgd.) "B. PICORNELL" tobacco, obtaining from .the sale P6,708.82.
Through these communications, therefore, Picornell learned that This action is for the recovery of the value of the bill of exchange above-
Hyndman, Tavera & Ventura had in their possession the tobacco mentioned. The Hyndman, Tavera & Ventura company accepted it
aforementioned. unconditionally, but did not pay it at its maturity; wherefore its responsibility,
In view of the question raised by the said company as to the quality of or that of its successor, J. Pardo de Tavera, to pay the same, is clear. (Sec.
the aforesaid tobacco, more correspond- 62, Negotiable Instruments Law.)
722 The question whether or not the tobacco was worth the value of the bill,
722 PHILIPPINE REPORTS ANNOTATED does not concern the plaintiff bank. Such partial want of consideration, if it
National Bank vs. Picornell was, does not exist with respect to the bank which paid to Picornell the full
ence was exchanged between the company and Picornell, who, upon the value of said bill of exchange. The bank was a holder in due course, and
suggestion of the former, wrote on March 26, 1920, this letter: was such for value full and complete. The Hyndman, Tavera & Ventura
company cannot escape liability in view of section 28 of the Negotiable
"Messrs. PHILIPPINE NATIONAL BANK, Instruments Law.
"Cebu. "* * * The drawee by acceptance becomes liable to the payee or his
indorsee, and also to the drawer himself. But the drawer and acceptor are
"DEAR SIRS : I would be obliged to you if you would wire your central office the immediate parties to the consideration, and if the acceptance be
at Manila to extend thirty days the time for payment of the bill for without consideration, the drawer cannot' recover of the acceptor. The
P39,529.83 against Messrs. Hyndman, Tavera & Ventura of Manila. payee holds a different relation; he is a stranger to the transaction between
"Awaiting your favor, I remain, the drawer and the acceptor, and is, therefore, in a legal sense a remote
"Yours very truly, party. In a suit by him against the acceptor, the question as to the
(Sgd.) "B. PICORNELL" consideration between the drawer and the acceptor cannot be inquired
The bank granted this request of the defendants; wherefore Hyndman, into. The payee or holder gives value to the drawer, and if he is ignorant of
Tavera & Ventura reaccepted the bill in the following terms: the equities between the drawer and the acceptor, he is in the position of
a bona fide indorsee. Hence, it is no defense to a suit against the acceptor
of a draft which has been discounted, and upon which money has been
advanced by the plaintiff, that the draft was accepted for the
accommodation of the drawer. * * *" (3 R. C. L., pp. 1143, 1144, par. 358.)
As to Bartolome Picornell, he warranted, as drawer of the bill, that it
would be accepted upon proper presentment
724
724 PHILIPPINE REPORTS ANNOTATED
National Bank vs. Picornell
and paid in due course, and as it was not paid, he became liable to the
payment of its value to the holder thereof, which is the plaintiff bank. (Sec.
61, Negotiable Instruments Law.)
The fact that Picornell was a commission agent of Hyndman, Tavera &
Ventura, in the purchase of the tobacco, does not necessarily make him
an agent of the company in its obligations arising from the drawing of the
bill by him. His acts in negotiating the bill constitute a different contract from
that made by his having purchased the tobacco on behalf of Hyndman,
Tavera & Ventura. Furthermore, he cannot exempt himself from
responsibility by the fact of his having been a mere agent of this company,
because nothing to this effect was indicated or added to his signature on
signing the bill. (Sec. 20, Negotiable Instruments Law.)
The fact that the tobacco was or was not of inferior quality does not
affect the responsibility of Picornell, because while it may have an effect
upon the contract between him and the firm of Hyndman, Tavera &
Ventura, yet it cannot have upon the responsibility of both to the bank, upon
the bill drawn and accepted as above stated.
As to the instruction "D/P" appearing on the instrument, it was not
violated by the bank, which, as above stated, kept possession of the
invoice and the bill of lading of the tobacco. By virtue of this circumstance,
the bank had the right to deal with that tobacco as a security in case of
non-payment of the bill, and this was admitted by Hyndman, Tavera &
Ventura when, upon their refusal to pay the bill, they placed the tobacco at
the disposal of the bank.
Neither does the fact of Hyndman, Tavera & Ventura having been given
possession of the tobacco before the payment of the bill affect the liability
of the defendants to the bank thereon.
725
VOL. 46, SEPTEMBER 26, 1922 725
National Bank vs. Picornell
The title of the bank to the tobacco in question by reason of the condition
"D/P" was that of a pledgee, and its possession after its delivery to it by
Hyndman, Tavera & Ventura was of the same nature—a discount security,
which it was authorized to accept and retain. (Act No. 2938.)
The appellants question the power of the bank to sell, as it did, the
tobacco in question. Taking into account the circumstances of the case,
we hold that the bank did not violate the law in making such sale without
notice. We hold that it is one of those cases provided for by law (sec. 33,
Act No. 2938), wherein a previous notice of the sale is not indispensable.
Besides, as to the price obtained in the sale, no question is made that it
was the best obtainable.
Concerning the notice to Picornell of the dishonor of the bill, it appears
from Exhibit C, which is the protest for the non-payment thereof, that a
copy of such protest was sent by mail in good season addressed to
Bartolome Picornell, the presumption, now conclusive, that the latter
received it (secs. 105, 106, Negotiable Instruments Law), not having been
rebutted, or at least, contradicted. Upon the non-payment of the bill by the
drawee-acceptor, the bank had the right of recourse, which it exercised,
against the drawer. (Sec. 84, Negotiable Instruments Law.)
The drawee, the Hyndman, Tavera & Ventura company, or its
successors, J. Pardo de Tavera, accepted the bill and is primarily liable for
the value of the negotiable instrument, while the drawer, Bartolome
Picornell, is secondarily liable. (3 R. C. L., pp. 1144, 1145.) However, no
question has been raised about this aspect of the responsibility of the
defendants.
We are of the opinion that the appellants are liable to the National Bank
for the value of the bill of exchange Exhibit
726
726 PHILIPPINE REPORTS ANNOTATED
Capistrano vs. Nadurata
A, deducting therefrom P6,708.82 the proceeds of the sale of the tobacco.
But the bank, not having appealed from the judgment of the lower court,
we cannot alter it in favor of said party, which, by its omission to appeal,
has shown full conformity with the judgment rendered.
For the foregoing, the judgment appealed from is affirmed, with costs
against the defendants. So ordered.
Araullo, C.
J., Street, Malcolm, Avanceña, Villamor, Ostrand, and Johns, JJ., concur.
Judgment affirmed.
_______________
462 SUPREME COURT REPORTS ANNOTATED Astro Electronics Corp. vs. Philippine Export and Foreign Loan
Astro Electronics Corp. vs. Philippine Export and Foreign Loan Guarantee Corporation
Guarantee Corporation G.R. CV No. 41274,1 affirming the decision of the Regional TrialCourt
G.R. No. 136729. September 23, 2003.* (Branch 147) of Makati, then Metro Manila, whereby petitioners Peter
ASTRO ELECTRONICS CORP. and PETER ROXAS, Roxas and Astro Electronics Corp. (Astro for brevity)were ordered to pay
petitioners, vs. PHILIPPINE EXPORT AND FOREIGN LOAN respondent Philippine Export and ForeignLoan Guarantee Corporation
GUARANTEE CORPORATION, respondent. (Philguarantee), jointly and severally, the amount of P3,621,187.52 with
Negotiable Instruments Law; Promissory interests and costs.
Note; Parties; Maker; Persons writing their names on face of promissory
notes are makers.—Under the Negotiable Instruments Law, persons who The antecedent facts are undisputed.
write their names on the face of promissory notes are makers, promising Astro was granted several loans by the Philippine Trust Company
that they will pay to the order of the payee or any holder according to its (Philtrust) amounting to P3,000,000.00 with interest and secured by three
tenor. promissory notes: PN No. PFX-254 dated December 14, 1981 for
Civil Law; Obligations; Subrogation; Legal Subrogation; Legal P600,000.00, PN No. PFX-258 also dated Decem-ber 14, 1981 for
subrogation is that which takes place by operation of law.—Subrogation is P400,000.00 and PN No. 15477 dated August 27, 1981 for P2,000,000.00
the transfer of all the rights of the creditor to a third person, who substitutes In each of these promissory notes, it appears that petitioner Roxas signed
him in all his rights. It may either be legal or conventional. Legal twice, as President of Astro and in his personal capacity.2 Roxas also
subrogation is that which takes place without agreement but by operation signed a Continuing Suretyship Agreement in favor of Philtrust Bank, as
of law because of certain acts. Instances of legal subrogation are those President of Astro and as surety.3
provided in Article 1302 of the Civil Code. Conventional subrogation, on Thereafter, Philguarantee, with the consent of Astro, guaranteed in
the other hand, is that which takes place by agreement of the parties. favor of Philtrust the payment of 70% of Astro’s loan,4 subject to the
Same; Same; Same; Same; Knowledge of debtor not necessary.— condition that upon payment by Philguarantee of said amount, it shall be
Roxas’ acquiescence is not necessary for subrogation to take place proportionally subrogated to the rights of Philtrust against Astro.5
because the instant case is one of legal subrogation that occurs by As a result of Astro’s failure to pay its loan obligations, despite
operation of law, and without need of the debtor’s knowledge. demands, Philguarantee paid 70% of the guaranteed loan to Philtrust.
Subsequently, Philguarantee filed against Astro and Roxas a complaint for
PETITION for review on certiorari of a decision of the Court of Appeals. sum of money with the RTC of Makati.
In his Answer, Roxas disclaims any liability on the instruments,
The facts are stated in the opinion of the Court. alleging, inter alia, that he merely signed the same in blank and the
Manuel Q. Molina for petitioners. phrases “in his personal capacity” and “in his official capacity” were
Office of the Government Corporate Counsel for respondent. fraudulently inserted without his knowledge.6
Isabelo G. Gumaru collaborating counsel for respondent TID- After trial, the RTC rendered its decision in favor of Philguarantee with
CORP. the following dispositve portion:

AUSTRIA-MARTINEZ, J.: _______________

1
Assailed in this petition for review on certiorari under Rule 45 of the Rules Justice Portia Aliño-Hormachuelos, ponente; JJ. Presbitero J.
of Court is the decision of the Court of Appeals in CA- Velasco, Jr. and Buenaventura J. Guerrero, concurring.
2 Original Records, pp. 6-8, Exhibits “3”, “4” and “5”.
3 Id., pp. 10-13, Exhibit “D”.
_______________ 4 Id., pp. 14-19, Exhibits “F” and “E”.
5 Id., p. 18.
*SECOND DIVISION. 6 Id., pp. 62-64.
463
VOL. 411, SEPTEMBER 23, 2003 463 464
464 SUPREME COURT REPORTS ANNOTATED
Astro Electronics Corp. vs. Philippine Export and Foreign Loan
Guarantee Corporation
“WHEREFORE, in view of all the foregoing, the Court hereby renders
judgment in favor or (sic) the plaintiff and against the
defendants Astro Electronics Corporation and Peter T. Roxas, ordering
the then (sic) to pay, jointly and severally, the plaintiff the sum of
P3,621,187.52 representing the total obligation of defendants in favor of
plaintiff Philgurantee as of December 31, 1984 with interest at the
stipulated rate of 16% per annum and stipulated penalty charges of 16%
per annum computed from January 1, 1985 until the amount is fully paid.
With costs.
SO ORDERED.”7
The trial court observed that if Roxas really intended to sign the
instruments merely in his capacity as President of Astro, then he should
have signed only once in the promissory note.8
On appeal, the Court of Appeals affirmed the RTC decision agreeing
with the trial court that Roxas failed to explain satisfactorily why he had to
sign twice in the contract and therefore the presumption that private
transactions have been fair and regular must be sustained.9
In the present petition, the principal issue to be resolved is whether or
not Roxas should be jointly and severally liable (solidary) with Astro for the
sum awarded by the RTC.
The answer is in the affirmative.
Astro’s loan with Philtrust Bank is secured by three promissory notes.
These promissory notes are valid and binding against Astro and Roxas. As
it appears on the notes, Roxas signed twice: first, as president of Astro and
second, in his personal capacity. In signing his name aside from being the
President of Astro, Roxas became a co-maker of the promissory notes and
cannot escape any liability arising from it. Under the Negotiable
Instruments Law, persons who write their names on the face of promissory
notes are makers,10 promising that they will pay to the order of the payee
or any holder according to its tenor.11 Thus, even without the phrase
“personal capacity”, Roxas will still be primarily liable as a joint and several
debtor under the notes considering that his intention to be liable as such is
manifested by the fact that he affixed his signa-
_______________
7 13
Id., p. 217; RTC Decision dated July 20, 1989, p. 4.
8 Ibid.
9 Rollo, p. 25; CA Decision, p. 7.
10 Negotiable Instrument Law (Act No. 2031), Section 184.
11 Id., Section 60.
465
VOL. 411, SEPTEMBER 23, 2003 465
Astro Electronics Corp. vs. Philippine Export and Foreign Loan
Guarantee Corporation
ture on each of the promissory notes twice which necessarily would imply
that he is undertaking the obligation in two different capacities, official and
personal.
Unnoticed by both the trial court and the Court of Appeals, a closer
examination of the signatures affixed by Roxas on the promissory notes,
Exhibits “A-4” and “3-A” and “B-4” and “4-A” readily reveals that portions of
his signatures covered portions of the typewritten words “personal
capacity” indicating with certainty that the typewritten words were already
existing at the time Roxasaffixed his signatures thus demolishing his claim
that the typewritten words were just inserted after he signed the promissory
notes. If what he claims is true, then portions of the typewritten words
would have covered portions of his signatures, and not vice versa.
As to the third promissory note, Exhibit “C-4” and “5-A”, the copy
submitted is not clear so that this Court could not discern the same
observations on the notes, Exhibits “A-4” and “3-A” and “B-4” and “4-A”.
Nevertheless, the following discussions equally apply to all three
promissory notes.
The three promissory notes uniformly provide: “FOR VALUE
RECEIVED, I/We jointly, severally and solidarily, promise to pay to
PHILTRUST BANK or order . . .”12 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.13 Also, the phrase “joint and several”
binds the makers 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.14 Having signed under such
terms, Roxas assumed the solidary liability of a debtor and Philtrust Bank
may choose to enforce the notes against him alone or jointly with Astro.
Roxas’ claim that the phrases “in his personal capacity” and “in his
official capacity” were inserted on the notes without his knowledge was
correctly disregarded by the RTC and the Court of Appeals. It is not
disputed that Roxas does not deny that he signed
_______________
12 Supra, Note 2.
Republic Planters Bank vs. Court of Appeals, G.R. No. 93073,
December 21, 1992, 216 SCRA 738, 744.
14 Ibid.
466
466 SUPREME COURT REPORTS ANNOTATED
 Astro Electronics Corp. vs. Philippine Export and Foreign Loan
Guarantee Corporation
the notes twice. As aptly found by both the trial and appellate
court, Roxas did not offer any explanation why he did so. It devolves upon
him to overcome the presumptions that private transactions are presumed
to be fair and regular15 and that a person takes ordinary care of his
concerns.16 Aside from his self-serving allegations, Roxas failed to prove
the truth of such allegations. Thus, said presumptions prevail over his
claims. Bare allegations, when unsubstantiated by evidence, documentary
or otherwise, are not equivalent to proof under our Rules of Court.17
Roxas is the President of Astro and reasonably, a businessman who is
presumed to take ordinary care of his concerns. Absent any countervailing
evidence, it cannot be gainsaid that he will not sign a document without
first informing himself of its contents and consequences. Clearly, he knew
the nature of the transactions and documents involved as he not only
executed these notes on two different dates but he also executed, and
again, signed twice, a “Continuing Suretyship Agreement” notarized on
July 31, 1981, wherein he guaranteed, jointly and severally with Astro the
repayment of P3,000,000.00 due to Philtrust. Such continuing suretyship
agreement even re-enforced his solidary liability to Philtrust because as a
surety, he bound himself jointly and severally with Astro’s
obligation.18 Roxas cannot now avoid liability by hiding under the
convenient excuse that he merely signed the notes in blank and the
phrases “in his personal capacity” and “in his official capacity” were
fraudulently inserted without his knowledge.
Lastly, Philguarantee has all the right to proceed against petitioner. It is
subrogated to the rights of Philtrust to demand for and collect payment
from both Roxas and Astro since it already paid the value of 70%
of Roxas and Astro Electronics Corp.’s loan obligation, in compliance with
its contract of “Guarantee” in favor of Philtrust.
_______________
15 Section 3 (p), Rule 131, Rules of Court; Mendoza vs. Court of
Appeals,G.R. No. 116710, June 25, 2001, 412 Phil. 14, 30; 359 SCRA
438.
16 Section 3 (d), Rule 131, Rules of Court.
17 Coronel vs. Constantino, G.R. No. 121069, February 7, 2003, 397
SCRA 128; Manzano vs. Perez, Sr., G.R. No. 112485, August 9,
2001, 362 SCRA 430, 439; Cuizon vs. Court of Appeals, G.R. No. 102096,
August 22, 1996, 260 SCRA 645, 669.
18 E. Zobel, Inc. vs. Court of Appeals, G.R. No. 113931, May 6,
1998, 290 SCRA 1, 8.
467
VOL. 411, SEPTEMBER 23, 2003 467
Astro Electronics Corp. vs. Philippine Export and Foreign Loan
Guarantee Corporation
Subrogation is the transfer of all the rights of the creditor to a third person,
who substitutes him in all his rights.19 It may either be legal or conventional.
Legal subrogation is that which takes place without agreement but by
operation of law because of certain acts.20 Instances of legal subrogation
are those provided in Article 1302 of the Civil Code. Conventional
subrogation, on the other hand, is that which takes place by agreement of
the parties.21
Roxas’ acquiescence is not necessary for subrogation to take place
because the instant case is one of legal subrogation that occurs by
operation of law, and without need of the debtor’s knowledge.22 Further,
Philguarantee, as guarantor, became the transferee of all the rights of
Philtrust as against Roxas and Astro because the “guarantor who pays is
subrogated by virtue thereof to all the rights which the creditor had against
the debtor.”23
WHEREFORE, finding no error with the decision of the Court of
Appeals dated December 10, 1998, the same is hereby AFFIRMED in toto.
SO ORDERED.
Bellosillo (Chairman), Callejo, Sr. and Tinga, JJ.,concur.
Quisumbing, J., In the result.
Judgment affirmed in toto.
Note.—The right of subrogation has its roots in equity—it is designed
to promote and to accomplish justice and is the mode which equity adopts
to compel the ultimate payment of a debt by one who in justice and in good
conscience ought to pay. (Delsan Transport Lines, Inc. vs. Court of
Appeals, 369 SCRA 24)
——o0o——
_______________
19
Philippine National Bank vs. Court of Appeals, G.R. No. 128661,
August 8, 2000, 337 SCRA 381, 404.
20 Chemphil Import & Export Corp. vs. Court of Appeals, G.R. Nos.
112438-39, December 12, 1995, 251 SCRA 257, 279.
21 Ibid.
22 Article 1302, paragraph 3, Civil Code.
23 Article 2067, Civil Code.
468
 G.R. No. 154127. December 8, 2003.*
ROMEO C. GARCIA, petitioner, vs. DIONISIO V. LLAMAS, respondent.
Civil Law; Obligations; Extinguishment; Novation; Definition.—
Novation is a mode of extinguishing an obligation by changing its objects
or principal obligations, by substituting a new debtor in place of the old one,
or by subrogating a third person to the rights of the creditor. Article 1293 of
the Civil Code defines novation.
Same; Same; Same; Same; Kinds; In general, there are two (2)
modes of substituting the person of the debtor: (1) expromision and (2)
delegacion.—In general, there are two modes of substituting the person of
the debtor: (1) expromision and (2) delegacion. In expromision, the
initiative for the change does not come from—and may even be made
without the knowledge of—the debtor, since it consists of a third person’s
assumption of the obligation. As such, it logically requires the consent of
the third person and the creditor. In delegacion, the debtor offers, and the
creditor accepts, a third person who consents to the substitution and
assumes the obligation; thus, the consent of these three persons are
necessary. Both modes of substitution by the debtor require the consent of
the creditor.
Same; Same; Same; Same; Same; Novation may also be extinctive
and modificatory.—Novation may also be extinctive or modificatory. It is
extinctive when an old obligation is terminated by the creation of a new one
that takes the place of the former. It is merely modificatory when the old
obligation subsists to the extent that it remains compatible with the
amendatory agreement. Whether extinctive or modificatory, novation is
made either by changing the object or the principal conditions, referred to
as objective or real novation; or by substituting the person of the debtor or
subrogating a third person to the rights of the creditor, an act known as
subjective or personal novation.
Same; Same; Same; Same; Same; Elements; For novation to take
place, the following requisites must concur.—For novation to take place,
the following requisites must concur: 1) There must be a previous valid
obligation. 2) The parties concerned must agree to a new contract. 3) The
old contract must be extinguished. 4) There must be a valid new contract.
Same; Same; Same; Same; Same; Novation may also be express or
implied.—Novation may also be express or implied. It is express when the
new obligation declares in unequivocal terms that the old obligation is
_______________
*
FIRST DIVISION.
293
VOL. 417, DECEMBER 8, 2003 293
Garcia vs. Llamas
extinguished. It is implied when the new obligation is incompatible
with the old one on every point. The test of incompatibility is whether the
two obligations can stand together, each one with its own independent
existence.
Same; Same; Same; Same; Proof; Well-settled is the rule that nova-
tion is never presumed.—Well-settled is the rule that novation is never
presumed. Consequently, that which arises from a purported change in the
person of the debtor must be clear and express.
Commercial Law; Negotiable Instruments Law; Promissory Notes; As
the note was made payable to a specific person, it is covered by the
general provisions of the Civil Code, not the NIL.—By its terms, the note
was made payable to a specific person rather than to bearer or to order—
a requisite for negotiability under Act 2031, the Negotiable Instruments
Law (NIL). Hence, petitioner cannot avail himself of the NIL’s provisions on
the liabilities and defenses of an accommodation party. Besides, a non-
negotiable note is merely a simple contract in writing and is evidence of
such intangible rights as may have been created by the assent of the
parties. The promissory note is thus covered by the general provisions of
the Civil Code, not by the NIL.
Same; Same; Same; Accommodation Party; Under Article 29 of Act
2031, an accommodation party is liable for the instrument to a holder for
value.—Under Article 29 of Act 2031, an accommodation party is liable for
the instrument to a holder for value even if, at the time of its taking, the
latter knew the former to be only an accommodation party. The relation
between an accommodation party and the party accommodated is, in
effect, one of principal and surety—the accommodation party being the
surety. It is a settled rule that a surety is bound equally and absolutely with
the principal and is deemed an original promissor and debtor from the
beginning. The liability is immediate and direct.
Actions; Pleadings and Practice; Summary Judgment; A summary
judgment is a procedural device designed for the prompt disposition of
actions in which the pleadings raise only a legal, not a genuine, issue
regarding any material fact.—Under Section 3 of Rule 35 of the Rules of
Court, a summary judgment may be rendered after a summary hearing if
the pleadings, supporting affidavits, depositions and admissions on file
show that (1) except as to the amount of damages, there is no genuine
issue regarding any material fact; and (2) the moving party is entitled to a
judgment as a matter of law. A summary judgment is a procedural device
designed for the prompt disposition of actions in which the pleadings raise
only a legal, not a genuine, issue regarding any material fact.
Consequently, facts are asserted in the complaint regarding which there is
yet no admission, disavowal or qualification; or specific denials or
affirmative
294
 294 SUPREME COURT REPORTS ANNOTATED
Garcia vs. Llamas
defenses are set forth in the answer, but the issues are fictitious as
shown by the pleadings, depositions or admissions. A summary judgment
may be applied for by either a claimant or a defending party.
Same; Same; Judgment on the Pleadings; A judgment on the
pleadings is proper when an answer fails to render an issue or otherwise
admits the material allegations of the adverse party’s pleading.—On the
other hand, under Section 1 of Rule 34 of the Rules of Court, a judgment
on the pleadings is proper when an answer fails to render an issue or
otherwise admits the material allegations of the adverse party’s pleading.
The essential question is whether there are issues generated by the
pleadings. A judgment on the pleadings may be sought only by a claimant,
who is the party seeking to recover upon a claim, counterclaim or cross-
claim; or to obtain a declaratory relief.
PETITION for review on certiorari of the decision and resolution of the
Court of Appeals.
The facts are stated in the opinion of the Court.
Carlos G. Nery, Jr. for petitioner.
Felipe N. Egargo, Jr. for respondent.
PANGANIBAN, J.:
Novation cannot be presumed. It must be clearly shown either by the
express assent of the parties or by the complete incompatibility between
the old and the new agreements. Petitioner herein fails to show either
requirement convincingly; hence, the summary judgment holding him liable
as a joint and solidary debtor stands.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court,
seeking to nullify the November 26, 2001 Decision2 and the June 26, 2002
Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 60521. The
appellate court disposed as follows:
_______________
1 Rollo, pp. 11-39.
2 Id., pp. 41-46. Tenth Division. Penned by Justice Renato C. Dacudao,
with the concurrence of Justices Ruben T. Reyes (Division chairman) and
Mariano C. del Castillo (member).
3 Rollo, pp. 48-49.
295
VOL. 417, DECEMBER 8, 2003 295
Garcia vs. Llamas
“UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment
appealed from, insofar as it pertains to [Petitioner] Romeo Garcia, must be,
as it hereby is, AFFIRMED, subject to the modification that the award for
attorney’s fees and cost of suit is DELETED. The portion of the judgment
that pertains to x x x Eduardo de Jesus is SET ASIDE and VACATED.
Accordingly, the case against x x x Eduardo de Jesus is REMANDED to
the court of origin for purposes of receiving ex parte [Respondent] Dionisio
Llamas’ evidence against x x x Eduardo de Jesus.”4
The challenged Resolution, on the other hand, denied petitioner’s Motion
for Reconsideration.
The Antecedents
The antecedents of the case are narrated by the CA as follows:
“This case started out as a complaint for sum of money and damages by x
x x [Respondent] Dionisio Llamas against x x x [Petitioner] Romeo Garcia
and Eduardo de Jesus. Docketed as Civil Case No. Q97-32-873, the
complaint alleged that on 23 December 1996[,] [petitioner and de Jesus]
borrowed P400,000.00 from [respondent]; that, on the same day, [they]
executed a promissory note wherein they bound themselves jointly and
severally to pay the loan on or before 23 January 1997 with a 5% interest
per month; that the loan has long been overdue and, despite repeated
demands, [petitioner and de Jesus] have failed and refused to pay it; and
that, by reason of the[ir] unjustified refusal, [respondent] was compelled to
engage the services of counsel to whom he agreed to pay 25% of the sum
to be recovered from [petitioner and de Jesus], plus P2,000.00 for every
appearance in court. Annexed to the complaint were the promissory note
above-mentioned and a demand letter, dated 02 May 1997, by
[respondent] addressed to [petitioner and de Jesus].
“Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred
that he assumed no liability under the promissory note because he signed
it merely as an accommodation party for x x x de Jesus; and, alternatively,
that he is relieved from any liability arising from the note inasmuch as the
loan had been paid by x x x de Jesus by means of a check dated 17 April
1997; and that, in any event, the issuance of the check and [respondent’s]
acceptance thereof novated or superseded the note.
“[Respondent] tendered a reply to [Petitioner] Garcia’s answer,
thereunder asserting that the loan remained unpaid for the reason that the
check issued by x x x de Jesus bounced, and that [Petitioner] Garcia’s
answer was not even accompanied by a certificate of non-forum shopping.
_______________
4
CA Decision, p. 6; Rollo, p. 46.
 296
296 SUPREME COURT REPORTS ANNOTATED
Garcia vs. Llamas
Annexed to the reply were the face of the check and the reverse side
thereof.
“For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim
that out of the supposed P400,000.00 loan, he received only P360,000.00,
the P40,000.00 having been advance interest thereon for two months, that
is, for January and February 1997; that[,] in fact[,] he paid the sum of
P120,000.00 by way of interests; that this was made when [respondent’s]
daughter, one Nits Llamas-Quijencio, received from the Central Police
District Command at Bicutan, Taguig, Metro Manila (where x x x de Jesus
worked), the sum of P40,000.00, representing the peso equivalent of his
accumulated leave credits, another P40,000.00 as advance interest, and
still another P40,000.00 as interest for the months of March and April 1997;
that he had difficulty in paying the loan and had asked [respondent] for an
extension of time; that [respondent] acted in bad faith in instituting the case,
[respondent] having agreed to accept the benefits he (de Jesus) would
receive for his retirement, but [respondent] nonetheless filed the instant
case while his retirement was being processed; and that, in defense of his
rights, he agreed to pay his counsel P20,000.00 [as] attorney’s fees, plus
P1,000.00 for every court appearance.
“During the pre-trial conference, x x x de Jesus and his lawyer did not
appear, nor did they file any pre-trial brief. Neither did [Petitioner] Garcia
file a pre-trial brief, and his counsel even manifested that he would no
[longer] present evidence. Given this development, the trial court gave
[respondent] permission to present his evidence ex parte against x x x de
Jesus; and, as regards [Petitioner] Garcia, the trial court directed
[respondent] to file a motion for judgment on the pleadings, and for
[Petitioner] Garcia to file his comment or opposition thereto.
“Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in
default and to allow him to present his evidence ex parte. Meanwhile,
[Petitioner] Garcia filed a [M]anifestation submitting his defense to a
judgment on the pleadings. Subsequently, [respondent] filed a
[M]anifestation/[M]otion to submit the case for judgement on the pleadings,
withdrawing in the process his previous motion. Thereunder, he asserted
that [petitioner’s and de Jesus’] solidary liability under the promissory note
cannot be any clearer, and that the check issued by de Jesus did not
discharge the loan since the check bounced.”5
On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch
222) disposed of the case as follows:
“WHEREFORE, premises considered, judgment on the pleadings is
hereby rendered in favor of [respondent] and against [petitioner and De
_______________
5
Id., pp. 2-3 & 42-43.
297
VOL. 417, DECEMBER 8, 2003 297
Garcia vs. Llamas
Jesus], who are hereby ordered to pay, jointly and severally, the
[respondent] the following sums, to wit:
1. ‘1)P400,000.00 representing the principal amount plus 5% interest
thereon per month from January 23, 1997 until the same shall
have been fully paid, less the amount of P120,000.00
representing interests already paid by x x x de Jesus;
2. ‘2)P100,000.00 as attorney’s fees plus appearance fee of
P2,000.00 for each day of [c]ourt appearance, and;
3. ‘3)Cost of this suit.’ ”6
Ruling of the Court of Appeals
The CA ruled that the trial court had erred when it rendered a judgment on
the pleadings against De Jesus. According to the appellate court, his
Answer raised genuinely contentious issues. Moreover, he was still
required to present his evidence ex parte. Thus, respondent was not ipso
facto entitled to the RTC judgment, even though De Jesus had been
declared in default. The case against the latter was therefore remanded by
the CA to the trial court for the ex parte reception of the former’s evidence.
As to petitioner, the CA treated his case as a summary judgment,
because his Answer had failed to raise even a single genuine issue
regarding any material fact.
The appellate court ruled that no novation—express or implied—had
taken place when respondent accepted the check from De Jesus.
According to the CA, the check was issued precisely to pay for the loan
that was covered by the promissory note jointly and severally undertaken
by petitioner and De Jesus. Respondent’s acceptance of the check did not
serve to make De Jesus the sole debtor because, first, the obligation
incurred by him and petitioner was joint and several; and, second, the
check—which had been intended to extinguish the obligation—bounced
upon its presentment.
Hence, this Petition.7
_______________
6
RTC Decision, p. 4; Rollo, p. 63. Penned by Judge Eudarlio B.
Valencia.
 7
Only Petitioner Garcia appealed the CA Decision. His Petition was
deemed submitted for decision on January 30, 2003, upon the Court’s
receipt of respondent’s Memorandum signed by Atty. Felipe N. Egargo Jr.
298
298 SUPREME COURT REPORTS ANNOTATED
Garcia vs. Llamas
Issues
Petitioner submits the following issues for our consideration:
“I
Whether or not the Honorable Court of Appeals gravely erred in not holding
that novation applies in the instant case as x x x Eduardo de Jesus had
expressly assumed sole and exclusive liability for the loan obligation he
obtained from x x x Respondent Dionisio Llamas, as clearly evidenced by:
1. a)Issuance by x x x de Jesus of a check in payment of the full
amount of the loan of P400,000.00 in favor of Respondent
Llamas, although the check subsequently bounced[;]
2. b)Acceptance of the check by the x x x respondent x x x which
resulted in [the] substitution by x x x de Jesus or [the superseding
of] the promissory note;
3. c)x x x de Jesus having paid interests on the loan in the total
amount of P120,000.00;
4. d)The fact that Respondent Llamas agreed to the proposal of x x x
de Jesus that due to financial difficulties, he be given an extension
of time to pay his loan obligation and that his retirement benefits
from the Philippine National Police will answer for said obligation.
“II
Whether or not the Honorable Court of Appeals seriously erred in not
holding that the defense of petitioner that he was merely an
accommodation party, despite the fact that the promissory note provided
for a joint and solidary liability, should have been given weight and
credence considering that subsequent events showed that the principal
obligor was in truth and in fact x x x de Jesus, as evidenced by the
foregoing circumstances showing his assumption of sole liability over the
loan obligation.
III
Whether or not judgment on the pleadings or summary judgment was
properly availed of by Respondent Llamas, despite the fact that there are
genuine issues of fact, which the Honorable Court of Appeals itself admit-
_______________
Petitioner’s Memorandum, which was signed by Atty. Carlos G. Nery,
Jr., was received by the Court on January 16, 2003.
299
VOL. 417, DECEMBER 8, 2003 299
Garcia vs. Llamas
ted in its Decision, which call for the presentation of evidence in a fullblown
trial.”8
Simply put, the issues are the following: 1) whether there was novation of
the obligation; 2) whether the defense that petitioner was only an
accommodation party had any basis; and 3) whether the judgment against
him—be it a judgment on the pleadings or a summary judgment—was
proper.
The Court’s Ruling
The Petition has no merit.
First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint and solidary
debtor by insisting that novation took place, either through the substitution
of De Jesus as sole debtor or the replacement of the promissory note by
the check. Alternatively, the former argues that the original obligation was
extinguished when the latter, who was his co-obligor, “paid” the loan with
the check.
The fallacy of the second (alternative) argument is all too apparent. The
check could not have extinguished the obligation, because it bounced upon
presentment. By law,9the delivery of a check produces the effect of
payment only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its
objects or principal obligations, by substituting a new debtor in place of the
old one, or by subrogating a third person to the rights
_______________
8 Petitioner’s Memorandum, pp. 10-11; Rollo, pp. 97-98. Original in
upper case.
9 Article 1249 of the Civil Code provides in part:
“The delivery of promissory notes payable to order, or bills of exchange or
other mercantile documents shall produce the effect of payment only when
they have been cashed, or when through the fault of the creditor they have
been impaired.
“x x x xxx x x x”
300
300 SUPREME COURT REPORTS ANNOTATED
Garcia vs. Llamas
of the creditor.10 Article 1293 of the Civil Code defines novation as follows:
“Art. 1293. Novation which consists in substituting a new debtor in the
place of the original one, may be made even without the knowledge or
against the will of the latter, but not without the consent of the creditor.
Payment by the new debtor gives him rights mentioned in articles 1236
and 1237.”
In general, there are two modes of substituting the person of the debtor:
(1) expromision and (2) delegacion. In expromision, the initiative for the
change does not come from—and may even be made without the
knowledge of—the debtor, since it consists of a third person’s assumption
of the obligation. As such, it logically requires the consent of the third
person and the creditor. In delegacion, the debtor offers, and the creditor
accepts, a third person who consents to the substitution and assumes the
obligation; thus, the consent of these three persons are necessary.11Both
modes of substitution by the debtor require the consent of the creditor.12
Novation may also be extinctive or modificatory. It is extinctive when an
old obligation is terminated by the creation of a new one that takes the
place of the former. It is merely modificatory when the old obligation
subsists to the extent that it remains compatible with the amendatory
agreement.13 Whether extinctive or modificatory, novation is made either
by changing the object or the principal conditions, referred to as objective
or real novation; or by substituting the person of the debtor or subrogating
a third person to the rights of the creditor, an act known as subjective or
personal
_______________
10
Idolor v. Court of Appeals, 351 SCRA 399, 407, February 7,
2001; Agro Conglomerates, Inc. v. Court of Appeals, 348 SCRA 450, 458,
December 12, 2000; De Cortes v. Venturanza, 79 SCRA 709, 722-723,
October 28, 1977; PNB v. Mallari and The First Nat'l. Surety & Assurance
Co., Inc., 104 Phil. 437, 441, August 29, 1958.
11 Tolentino, Civil Code of the Philippines, Vol. IV (1991 ed.), p. 390; De
Cortes v. Venturanza, supra, p. 723.
12 Garcia v. Khu Yek Chiong, 65 Phil. 466, 468, March 31, 1938; De
Cortes v. Venturanza, supra, p. 723.
13 Babst v. Court of Appeals, 350 SCRA 341, January 26, 2001.
301
VOL. 417, DECEMBER 8, 2003 301
Garcia vs. Llamas
novation.14 For novation to take place, the following requisites must
concur:
1. 1)There must be a previous valid obligation.
2. 2)The parties concerned must agree to a new contract.
3. 3)The old contract must be extinguished.
4. 4)There must be a valid new contract.15
Novation may also be express or implied. It is express when the new
obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible with the
old one on every point.16The test of incompatibility is whether the two
obligations can stand together, each one with its own independent
existence.17
Applying the foregoing to the instant case, we hold that no novation
took place.
The parties did not unequivocally declare that the old obligation had
been extinguished by the issuance and the acceptance of the check, or
that the check would take the place of the note. There is no incompatibility
between the promissory note and the check. As the CA correctly observed,
the check had been issued precisely to answer for the obligation. On the
one hand, the note evidences the loan obligation; and on the other, the
check answers for it. Verily, the two can stand together.
Neither could the payment of interests—which, in petitioner’s view, also
constitutes novation18—change the terms and conditions of the obligation.
Such payment was already provided for in the promissory note and, like
the check, was totally in accord with the terms thereof.
_______________
14
Spouses Bautista v. Pilar Development Corporation, 371 Phil.
533; 312 SCRA 611, August 17, 1999.
15 Agro Conglomerates, Inc. v. Court of Appeals, supra, pp. 458-
459; Security Bank and Trust Company, Inc. v. Cuenca, 341 SCRA 781,
796, October 3, 2000; Reyes v. Court of Appeals, 332 Phil. 40, 50; 264
SCRA 35, November 4, 1996.
16 Spouses Bautista v. Pilar Development Corporation, supra. See
alsoArticle 1292 of the Civil Code.
17 Molino v. Security Diners International Corporation, 415 Phil.
587; 363 SCRA 358, August 16, 2001.
18 Petitioner’s Memorandum, p. 17; Rollo, p. 104.
302
302 SUPREME COURT REPORTS ANNOTATED
Garcia vs. Llamas
Also unmeritorious is petitioner’s argument that the obligation was novated
by the substitution of debtors. In order to change the person of the debtor,
the old one must be expressly released from the obligation, and the third
person or new debtor must assume the former’s place in the
relation.19 Well-settled is the rule that novation is never
presumed.20 Consequently, that which arises from a purported change in
the person of the debtor must be clear and express.21 It is thus incumbent
on petitioner to show clearly and unequivocally that novation has indeed
taken place.
In the present case, petitioner has not shown that he was expressly
released from the obligation, that a third person was substituted in his
place, or that the joint and solidary obligation was cancelled and
substituted by the solitary undertaking of De Jesus. The CA aptly held:
“x x x. Plaintiff ’s acceptance of the bum check did not result in substitution
by de Jesus either, the nature of the obligation being solidary due to the
fact that the promissory note expressly declared that the liability of
appellants thereunder is joint and [solidary.] Reason: under the law, a
creditor may demand payment or performance from one of the solidary
debtors or some or all of them simultaneously, and payment made by one
of them extinguishes the obligation. It therefore follows that in case the
creditor fails to collect from one of the solidary debtors, he may still proceed
against the other or others. x x x”22
Moreover, it must be noted that for novation to be valid and legal, the law
requires that the creditor expressly consent to the substitution of a new
debtor.23 Since novation implies a waiver of the right the creditor had
before the novation, such waiver must be express.24 It cannot be
supposed, without clear proof, that the pres-
_______________
19
Reyes v. Court of Appeals, supra; citing Ajax Marketing and
Development Corporation v. Court of Appeals, 248 SCRA 222, September
14, 1995.
20 Ibid.; Agro Conglomerates, Inc. v. Court of Appeals, supra; Security
Bank and Trust Company, Inc. v. Cuenca, supra.
21 Ibid.
22 CA Decision, p. 5; Rollo, p. 45.
23 Article 1293 of the Civil Code.
24 Babst v. Court of Appeals, supra; citing Testate Estate of Mota v.
Serra, 47 Phil. 464, February 14, 1925.
303
VOL. 417, DECEMBER 8, 2003 303
Garcia vs. Llamas
ent respondent has done away with his right to exact fulfillment from either
of the solidary debtors.25
More important, De Jesus was not a third person to the obligation. From
the beginning, he was a joint and solidary obligor of the P400,000 loan;
thus, he can be released from it only upon its extinguishment.
Respondent’s acceptance of his check did not change the person of the
debtor, because a joint and solidary obligor is required to pay the entirety
of the obligation.
It must be noted that in a solidary obligation, the creditor is entitled to
demand the satisfaction of the whole obligation from any or all of the
debtors.26 It is up to the former to determine against whom to enforce
collection.27Having made himself jointly and severally liable with De Jesus,
petitioner is therefore liable28 for the entire obligation.29
Second Issue:
Accommodation Party
Petitioner avers that he signed the promissory note merely as an
accommodation party; and that, as such, he was released as obligor when
respondent agreed to extend the term of the obligation.
This reasoning is misplaced, because the note herein is not a
negotiable instrument. The note reads:
_______________
25
Article 1216 of the Civil Code provides:
“Art. 1216. The creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The demand made against
one of them shall not be an obstacle to those which may subsequently be
directed against the others, so long as the debt has not been fully
collected.”
26 PH Credit Corporation v. Court of Appeals, 370 SCRA 155,
November 22, 2001; Industrial Management International Development
Corp. v. National Labor Relations Commission, 387 Phil. 659; 331 SCRA
640, May 11, 2000; Inciong, Jr. v. Court of Appeals, 327 Phil. 364; 257
SCRA 578, June 26, 1996. See also Article 1216 of the Civil Code.
27 Inciong, Jr. v. Court of Appeals, 327 Phil. 364; 257 SCRA 578, June
26, 1996.
28 Ibid.; PH Credit Corporation v. Court of Appeals, supra; Industrial
Management International Development Corp. v. National Labor Relations
Commission, supra.
29 See Articles 1217 and 1218 of the Civil Code.
304
304 SUPREME COURT REPORTS ANNOTATED
Garcia vs. Llamas
 “PROMISSORY NOTE
“P400,000.00
“RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR
HUNDRED THOUSAND PESOS, Philippine Currency payable on or
before January 23, 1997 at No. 144 K-10 St. Kamias, Quezon City, with
interest at the rate of 5% per month or fraction thereof.
“It is understood that our liability under this loan is jointly and severally
[sic].
“Done at Quezon City, Metro Manila this 23rd day of December,
1996.”30
By its terms, the note was made payable to a specific person rather than
to bearer or to order31—a requisite for negotiability under Act 2031, the
Negotiable Instruments Law (NIL). Hence, petitioner cannot avail himself
of the NIL’s provisions on the liabilities and defenses of an accommodation
party. Besides, a non-negotiable note is merely a simple contract in writing
and is evidence of such intangible rights as may have been created by the
assent of the parties.32 The promissory note is thus covered by the general
provisions of the Civil Code, not by the NIL.
Even granting arguendo that the NIL was applicable, still, petitioner
would be liable for the promissory note. Under Article 29 of Act 2031, an
accommodation party is liable for the instrument to a holder for value even
if, at the time of its taking, the latter knew
_______________
30
Records, p. 7.
31
Section 1 of the Negotiable Instruments Law provides the requisites
for the negotiability of an instrument, as follows:
“Section 1. Form of negotiable instruments.—An instrument to be
negotiable must conform to the following requirements:
1. (a)It must be in writing and signed by the maker or drawer;
2. (b)Must contain an unconditional promise or order to pay a sum
certain in money;
3. (c)Must be payable on demand, or at a fixed or determinable future
time;
4. (d)Must be payable to order or to bearer; and
5. (e)Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.”
32
Agbayani, Commentaries and Jurisprudence on the Commercial
Laws of the Philippines, Vol. 1 (1992 ed.), p. 100.
305
VOL. 417, DECEMBER 8, 2003 305
Garcia vs. Llamas
the former to be only an accommodation party. The relation between an
accommodation party and the party accommodated is, in effect, one of
principal and surety—the accommodation party being the surety.33 It is a
settled rule that a surety is bound equally and absolutely with the principal
and is deemed an original promissor and debtor from the beginning. The
liability is immediate and direct.34
Third Issue:
Propriety of Summary Judgment
or Judgment on the Pleadings
The next issue illustrates the usual confusion between a judgment on the
pleadings and a summary judgment. Under Section 3 of Rule 35 of the
Rules of Court, a summary judgment may be rendered after a summary
hearing if the pleadings, supporting affidavits, depositions and admissions
on file show that (1) except as to the amount of damages, there is no
genuine issue regarding any material fact; and (2) the moving party is
entitled to a judgment as a matter of law.
A summary judgment is a procedural device designed for the prompt
disposition of actions in which the pleadings raise only a legal, not a
genuine, issue regarding any material fact.35 Consequently, facts are
asserted in the complaint regarding which there is yet no admission,
disavowal or qualification; or specific denials or affirmative defenses are
set forth in the answer, but the issues are fictitious as shown by the
pleadings, depositions or admissions.36 A summary judgment may be
applied for by either a claimant or a defending party.37
On the other hand, under Section 1 of Rule 34 of the Rules of Court, a
judgment on the pleadings is proper when an answer fails
_______________
33
Spouses Gardose v. Tarroza, 352 Phil. 797; 290 SCRA 186, May 19,
1998, citing Caneda Jr. v. Court of Appeals, 181 SCRA 762, February 5,
1990; Prudencio v. Court of Appeals, 227 Phil. 7; 143 SCRA 7, July 14,
1986.
34 Palmares v. Court of Appeals, 351 Phil. 664; 288 SCRA 422, March
31, 1998.
35 Puyat v. Zabarte, 352 SCRA 738, February 26, 2001.
36 Narra Integrated Corporation v. Court of Appeals, 344 SCRA 781,
November 15, 2000.
37 See §§1 and 2 of Rule 35 of the Rules of Court.
306
306 SUPREME COURT REPORTS ANNOTATED
 Garcia vs. Llamas WHEREFORE, this Petition is hereby DENIED and the assailed Decision
to render an issue or otherwise admits the material allegations of the AFFIRMED. Costs against petitioner.
adverse party’s pleading. The essential question is whether there are SO ORDERED.
issues generated by the pleadings.38 A judgment on the pleadings may be Davide, Jr. (C.J., Chairman), Ynares-
sought only by a claimant, who is the party seeking to recover upon a claim, Santiago, Carpio and Azcuna, JJ., concur.
counterclaim or cross-claim; or to obtain a declaratory relief.39 Petition denied, assailed decision affirmed.
Apropos thereto, it must be stressed that the trial court’s judgment Note.—It is not proper to consider an obligation novated by unimportant
against petitioner was correctly treated by the appellate court as a modifications which do not alter its essence. (Idolor vs. Court of
summary judgment, rather than as a judgment on the pleadings. His Appeals, 351 SCRA 399 [2001])
Answer40 apparently raised several issues—that he signed the promissory
note allegedly as a mere accommodation party, and that the obligation was ——o0o——
extinguished by either payment or novation. However, these are not factual
issues requiring trial. We quote with approval the CA’s observations:
“Although Garcia’s [A]nswer tendered some issues, by way of affirmative
defenses, the documents submitted by [respondent] nevertheless clearly
showed that the issues so tendered were not valid issues. Firstly, Garcia’s
claim that he was merely an accommodation party is belied by the
promissory note that he signed. Nothing in the note indicates that he was
only an accommodation party as he claimed to be. Quite the contrary, the
promissory note bears the statement: ‘It is understood that our liability
under this loan is jointly and severally [sic].’ Secondly, his claim that his co-
defendant de Jesus already paid the loan by means of a check collapses
in view of the dishonor thereof as shown at the dorsal side of said check.”41
From the records, it also appears that petitioner himself moved to submit
the case for judgment on the basis of the pleadings and documents. In a
written Manifestation,42 he stated that “judgment on the pleadings may now
be rendered without further evidence, considering the allegations and
admissions of the parties.”43
In view of the foregoing, the CA correctly considered as a summary
judgment that which the trial court had issued against petitioner.

_______________
38 Diman v. Alumbres, 359 Phil. 796; 299 SCRA 459, November 27,
1998.
39 Ibid.
40 Dated February 2, 1998; Records, pp. 21-22.
41 CA Decision, p. 5; Rollo, p. 45.
42 Dated May 12, 1998; Records, pp. 44-45.
43 Petitioner’s Manifestation dated May 12, 1998, p. 1; id., p. 44.

307
VOL. 417, DECEMBER 8, 2003 307
Land Car, Inc. vs. Bachelor Express, Inc.
594 SUPREME COURT REPORTS ANNOTATED
Crisologo-Jose vs. Court of Appeals
G.R. No. 80599.September 15, 1989.*
ERNESTINA CRISOLOGO-JOSE, petitioner, vs. COURT OF APPEALS
and RICARDO S. SANTOS, JR. in his own behalf and as Vice-President
for Sales of Mover Enterprises, Inc., respondents.
Negotiable Instruments Law; Corporations; Rule that an
accommodation party liable on the instrument to a holder for value does
not apply to corporations which are accommodation parties; Reasons.—
The aforequoted provision of the Negotiable Instruments Law which holds
an accommodation party liable on the instrument to a holder for value,
although such holder at the time of taking the instrument knew him to be
only an accommodation party, does not include nor apply to corporations
which are accommodation parties. This is because the issue or
indorsement of negotiable paper by a corporation without consideration
and for the accommodation of another is ultra vires. Hence, one who has
taken the instrument with knowledge of the accommodation nature thereof
cannot recover against a corporation where it is only an accommodation
party. If the form of the instrument, or the nature of the transaction, is such
as to charge the indorsee with knowledge that the issue or indorsement of
the instrument by the corporation is for the accommodation of another, he
cannot recover against the corporation thereon.
Same; Same; Same; Same; Exception; An officer or agent of a
corporation shall have the power to execute or indorse a negotiable paper
in the name of the corporation for accommodation only if specifically
authorized to do so; Personal liability of signatories in the instrument.—By
way of exception, an officer or agent of a corporation shall have the power
to execute or indorse a negotiable paper in the name of the corporation for
the accommodation of a third person only if specifically authorized to do
so. Corollarily, corporate officers, such as the president and vice-president,
have no power to execute for mere
_______________
*SECOND DIVISION.
595
VOL. 177, SEPTEMBER 15 ,1989 595
Crisologo-Jose vs. Court of Appeals
accommodation a negotiable instrument of the corporation for their
individual debts or transactions arising from or in relation to matters in
which the corporation has no legitimate concern. Since such
accommodation paper cannot thus be enforced against the corporation,
especially since it is not involved in any aspect of the corporate business
or operations, the inescapable conclusion in law and in logic is that the
signatories thereof shall be personally liable therefor, as well as the
consequences arising from their acts in connection therewith.
Same; Same; Same; Same; Consignation; Payment; Remedy of
consignation, proper; Case at bar; Effects of consignation.—We interpose
the caveat,however, that by holding that the remedy of consignation is
proper under the given circumstances, we do not thereby rule that all the
operative facts for consignation which would produce the effect of payment
are present in this case. Those are factual issues that are not clear in the
records before us and which are for the Regional Trial Court of Quezon
City to ascertain in Civil Case No. Q-33160, for which reason it has
advisedly been directed by respondent court to give due course to the
complaint for consignation, and which would be subject to such issues or
claims as may be raised by defendant and the counterclaim filed therein
which is hereby ordered similarly revived.
Checks; B.P. 22; Presumptive rule to determine whether or not there
was insufficiency of funds in or credit with the drawee bank.—These are
aside the considerations that the disputed period involved in the criminal
case is only a presumptive rule, juris tantum at that, to determine whether
or not there was knowledge of insufficiency of funds in or credit with the
drawee bank; that payment of civil liability is not a mode for extinguishment
of criminal liability; and that the requisite quantum of evidence in the two
types of cases are not the same.
PETITION to review the decision of the Court of Appeals. Torres, Jr., J.
The facts are stated in the opinion of the Court.
Melquiades P. de Leon for petitioner.
Rogelio A. Ajes for private respondent.
596
596 SUPREME COURT REPORTS ANNOTATED
Crisologo-Jose vs. Court of Appeals
REGALADO, J.:
Petitioner seeks the annulment of the decision1 of respondent Court of
Appeals, promulgated on September 8, 1987, which reversed the decision
of the trial court2dismissing the complaint for consignation filed by therein
plaintiff Ricardo S. Santos, Jr.
The parties are substantially agreed on the following facts as found by
both lower courts:
“In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-president of Mover
Enterprises, Inc. incharge of marketing and sales; and the president of the
said corporation was Atty. Oscar Z. Benares. On April 30, 1980, Atty.
Benares, in accommodation of his clients, the spouses Jaime and Clarita
Ong, issued Check No. 093553 drawn against Traders Royal Bank, dated
June 14, 1980, in the amount of P45,000.00 (Exh. ‘1’) payable to defendant
Ernestina Crisologo-Jose. Since the check was under the account of
Mover Enterprises, Inc., the same was to be signed by its president, Atty.
Oscar Z. Benares, and the treasurer of the said corporation. However,
since at that time, the treasurer of Mover Enterprises was not available,
Atty. Benares prevailed upon the plaintiff, Ricardo S. Santos, Jr., to sign
the aforesaid check as an alternate signatory. Plaintiff Ricardo S. Santos,
Jr. did sign the check.
“It appears that the check (Exh. ‘1’) was issued to defendant Ernestina
Crisologo-Jose in consideration of the waiver or quitclaim by said
defendant over a certain property which the Government Service
Insurance System (GSIS) agreed to sell to the clients of Atty. Oscar
Benares, the spouses Jaime and Clarita Ong, with the understanding that
upon approval by the GSIS of the compromise agreement with the spouses
Ong, the check will be encashed accordingly. However, since the
compromise agreement was not approved within the expected period of
time, the aforesaid check for P45,000.00 (Exh. ‘1’) was replaced by Atty.
Benares with another Traders Royal Bank check bearing No. 379299
dated August 10, 1980, in the same amount of P45,000.00 (Exhs. ‘A’ and
‘2’), also payable to the defendant Jose. This replacement check was also
signed by Atty. Oscar Z. Benares and
_______________
1 Penned by Justice Justo P. Torres, Jr. and concurred in by Associate
Justices Leonor Ines Luciano and Oscar M. Herrera; Rollo, 18.
2 Civil Case No. Q-33160, Regional Trial Court of Quezon City, Branch
XCVI.
597
VOL. 177, SEPTEMBER 15, 1989 597
Crisologo-Jose vs. Court of Appeals
by the plaintiff Ricardo S. Santos, Jr. When defendant deposited this
replacement check (Exhs. ‘A’ and ‘2’) with her account at Family Savings
Bank, Mayon Branch, it was dishonored for insufficiency of funds. A
subsequent redepositing of the said check was likewise dishonored by the
bank for the same reason. Hence, defendant through counsel was
constrained to file a criminal complaint for violation of Batas Pambansa
Blg. 22 with the Quezon City Fiscal’s Office against Atty. Oscar Z. Benares
and plaintiff Ricardo S. Santos, Jr. The investigating Assistant City Fiscal,
Alfonso Llamas, accordingly filed an amended information with the court
charging both Oscar Benares and Ricardo S. Santos, Jr., for violation of
Batas Pambansa Blg. 22 docketed as Criminal Case No. Q-14867 of then
Court of First Instance of Rizal, Quezon City.
“Meanwhile, during the preliminary investigation of the criminal charge
against Benares and the plaintiff herein, before Assistant City Fiscal
Alfonso T. Llamas, plaintiff Ricardo S. Santos, Jr. tendered cashier’s check
No. CC 160152 for P45,000.00 dated April 10, 1981 to the defendant
Ernestina Crisologo-Jose, the complainant in that criminal case. The
defendant refused to receive the cashier’s check in payment of the
dishonored check in the amount of P45,000.00. Hence, plaintiff encashed
the aforesaid cashier’s check and subsequently deposited said amount of
P45,000.00 with the Clerk of Court on August 14, 1981 (Exhs. ‘D’ and ‘E’).
Incidentally, the cashier’s check adverted to above was purchased by Atty.
Oscar Z. Benares and given to the plaintiff herein to be applied in payment
of the dishonored check.”3
After trial, the court a quo, holding that it was “not persuaded to believe
that consignation referred to in Article 1256 of the Civil Code is applicable
to this case,” rendered judgment dismissing plaintiff’s complaint and
defendant’s counterclaim.4
As earlier stated, respondent court reversed and set aside said
judgment of dismissal and revived the complaint for consignation, directing
the trial court to give due course thereto. Hence, the instant petition, the
assignment of errors wherein are prefatorily stated and discussed seriatim.
1. Petitioner contends that respondent Court of Appeals erred in holding
that private respondent, one of the signatories of the check issued under
the account of Mover Enterprises, Inc., is an accommodation party under
the Negotiable Instru-
_______________
3
Rollo, 19-20.
4
Rollo, 18.
598
598 SUPREME COURT REPORTS ANNOTATED
Crisologo-Jose vs. Court of Appeals
amount of said check.
Petitioner avers that the accommodation party in this case is Mover
Enterprises, Inc. and not private respondent who merely signed the check
in question in a representative capacity, that is, as vice-president of said
corporation, hence he is not liable thereon under the Negotiable
Instruments Law.
The pertinent provision of said law referred to provides:
“Sec. 29. Liability of accommodation party.—An accommodation party is
one who has signed the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for the purpose of lending
his name to some other person. Such a person is liable on the instrument
to a holder for value, notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation party.”
Consequently, to be considered an accommodation party, a person must
(1) be a party to the instrument, signing as maker, drawer, acceptor, or
indorser, (2) not receive value therefor, and (3) sign for the purpose of
lending his name for the credit of some other person.
Based on the foregoing requisites, it is not a valid defense that the
accommodation party did not receive any valuable consideration when he
executed the instrument. From the standpoint of contract law, he differs
from the ordinary concept of a debtor therein in the sense that he has not
received any valuable consideration for the instrument he signs.
Nevertheless, he is liable to a holder for value as if the contract was not for
accommodation,5 in whatever capacity such accommodation party signed
the instrument, whether primarily or secondarily. Thus, it has been held
that in lending his name to the accommodated party, the accommodation
party is in effect a surety for the latter.6
Assuming arguendo that Mover Enterprises, Inc. is the accommodation
party in this case, as petitioner suggests, the inevitable question is whether
or not it may be held liable on
_______________
5
Ang Tiong vs. Ting, et al., 22 SCRA 713 (1968).
6
Philipine Bank of Commerce vs. Aruego, 102 SCRA 530 (1981).
599
VOL. 177, SEPTEMBER 15, 1989 599
Crisologo-Jose vs. Court of Appeals
the accommodation instrument, that is, the check issued in favor of herein
petitioner.
We hold in the negative.
The aforequoted provision of the Negotiable Instruments Law which
holds an accommodation party liable on the instrument to a holder for
value, although such holder at the time of taking the instrument knew him
to be only an accommodation party, does not include nor apply to
corporations which are accommodation parties.7 This is because the issue
or indorsement of negotiable paper by a corporation without consideration
and for the accommodation of another is ultra vires.8 Hence, one who has
taken the instrument with knowledge of the accommodation nature thereof
cannot recover against a corporation where it is only an accommodation
party. If the form of the instrument, or the nature of the transaction, is such
as to charge the indorsee with knowledge that the issue or indorsement of
the instrument by the corporation is for the accommodation of another, he
cannot recover against the corporation thereon.9
By way of exception, an officer or agent of a corporation shall have the
power to execute or indorse a negotiable paper in the name of the
corporation for the accommodation of a third person only if specifically
authorized to do so.10 Corollarily, corporate officers, such as the president
and vice-president, have no power to execute for mere accommodation a
negotiable instrument of the corporation for their individual debts or
transactions arising from or in relation to matters in which the corporation
has no legitimate concern. Since such accommodation paper cannot thus
be enforced against the corporation, especially since it is not involved in
any aspect of the corporate business or operations, the inescapable
conclusion in law and in logic is that the signatories thereof shall be
personally liable therefor, as well as the consequences arising from their
acts in connection therewith.
_______________
7
11 C.J.S. 309.
8
14A C.J. 732.
9 Oppenheim vs. Simon Reigel Cigar Co., 90 N.Y.S. 355, cited in 11
C.J.S. 309.
10 In re Wrentham Mfg. Co., 2 Low. 119; Hall vs. Auburn Turnp. Co., 27
Cal. 255, cited in 14A C.J. 461.
600
600 SUPREME COURT REPORTS ANNOTATED
Crisologo-Jose vs. Court of Appeals
The instant case falls squarely within the purview of the aforesaid
decisional rules. If we indulge petitioner in her aforesaid postulation, then
she is effectively barred from recovering from Mover Enterprises, Inc. the
value of the check. Be that as it may, petitioner is not without recourse.
The fact that for lack of capacity the corporation is not bound by an
accommodation paper does not thereby absolve, but should render
personally liable, the signatories of said instrument where the facts show
that the accommodation involved was for their personal account,
undertaking or purpose and the creditor was aware thereof.
Petitioner, as hereinbefore explained, was evidently charged with the
knowledge that the check was issued at the instance and for the personal
account of Atty. Benares who merely prevailed upon respondent Santos to
act as co-signatory in accordance with the arrangement of the corporation
with its depository bank. That it was a personal undertaking of said
corporate officers was apparent to petitioner by reason of her personal
involvement in the financial arrangement and the fact that, while it was the
corporation’s check which was issued to her for the amount involved, she
actually had no transaction directly with said corporation.
 There should be no legal obstacle, therefore, to petitioner’s claims
being directed personally against Atty. Oscar Z. Benares and respondent
Ricardo S. Santos, Jr., president and vice-president, respectively, of Mover
Enterprises, Inc.
1. 2.On her second assignment of error, petitioner argues that the
Court of Appeals erred in holding that the consignation of the sum
of P45,000.00, made by private respondent after his tender of
payment was refused by petitioner, was proper under Article 1256
of the Civil Code.
Petitioner’s submission is that no creditor-debtor relationship exists
between the parties, hence consignation is not proper. Concomitantly, this
argument was premised on the assumption that private respondent Santos
is not an accommodation party.
As previously discussed, however, respondent Santos is an
accommodation party and is, therefore, liable for the value of the check.
The fact that he was only a co-signatory does not detract from his personal
liability. A co-maker or co-drawer under the circumstances in this case is
as much an accommoda-
601
VOL. 177, SEPTEMBER 15, 1989 601
Crisologo-Jose vs. Court of Appeals
tion party as the other co-signatory or, for that matter, as a lone signatory
in an accommodation instrument. Under the doctrine in Philippine Bank of
Commerce vs. Aruego, supra, he is in effect a co-surety for the
accommodated party with whom he and his co-signatory, as the other co-
surety, assume solidary liabilityex lege for the debt involved. With the
dishonor of the check, there was created a debtor-creditor relationship, as
between Atty. Benares and respondent Santos, on the one hand, and
petitioner, on the other. This circumstance enables respondent Santos to
resort to an action of consignation where his tender of payment had been
refused by petitioner.
We interpose the caveat,however, that by holding that the remedy of
consignation is proper under the given circumstances, we do not thereby
rule that all the operative facts for consignation which would produce the
effect of payment are present in this case. Those are factual issues that
are not clear in the records before us and which are for the Regional Trial
Court of Quezon City to ascertain in Civil Case No. Q-33160, for which
reason it has advisedly been directed by respondent court to give due
course to the complaint for consignation, and which would be subject to
such issues or claims as may be raised by defendant and the counterclaim
filed therein which is hereby ordered similarly revived.
3. That respondent court virtually prejudged Criminal Case No. Q-
14687 of the Regional Trial Court of Quezon City filed against private
respondent for violation of Batas Pambansa Blg. 22, by holding that no
criminal liability had yet attached to private respondent when he deposited
with the court the amount of P45,000.00 is the final plaint of petitioner.
We sustain petitioner on this score.
Indeed, respondent court went beyond the ratiocination called for in the
appeal to it in CA-G.R. CV. No. 05464. In its own decision therein, it
declared that “(t)he lone issue dwells in the question of whether an
accommodation party can validly consign the amount of the debt due with
the court after his tender of payment was refused by the creditor.” Yet, from
the commercial and civil law aspects determinative of said issue, it
digressed into the merits of the aforesaid Criminal Case No. Q-14867, thus:
602
602 SUPREME COURT REPORTS ANNOTATED
Crisologo-Jose vs. Court of Appeals
“Section 2 of B.P. 22 establishes the prima facie evidence of knowledge of
such insufficiency of funds or credit. Thus, the making, drawing and
issuance of a check, payment of which is refused by the drawee because
of insufficient funds in or credit with such bank is prima facie evidence of
knowledge of insufficiency of funds or credit, when the check is presented
within 90 days from the date of the check.
“It will be noted that the last part of Section 2 of B.P. 22 provides that
the element of knowledge of insufficiency of funds or credit is not present
and, therefore, the crime does not exist, when the drawer pays the holder
the amount due or makes arrangements for payment in full by the drawee
of such check within five (5) banking days after receiving notice that such
check has not been paid by the drawee.
“Based on the foregoing consideration, this Court finds that the plaintiff-
appellant acted within his legal rights when he consigned the amount of
P45,000.00 on August 14, 1981, between August 7, 1981, the date when
plaintiff-appellant receive (sic) the notice of non-payment, and August 14,
1981, the date when the debt due was deposited with the Clerk of Court (a
Saturday and a Sunday which are not banking days) intervened. The fifth
banking day fell on August 14, 1981. Hence, no criminal liability has yet
attached to plaintiff-appellant when he deposited the amount of
P45,000.00 with the Court a quo on August 14, 1981.”11
That said observations made in the civil case at bar and the intrusion into
the merits of the criminal case pending in another court are improper do
not have to be belabored. In the latter case, the criminal trial court has to
grapple with such factual issues as, for instance, whether or not the period
of five banking days had expired, in the process determining whether
notice of dishonor should be reckoned from any prior notice if any has been
given or from receipt by private respondents of the subpoena therein with
supporting affidavits, if any, or from the first day of actual preliminary
investigation; and whether there was a justification for not making the
requisite arrangements for payment in full of such check by the drawee
bank within the said period. These are matters alien to the present
controversy on tender and consignation of payment, where no such period
and its legal effects are involved.
These are aside from the considerations that the disputed
_______________
11
Rollo, 21-22.
603
VOL. 177, SEPTEMBER 15, 1989 603
Crisologo-Jose vs. Court of Appeals
period involved in the criminal case is only a presumptive rule, juris tantum
at that, to determine whether or not there was knowledge of insufficiency
of funds in or credit with the drawee bank; that payment of civil liability is
not a mode for extinguishment of criminal liability; and that the requisite
quantum of evidence in the two types of cases are not the same.
To repeat, the foregoing matters are properly addressed to the trial
court in Criminal Case No. Q-14867, the resolution of which should not be
interfered with by respondent Court of Appeals at the present posture of
said case, much less preempted by the inappropriate and unnecessary
holdings in the aforequoted portion of the decision of said respondent
court. Consequently, we modify the decision of respondent court in CA-
G.R. CV No. 05464by setting aside and declaring without force and effect
its pronouncements and findings insofar as the merits of Criminal Case No.
Q-14867 and the liability of the accused therein are concerned.
WHEREFORE, subject to the aforesaid modifications, the judgment of
respondent Court of Appeals is AFFIRMED.
SO ORDERED.
Paras, Padilla and Sarmiento, JJ., concur.
Melencio-Herrera J., No part. Did not participate in deliberations.
Judgment affirmed with modifications.
Notes.—In order that consignation may be effective, the debtor must
first comply with certain requirements prescribed by law. (Soco vs.
Militante, 123 SCRA 160.)
Without prior notice, consignation is void as payment. (Soco vs.
Militante, 123 SCRA 160.)
——o0o——
604
604 SUPREME COURT REPORTS ANNOTATED
Guzman vs. Court of Appeals
G.R. No. 81949.September 15, 1989.*
SPOUSES EMETERIO and LOLITA GUZMAN,
petitioners, vs. HONORABLE COURT OF APPEALS and SPOUSES
GUILLERMO and GERARDA EVANGELISTA, respondents.
Agrarian Reform; Urban Land Reform Law; Right of First
Refusal; Only legitimate tenants who have resided for ten years or more
on specific parcels of land in declared urban land reform zones or urban
zones, and who have built their houses thereon, have the right of first
refusal.—It is clear from the language of the law that only legitimate tenants
who have resided for ten years or more on specific parcels of land situated
in declared Urban Land Reform Zones or Urban Zones, and who have built
their homes thereon, have the right not to be dispossessed therefrom and
the “right of first refusal” to purchase the property under reasonable terms
and conditions to be determined by the appropriate government agency.
At the time of the sale of the subject property to petitioners, Proclamation
No. 1967 [Amending Proclamation No. 1893 by specifying 244 sites in
Metropolitan Manila as Areas for Priority Development (APDs) and Urban
Land Reform Zones], promulgated on May 14, 1980, was the prevailing
law enumerating the parcels of land affected by Pres. Dec. Nos. 1517,
1640 and 1642, and LOI No. 935. A simple reading of the list of 244 sites
described in the annex to Proclamation No. 1967 reveals that the subject
property was not among the APDs or Urban Land Reform Zones in
Navotas. Thus, when the subject property was sold to petitioners, it was
neither covered by, nor subject, to the conditions set forth in, the Urban
Land Reform Law.
Same; Same; Tenants, Defined; Tenants, as defined in Pres. Decree
No. 1517 does not include those whose possession of the property is under
litigation.—Secondly, private respondents are not even “tenants” within the
purview of Pres. Dec. No. 1517. Section 3 (f) of this decree, which defines
the term “tenant,” provides: Tenant refers to the rightful occupant of land
and its structures, but does not include those whose presence on the land
is merely tolerated and without the benefit of contract, those who enter the
land by force or deceit, or those whose possession is under litigation [italics
supplied.] It cannot be denied that at the time the subject property was
declared an APD in December 1987, the right of private respondents to
occupy and possess the subject property was then an issue under litigation
in the action
_______________
*
THIRD DIVISION.
605
VOL. 177, SEPTEMBER 15, 1989 605
 Guzman vs. Court of Appeals
for ejectment filed against them by petitioners.
Civil Law; Contracts; Lease; Suspension of Rental Payments; Private
respondent’s belief that the subject property should have been sold to
them, does not justify the unilateral withholding of rental payments due the
new owner.—Upon the purchase of the leased property and proper notice
by the vendee to the lessee, the latter must pay the agreed monthly rentals
to the new owner since, by virtue of the sale, the vendee steps into the
shoes of the original lessor to whom the lessee bound himself to pay
[Mirasol v. Magsuci, G.R. No. L-17125, November 28, 1966, 18 SCRA
801]. In the instant case, despite their receipt of the demand letter dated
March 21, 1986 informing them of the change of property ownership,
private respondents unjustifiably failed to pay the monthly rentals which
accrued for the account of the new owner. Their belief that the subject
property should have been sold to them does not justify the unilateral
withholding of rental payments due to Lolita Guzman as new owner of the
property. Private respondents must be reminded that Article 1658 of the
New Civil Code provides only two instances wherein the lessee may
suspend payment of rent, namely, in case the lessor fails to make the
necessary repairs or to maintain the lessee in peaceful and adequate
enjoyment of the property leased [See Reyes v. Arca, G.R. No. L-21447,
November 29, 1965, 15 SCRA 442].
Same; Same; Same; Ejectment; Private respondents’ continued stay
in the property without having paid a single monthly rental is a sufficient
cause for ejectment.—Private respondents should have at the very least
replied to Lolita Guzman’s letter and tendered payment of the monthly
rentals which accrued in her favor beginning March 1986, and if such were
to be refused by her, then private respondents should have made a
consignation thereof or deposited the rentals due pending the resolution of
their alleged claim against the administratrix of the estate of the late
Mercedes Policarpio [SeeIpapo v. IAC, G.R. No. 72740, January 27, 1987,
147 SCRA 342]. Instead, they opted to take a hard-line stance in refusing
to acknowledge Lolita Guzman as owner and lessor, and, in so doing, gave
cause to be declared in default in their obligation to pay rentals due her.
[SeeLandicho v. Tensuan, G.R. No. 51216, June 30, 1987, 151 SCRA
410]. Thus, when petitioners filed their action for ejectment, the rentals
(which were payable in advance within the first five days of each month)
corresponding to the months of March, April and May, 1986 had not been
paid. And the glaring situation to date is that private respondents continue
to occupy the subject property without having paid a single monthly rental
which accrued pending litigation. Under these circumstances,
606
606 SUPREME COURT REPORTS ANNOTATED
Guzman vs. Court of Appeals
the Court finds that sufficient cause for their ejectment under Section
5 (b) of Batas Pambansa Blg. 877 has been established. [SeeRoxas v.
IAC, G.R. Nos. 74279 and 74801-03, January 20, 1988, 157 SCRA 166].
Civil Procedure; Prejudicial Question; Ejectment; Possession; Mere
allegation of ownership by the defendant in an ejectment case or the
pendency of an action for reconveyance does not divest the inferior court
of jurisdiction over the ejectment suit; Exceptions.—Finally, the Court is not
unaware of Civil Case No. 957-MN pending in the Regional Trial Court of
Malabon. This action was instituted by private respondents on July 1, 1987
against petitioners and administratrix Rufina Samaniego for the annulment
of the sale and the reconveyance of the subject property in favor of private
respondents. As correctly held by respondent appellate court, Civil Case
No. 957-MN poses no prejudicial question to the resolution of the instant
petition. Well settled is the rule that the mere allegation of ownership of the
property in dispute by the defendant in an ejectment suit or the pendency
of an action for reconveyance of title over the same property does not
divest the inferior court of its jurisdiction over the ejectment suit [Alilaya v.
Espanola, G.R. No. L-36208, September 18, 1981, 107 SCRA 564; De la
Cruz v. Court of Appeals, G.R. No. 57454, November 29, 1984, 133 SCRA
520; Drilon v. Gaurana, G.R. No. L-35482, April 30, 1987, 149 SCRA 342].
The only exception to this rule is where the question of de facto possession
cannot be determined properly without settling that of de jure possession
and ownership because the latter is inseparably linked with the former
[Andres v. Soriano, 101 Phil. 848 (1957); Castro v. de los Reyes, 109 Phil.
64 (1960); Alvir v. Vera, G.R. No. L-39338, July 16, 1984, 130 SCRA 357;
De la Santa v. Court of Appeals, G.R. Nos. L-30560 and L-31078,
November 18, 1985, 140 SCRA 44].
Contracts; Lease; Right of Removal; Useful Improvements; Private
respondents have the right to remove their house and other useful
improvements should petitioner refuse to reimburse the amount thereof;
ornamental objects may be removed if no damage shall be caused to the
principal and that the owner of the principal do not choose to retain them
by paying their value.—Moreover, since private respondents had built in
good faith their house on the leased subject property, it is appropriate to
mention that Article 1678 of the New Civil Code governs the parties’ rights
thereto. As the new lessors, petitioners have the option to appropriate the
house and other useful improvements made by private respondents by
paying one-half of their value. But private respondents do not have the right
to compel petitioners to appropriate the improvements and make
reimbursement, nor to retain possession
607
VOL. 177, SEPTEMBER 15, 1989 607
Guzman vs. Court of Appeals
 of the subject property until such reimbursement. Their right under the
law is the removal of the house and other useful improvements in the event
that petitioners refuse to reimburse the above amount [Lapena v. Morfe,
101 Phil. 997 (1957); Balucanag v. Francisco, G.R. No. L-33422, May 30,
1983, 122 SCRA 498]. Incidentally, as regards ornamental objects, private
respondents may remove the same provided that no damage is caused to
the principal thing and petitioners do not choose to retain them by paying
their value at the time the lease is extinguished.
PETITION for certiorari to review the decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Eleazar S. Calasan for petitioners.
Bienvenido J. Medel for private respondents.
CORTÉS, J.:
This is a petition for review on certiorari which seeks the reversal of the
decision of the Court of Appeals rendered in CA-G.R. SP No.
13475 setting aside the decisions of the Regional Trial Court and
Metropolitan Trial Court, and dismissing the complaint for ejectment filed
by petitioners against private respondents.
The facts of the case are as follows:
Since 1937, private respondents have been in possession of a 184 sq.
m. parcel of land situated at M. Policarpio Street, Bagong Barrio, Navotas,
Metro Manila by virtue of an oral lease agreement with the late Mercedes
Policarpio whereby the former agreed to pay a monthly rental of thirty eight
pesos (P38.00), payable in advance within the first five (5) days of each
month.
Petitioner Lolita Guzman, on the other hand, is presently the registered
owner of the same property, having acquired the same from the Estate of
the late Mercedes Policarpio by virtue of a Deed of Absolute Sale dated
March 3, 1986 executed in her favor by the administratrix Rufina
Samaniego. This sale was judicially approved by the probate court in
Special Proceedings No. 2640 entitled “Testate Estate of Mercedes
Policarpio.” Lolita Guzman’s ownership is evidenced by TCT No. T-134078
issued by the Register of Deeds of Caloocan City on March 17, 1986. Soon
after the sale, Lolita Guzman, through her counsel, sent
608
608 SUPREME COURT REPORTS ANNOTATED
Guzman vs. Court of Appeals
private respondents a letter dated March 21, 1986 informing them that she
is the new owner of the subject property and demanding that they vacate
it in view of their failure to pay the monthly rentals since October 1983
despite previous demands by the former owner and pay the rentals in
arrears.
Due to the failure of private respondents to reply to, or comply with, the
above demand, peitioner spouses brought their complaint before the
Barangay Chairman, but no amicable settlement was reached. Petitioners
then filed on May 7, 1986 a complaint for ejectment against private
respondents in the Metropolitan Trial Court, invoking Section 5(b) of Batas
Pambansa Blg. 877. The case was docketed as Civil Case No. 2839.
Private respondents, in their verified answer, alleged that they had been
religiously paying their monthly rentals for the subject property upon which
they constructed their home until the middle part of 1984 when they were
advised by the administratrix Rufina Samaniego to cease making
payments because the estate was then being partitioned and the
subdivided units were to be offered for sale to the respective occupants at
twentyfive thousand pesos (P25,000.00). They had offered to pay the
amount in cash on the condition that a clear title would be given, but were
informed that it would be sometime before titles could be issued for the
individual units. But in violation of their “right of first refusal” under Pres.
Dec. No. 1517 [otherwise known as the Urban Land Reform Law], the
administratrix executed an absolute deed of sale over the property in favor
of petitioner Lolita Guzman. They finally concluded that petitioners had no
cause of action against them in view of the nullity of this deed of sale.
On May 5, 1987, the court rendered judgment against private
respondents ordering them to vacate the subject property and to pay the
sum of one thousand one hundred seventy-eight pesos (P1,178.00)
representing unpaid rentals from October 1983 until April 1986 and the
sum of thirty-eight pesos (P38.00) for every month thereafter until they
have completely surrendered possession of the property to the petitioners.
The court held that:
xxx
The defendant admitted in his answer (par. 3) that he received
609
VOL. 177, SEPTEMBER 15, 1989 609
Guzman vs. Court of Appeals
the letter of demand dated March 17, 1986 (sic) sent by the plaintiffs’
counsel, but there is (sic) no reply or answer was made by the defendant
to the aforesaid letter of demand, to explain why he should not pay the
rentals claimed by the plaintiffs. Thus, the plaintiffs were constrained to file
the present action under Section 5 (b) of BP 877.
The plaintiffs being the registered owner of the property in question, as
evidence (sic) by TCT No. T-134078, they have the better right of
possession as adverse to the defendant. Moreover, the defendant cannot
be considered as a legitimate tenant as contemplated by the Urban Land
Reform Act, he having failed to comply religiously with his obligation to pay
the agreed rentals on time, he became a possessor in bad faith and his
ejectment from the premises is allowed by BP 877 and therefore not
entitled to the protection of P.D. No. 1517 as amended and its implemented
(sic) proclamations of the Rental Control Law.
xxx
[MTC Decision, p. 3; Rollo, p. 52.]
On Appeal, this decision was affirmed in toto by the Regional Trial Court
on October 16, 1987 in Appealed Civil Case No. 262-MN.
Private respondents then filed on December 11, 1987 a petition for
review with the Court of Appeals. In a decision promulgated on January
28, 1988, the Court of Appeals1 set aside the decisions of the lower courts
and dismissed for lack of merit petitioners complaint for ejectment. The
Court of Appeals held that the ejectment of private respondents from the
subject property on the ground of non-payment of rentals was baseless
and improper, finding that:
xxx
... [private respondents] have been leasing and actually occupying
subject lot since 1937 at a meager rental of P38.00 a month, and did even
offer to pay cash of P25,000.00 therefor, it is simply unbelievable that they
defaulted or failed to pay the measly rental of P38.00 a month as
[petitioners] would like the court to understand. [Private respondents’]
theory that they were told to stop paying their rents sometime in October
1984 is more in accord with reason and human experience. If they were
really told by the administratrix of the estate
_______________
1
Penned by Fidel P. Purisima with Segundino G. Chua and Nicolas P.
Lapena, Jr. concurring.
610
610 SUPREME COURT REPORTS ANNOTATED
Guzman vs. Court of Appeals
of the deceased owner-lessor to hold or defer their rental payments, it
stands to reason that [they] never defaulted in the payment of their rental
for the lot in question. Indeed, if they were not advised to pay their rents,
why should [they] falter in their rental payments when they have their house
thereon, are actually residing therein and have the financial capacity to buy
the lot in dispute on spot cash basis?
... If they stopped paying the monthly rental therefor since October
1984, it was not due to inability or refusal on their part to pay; but was upon
the advice of the administratrix of the estate of the late owner-lessor
Mercedes Policarpio. The latter unequivocably [sic] told [private
respondents] not to pay their rents anymore because the area would be
subdivided and sold to the actual occupants, including the [private
respondents] with respect to the lot in question which they have been
renting and occupying for around fifty (50) years already. With the
foregoing explanation of [private respondents] for their failure to pay their
rental starting October 1984, an assertion inducing faith and reliance and
which has not been effectively controverted, [their] ejectment on the
ground of non-payment of rental is improper and cannot be sanctioned.
xxx
[CA Decision, pp. 5-6; Rollo, pp. 18-19.]
Moreover, the Court of Appeals upheld private respondents’ contention
that they have the “right of first refusal” to purchase the property pursuant
to Section 6 of Pres. Dec. No. 1517.
Hence, petitioners filed the instant petition, assigning the following as
errors:
1. I.THE HONORABLE COURT OF APPEALS ERRED IN
APPLYING SECTION 6 OF PRESIDENTIAL DECREE NO. 1517,
OTHERWISE KNOWN AS URBAN LAND REFORM LAW IN
FAVOR OF PRIVATE RESPONDENTS IN UTTER DISREGARD
OF THE EXPRESS PROVISIONS OF PROCLAMATION NO.
1967 WHICH SPECIFIES THE AREAS OF APPLICABILITY OF
THE “URBAN ZONES” MENTIONED IN SAID SECTION 6 OF
P.D. NO. 1517;
2. II.THE HONORABLE COURT OF APPEALS ERRED IN HOLDING
THAT PRIVATE RESPONDENTS WERE NOT GUILTY OF
NON-PAYMENT OF RENTALS [Petition, p. 5; Rollo, p. 6.]
After a careful consideration of the issues raised in the pleadings and the
various laws applicable to the case at hand, this Court finds merit in the
instant petition.
611
VOL. 177, SEPTEMBER 15, 1989 611
Guzman vs. Court of Appeals
I.
The Court holds that there is no basis to the claim that the sale of the
subject property between the estate of the late Mercedes Policarpio and
petitioner Lolita Guzman is null and void for being violative of the “right of
first refusal” granted to tenants under Section 6 of Pres. Dec. No. 1517.
Section 6 of Pres. Dec. No. 1517 reads as follows:
SECTION 6. Land Tenancy in Urban Land Reform Areas.—Within the
Urban Zones, legitimate tenants who have resided on the land for ten years
or more, who have built their homes on the land, and residents who have
legally occupied the lands by contract continuously for the last ten years
shall not be dispossessed of the land and shall be allowed the right of first
refusal to purchase the same within a reasonable time and at reasonable
prices, under terms and conditions to be determined by the Urban Zone
Expropriation and Land Management Committee created by Section 8 of
this Decree.
It is clear from the language of the law that only legitimate tenants who
have resided for ten years or more on specific parcels of land situated in
declared Urban Land Reform Zones or Urban Zones, and who have built
their homes thereon, have the right not to be dispossessed therefrom and
the “right of first refusal” to purchase the property under reasonable terms
and conditions to be determined by the appropriate government agency.
At the time of the sale of the subject property to petitioners,
Proclamation No. 1967 [Amending Proclamation No. 1893 by specifying
244 sites in Metropolitan Manila as Areas for Priority Development (APDs)
and Urban Land Reform Zones], promulgated on May 14, 1980, was the
prevailing law enumerating the parcels of land affected by Pres. Dec. Nos.
1517, 16402 and 1642,3 and LOI No. 935. A simple reading of the list of
244 sites described in the annex to Proclamation No. 1967 reveals that
_______________
2 Freezing the prices of land in Metropolitan Manila at current value.
(1979)
3 Freezing the rates of rental, above three hundred pesos a month, of
residential and commercial buildings, houses, apartments, and dwelling
units in Metropolitan Manila at current levels. (1979)
612
612 SUPREME COURT REPORTS ANNOTATED
Guzman vs. Court of Appeals
Reform Zones in Navotas. Thus, when the subject property was sold to
petitioners, it was neither covered by, nor subject, to the conditions set
forth in, the Urban Land Reform Law.
This is made all the more obvious by the fact that Resolution No. 1369
of the National Housing Authority Board of Directors which proclaimed the
Estate of the late Mercedes Policarpio in Navotas an APD was passed only
on December 18, 1987 [Rollo, p. 81], long after the sale was executed
between administratrix Rufina Samaniego and petitioners and judicially
approved by the probate court. Private respondents, therefore, have no
basis in claiming that the sale violated the “right of first refusal” granted to
tenants by Pres. Dec. No. 1517.
Furthermore, notwithstanding the fact that, as provided by the above
resolution, the subject property is presently an APD or Urban Land Reform
Zone, private respondents still do not enjoy the protective mantle of Pres.
Dec. No. 1517.
In the first place, petitioners’ cause of action to evict private
respondents accrued, and the complaint on the basis thereof was filed,
while the subject property had not yet been declared an APD and subject
to Pres. Dec. No. 1517. In addition, prior to the issuance of Resolution No.
1369, the Metropolitan Trial Court in Civil Case No. 2839 had already
rendered a decision in favor of petitioners ordering private respondents to
vacate the property for non-payment of rentals pursuant to Section 5 (b) of
Batas Pambansa Blg. 877.
Secondly, private respondents are not even “tenants” within the
purview of Pres. Dec. No. 1517, Section 3 (f) of this decree, which defines
the term “tenant,” provides:
Tenant refers to the rightful occupant of land and its structures, but does
not include those whose presence on the land is merely tolerated and
without the benefit of contract, those who enter the land by force or deceit,
or those whose possession is under litigation [Italics supplied.]
It cannot be denied that at the time the subject property was declared an
APD in December 1987, the right of private respondents to occupy and
possess the subject property was then an issue under litigation in the
action for ejectment filed against them by petitioners.
613
VOL. 177, SEPTEMBER 15, 1989 613
Guzman vs. Court of Appeals
Thirdly, private respondents are not the “legitimate tenants” envisaged in
Section 6 of Pres. Dec. No. 1517 considering that their possession of the
subject property has been rendered illegal by their stubborn and
unjustifiable refusal to comply with their obligation to pay their monthly
rentals to petitioners.4
Consequently, the Court holds that respondent appellate court
committed a reversible error in applying the provisions of Pres. Dec. No.
1517 to sustain private respondents’ defense in the action for ejectment.
II.
Anent the second error raised, the record of the case does not support
respondent appellate court’s conclusion that private respondents’ were not
in default in the payment of their monthly rentals due to petitioners.
While discussion was made concerning private respondents’
explanation for non-payment of the rentals due to the estate of the late
Mercedes Policarpio, this is irrelevant to the issue at hand. What is
palpably clear from the record of the case is the fact that private
respondents had failed to pay the monthly rentals which accrued from the
time petitioner Lolita Guzman acquired ownership of the subject property
in March 1986.
Upon the purchase of the leased property and proper notice by the
vendee to the lessee, the latter must pay the agreed monthly rentals to the
new owner since, by virtue of the sale, the vendee steps into the shoes of
the original lessor to whom the lessee bound himself to pay [Mirasol v.
Magsuci, G.R. No. L-17125, November 28, 1966, 18 SCRA 801]. In the
instant case, despite their receipt of the demand letter dated March 21,
1986 informing them of the change of property ownership, private
respondents unjustifiably failed to pay the monthly rentals which accrued
for the account of the new owner. Their belief that the subject property
should have been sold to them does not justify the unilateral withholding of
rental payments due to Lolita Guzman as new owner of the property.
Private respondents
_______________
4 This point will be discussed in length in the following section of this
decision.
614
614 SUPREME COURT REPORTS ANNOTATED
Guzman vs. Court of Appeals
provides only two instances wherein the lessee may suspend payment of
rent, namely, in case the lessor fails to make the necessary repairs or to
maintain the lessee in peaceful and adequate enjoyment of the property
leased [See Reyes v. Arca, G.R. No. L-21447, November 29, 1965, 15
SCRA 442].
Private respondents should have, at the very least, replied to Lolita
Guzman’s letter and tendered payment of the monthly rentals which
accrued in her favor beginning March 1986, and if such were to be refused
by her, then private respondents should have made a consignation thereof
or deposited the rentals due pending the resolution of their alleged claim
against the administratrix of the estate of the late Mercedes Policarpio
[See Ipapo v. IAC, G.R. No. 72740, January 27, 1987, 147 SCRA 342].
Instead, they opted to take a hard-line stance in refusing to acknowledge
Lolita Guzman as owner and lessor, and, in so doing, gave cause to be
declared in default in their obligation to pay rentals due her. [See Landicho
v. Tensuan, G.R. No. 51216, June 30, 1987, 151 SCRA 410]. Thus, when
petitioners filed their action for ejectment, the rentals (which were payable
in advance within the first five days of each month) corresponding to the
months of March, April and May, 1986 had not been paid. And the glaring
situation to date is that private respondents continue to occupy the subject
property without having paid a single monthly rental which accrued
pending litigation. Under these circumstances, the Court finds that
sufficient cause for their ejectment under Section 5 (b) of Batas Pambansa
Blg. 8775
_______________
5 SEC. 5. Grounds For Judicial Ejectment.—Ejectment shall be allowed
on the following grounds:
xxx
(b) Arrears in payment of rent for a total of three (3) months: Provided,
That in case of refusal by the lessor to accept payment of the rental agreed
upon, the lessee may either deposit, by way of consignation, the amount
in court, or with the city or municipal treasurer, as the case may be, or in a
bank in the name of and with notice to the lessor, within one month after
the refusal of the lessor to accept payment.
The lessee shall thereafter deposit the rental within ten days of every
current month. Failure to deposit rentals for three months shall constitute
a ground for ejectment. x x x
615
VOL. 177, SEPTEMBER 15, 1989 615
Guzman vs. Court of Appeals
has been established. [See Roxas v. IAC, G.R. Nos. 74279 and 74801-03,
January 20, 1988, 157 SCRA 166].
It might be argued that petitioners’ action for ejectment was prematurely
filed on May 7, 1986 because less than three (3) months had elapsed since
private respondents failed to tender payment of the March 1986 rental in
favor of the new lessor Lolita Guzman.
However, this point was never raised as an issue in the proceedings
below by private respondents, and, therefore, cannot be passed upon for
the first time on appeal [Matienzo v. Servidad, G.R. No. L-28135,
September 10, 1981, 107 SCRA 276; Dulos Realty & Development
Corporation v. Court of Appeals, G.R. No. 76668, January 28, 1988, 157
SCRA 425]. And, even assuming that the action for ejectment was indeed
prematurely filed in the court a quo, such will not in anyway change the
conclusion reached by this Court that petitioners have established a right
to evict private respondents from the subject property for non-payment of
rentals. For if the Court were to dismiss petitioners’ complaint based on
this point, there would be more than sufficient basis for petitioners to file
another complaint for ejectment against private respondents as delinquent
lessees under Section 5(b) Batas Pambansa Blg. 877 in view of the latter’s
inexcusable failure to pay, deposit or consign for the account of petitioners
monthly rentals since March 1986 up to the present. It must be borne in
mind that ejectment cases must be expeditiously resolved and terminated.
Certainly, it will serve the ends of justice for the Court to promptly settle the
issue of non-payment of rentals in the case at bar, rather than to require
the parties to litigate anew. Otherwise, as the Court has had occasion to
state, “further proceedings will undoubtedly be only a waste of effort and
time and to the continuing, prejudice of the petitioners. It will only prolong
the already unjustified stay of the private respondent[s] and provide [them]
an unwarranted excuse to remain in the leased premises, notwithstanding
her non-payment of the corresponding rentals for the past several years”
[Ipapo v. IAC, supra].
Finally, the Court is not unaware of Civil Case No. 957-MN pending in
the Regional Trial Court of Malabon. This action was instituted by private
respondents on July 1, 1987 against petitioners and administratrix Rufina
Samaniego for the annul-
616
616 SUPREME COURT REPORTS ANNOTATED
Guzman vs. Court of Appeals
favor of private respondents.
As correctly held by respondent appellate court, Civil Case No. 957-MN
poses no prejudicial question to the resolution of the instant petition. Well
settled is the rule that the mere allegation of ownership of the property in
dispute by the defendant in an ejectment suit or the pendency of an action
for reconveyance of title over the same property does not divest the inferior
court of its jurisdiction over the ejectment suit [Alilaya v. Espanola, G.R.
No. L-36208, September 18, 1981, 107 SCRA 564; De la Cruz v. Court of
Appeals, G.R. No. 57454, November 29, 1984, 133 SCRA 520; Drilon v.
Gaurana, G.R. No. L-35482, April 30, 1987, 149 SCRA 342]. The only
exception to this rule is where the question of de facto possession cannot
be determined properly without settling that of de jure possession and
ownership because the latter is inseparably linked with the former [Andres
v. Soriano, 101 Phil. 848(1957); Castro v. de los Reyes, 109 Phil.
64 (1960); Alvir v. Vera, G.R. No. L-39338, July 16, 1984, 130 SCRA
357; De la Santa v. Court of Appeals, G.R. Nos. L-30560 and L-31078,
November 18, 1985, 140 SCRA 44].
Such exception is unavailing in the case at bar. Petitioner Lolita
Guzman was at the time of the institution of the ejectment suit the titled
owner of the property, having acquired the same by absolute deed of sale
which was judicially approved by the probate court. Private respondents’
claim of preference, on the other hand, rests on the mere allegation that
an agreement to purchase and sell existed between them and the
administratrix Rufina Samaniego. Yet, no written document evidencing this
agreement has been presented by them to enforce, much less support,
their claim. From the facts thus presented, the claim of preference is
without concrete basis in fact and in law and does not preclude the courts
from assuming, and continuing to exercise, jurisdiction over the ejectment
suit [De la Cruz v. Court of Appeals, supra].
Premises considered, the Court finds that petitioners have established
a cause of action for the ejectment of private respondents for non-payment
of rentals pursuant to Section 5(b) of Batas Pambansa Blg. 877.
But inasmuch as no evidence has been presented by petitioners to the
effect that the original owner or vendor of the subject
617
VOL. 177, SEPTEMBER 15, 1989 617
Guzman vs. Court of Appeals
property had assigned to them her rights under the lease agreement with
the lessees, i.e. the collection of rentals in arrears, there is no legal basis
for ordering private respondents to pay monthly rentals which accrued prior
to March 1986.
Moreover, since private respondents had built in good faith their house
on the leased subject property, it is appropriate to mention that Article 1678
of the New Civil Code6 governs the parties’ rights thereto. As the new
lessors, petitioners have the option to appropriate the house and other
useful improvements made by private respondents by paying one-half of
their value. But private respondents do not have the right to compel
petitioners to appropriate the improvements and make reimbursement, nor
to retain possession of the subject property until such reimbursement.
Their right under the law is the removal of the house and other useful
improvements in the event that petitioners refuse to reimburse the above
amount [Lapena v. Morfe, 101 Phil. 997 (1957); Balucanag v.
Francisco, G.R. No. L-33422, May 30, 1983, 122 SCRA 498]. Incidentally,
as regards ornamental objects, private respondents may remove the same
provided that no damage is caused to the principal thing and petitioners do
not choose to retain them by paying their value at the time the lease is
extinguished.
WHEREFORE, the judgment of respondent appellate court rendered in
CA-G.R. SP No. 13475 is REVERSED. Private respondents and all
persons claiming rights under them are hereby ordered to immediately
vacate the subject property and
_______________
6
ARTICLE 1678. If the lessee makes, in good faith, useful
improvements which are suitable to the use for which the lease is intended,
without altering the form or substance of the property leased, the lessor
upon the termination of the lease shall pay the lessee onehalf of the value
of the improvements at that time. Should the lessor refuse to reimburse
said amount, the lessee may remove the improvements, even though the
principal thing may suffer damage thereby. He shall not, however, cause
any more impairment upon the property leased than is necessary.
 With regard to ornamental expenses, the lessee shall not be entitled to
any reimbursement, but he may remove the ornamental objects, provided
no damage is caused to the principal thing, and the lessor does not choose
to retain them by paying their value at the time the lease is extinguished.
618
618 SUPREME COURT REPORTS ANNOTATED
Andres vs. Manufacturers Hanover & Trust Corporation
surrender possession thereof to petitioners, and to pay petitioners rentals
in arrears in the monthly sum of thirty-eight pesos (P38.00) to be computed
only from March 1986 until they have completely vacated the subject
property, the further sum of two thousand pesos (P2,000.00) as attorney’s
fees, and costs of the suit. This case is REMANDED to the Regional Trial
Court for the determination of the value of the improvements made by
private respondents on the subject property, in accordance with Article
1678 of the New Civil Code.
SO ORDERED.
Fernan, (C.J.), Gutierrez, Jr., and Bidin, JJ., concur. Feliciano, J.,
on leave.
Judgment reversed. Case remanded to trial court for determination of
the value of improvements made by private respondents on the subject
property.
Note.—Persons who are not tenants on the property are not covered
by Pres. Decree No. 316 which prohibits the ejectment of tenant farmers
in agricultural lands primarily devoted to rice and corn. (Geronimo vs. Court
of Appeals, 121 SCRA 859.)

——o0o——
924 SUPREME COURT REPORTS ANNOTATED
Sadaya vs. Sevilla
No. L-17845. April 27, 1967.
INTESTATE ESTATE OF VlCTOR SEVILLA. SlMEON SADAYA,
petitioner, vs. FRANCISCO SEVILLA, respondent.
Obligations; Solidary liability of accommodation makers.—Where the
principal debtor failed to pay the bank the balance due on a promissory
note, either one of the solidary accommodation makers may be held liable
for the said balance.
Same; Obligation of principal debtor to reimburse accommodation
maker who paid the debt.—The principal debtor, who received from the
bank the full value of the note. is obligated to make full reimbursement to
an accommodation maker who paid the bank the balance due on said note.
Same; Negotiable Instruments Law; Right to seek contribution from
co-accommodation maker.—Where a solidary accommodation maker paid
to the bank the balance due on a promissory note, he may seek
contribution from the other solidary accommodation maker, in the absence
of a contrary agreement between them. This right springs from an implied
promise between the accommodation makers to share equally the burdens
resulting from their execution of the note. They are joint guarantors of the
principal debtors.
Same; New Civil Code supplements Negotiable Instruments Law—
Since the Negotiable Instruments Law does not define the right of an
accommodation maker, to seek reimbursement from another
accommodation maker, this deficiency should be supplied by article 2073
of the New Civil Code, which deals with a situation where one surety has
paid the debt and is seeking contribution from his co-sureties.
Same; Rules on reimbursement under article 2073.—A solidary
accommodation maker (1) may demand from the principal debtor
reimbursement of the amount which he paid on the promissory note and
(2) he may demand contribution from his co-accommodation maker.
without first directing his action
925
VOL. 19, APRIL 27, 1967 925
Sadaya vs. Sevilla
against the principal debtor, provided that (a) he made the payment
by virtue of a judicial demand, or (b) the principal debtor is insolvent.
Same; When paying solidary accommodation maker is not entitled to
demand contribution.—A solidary accommodation maker, who paid the
balance due on a promissory note, is not entitled to demand contribution
from his co-accommodation maker where he made the payment voluntarily
and without any judicial demand and there is no proof that the principal
debtor is insolvent.
PETITION for review by certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Belen Law Offices for petitioner.
Poblador, Cruz & Nazareno for respondent.
SANCHEZ, J.:
On March 28, 1949, Victor Sevilla, Oscar Varona and Simeon Sadaya
executed, jointly and severally, in favor of the Bank of the Philippine
Islands, or its order, a promissory note for P15,000.00 with interest at 8%
per annum, payable on demand. The entire amount of P15,000.00,
proceeds of the promissory note, was received f rom the bank by Oscar
Varona alone. Victor Sevilla and Simeon Sadaya signed the promissory
note as co-makers only as a favor to Oscar Varona. Payments were made
on account. As of June 15, 1950, the outstanding balance stood at
P4,859.00. No payment was thereafter made.
On October 6, 1952; the bank collected from Sadaya the foregoing
balance which, together with interest, totalled P5,746.12. Varona failed to
reimburse Sadaya despite repeated demands.
Victor Sevilla died. Intestate estate proceedings were started in the
Court of First Instance of Rizal, Special Proceeding No. 1518. Francisco
Sevilla was named administrator.
In Special Proceeding No. 1518, Sadaya filed a creditor’s claim f or the
above sum of P5,746.12, plus attorneys fees in the sum of P1,500.00. The
administrator resisted the claim upon the averment that the deceased
Victor Sevilla “did not receive any amount as consideration for the pro-
926
926 SUPREME COURT REPORTS ANNOTATED
Sadaya vs. Sevilla
missory note,” but signed it only “as surety for Oscar Varona”. On June 5,
1957, the trial court issued an order admit
ting the claim of Simeon Sadaya in the amount of P5,746.-12, and
directing the administrator to pay the same from any available funds
belonging to the estate of the deceased Victor Sevilla.
The motion to reconsider having been overruled, the administrator
appealed.1 The Court of Appeals, in a decision promulgated on July 15,
1960, voted to set aside the order appealed from and to disapprove and
disallow “appellee’s claim of P5,746.12 against the intestate estate.”
The case is now before this Court on certiorari to review the judgment
of the Court of Appeals.
Sadaya’s brief here seeks reversal of the appellate court’s decision and
prays that his claim “in the amount of 50% of P5,746.12, or P2,878.06,
against the intestate estate of the deceased Victor Sevilla,” be approved.
 1. That Victor Sevilla and Simeon Sadaya were joint and several
accommodation makers of the 15,000.00-peso promissory note in favor of
the Bank of the Philippine Islands, need not be essayed. As such
accommodation makers, the individual obligation of each of them to the
bank is no different from, and no greater and no less than, that contracted
by Oscar Varona. For, while these two did not receive value on the
promissory note, they executed the same with, and for the purpose of
lending their names to, Oscar Varona, Their liability to the bank upon the
explicit terms of the promissory note is joint and several.2 Better yet, the
bank could have pursued its right to collect the unpaid balance against
either Sevilla or Sadaya. And the fact is that one of the last two, Simeon
Sadaya, paid that balance.
________________
1
CA-G.R. No. 22246-R, “Intestate Estate of the deceased Victor
Sevilla, Francisco Sevilla, administrator-appellant, vs. Simeon Sadaya,
claimant-appellee”.
2 Section 29, Negotiable Instruments Law; Acuna vs. Veloso and
Xavier, 50 Phil. 241, 252; Philippine Trust Company vs. Antigua Botica
Ramirez, et al., 56 Phil. 662, 565–566, 571. See also; Article 1216, Civil
Code.
927
VOL. 19, APRIL 27, 1967 927
Sadaya vs. Sevilla
2. It is beyond debate that Simeon Sadaya could have sought
reimbursement of the total amount paid from Oscar Varona. This is but
right and just. Varona received full value of the promissory note.3 Sadaya
received nothing therefrom. He paid the bank because he was a joint and
several obligor. The least that can be said is that, as between Varona and
Sadaya, there is an implied contract of indemnity. And Varona is bound by
the obligation to reimburse Sadaya.4
3. The common creditor, the Bank of the Philippine Islands, now out of
the way, we first look into the relations inter se amongst the three
consigners of the promissory note, Their relations vis-a-vis the Bank, we
repeat, is that of joint and several obligors. But can the same thing be said
about the relations of the three consigners, in respect to each other?
Surely enough, as amongst the three, the obligation of Varona and
Sevilla to Sadaya who paid can not be joint and several. For, indeed, had
payment been made by Oscar Varona, instead of Simeon Sadaya, Varona
could not have had reason to seek reimbursement from either Sevilla or
Sadaya, or both. After all, the proceeds of the loan went to Varona and the
other two received nothing therefrom.
4. On principle, a solidary accommodation maker—who made
payment—has the right to contribution, from his co-accommodation maker,
in the absence of agreement to the contrary between them, and subject to
conditions imposed by law. This right springs from an implied promise
between the accommodation makers to share equally the burdens that
may ensue from their having consented to stamp their signatures on the
promissory note.5 For having lent their signatures to the principal debtor,
they clearly placed themselves—in so far as payment made by one
________________
3
Philippine National Bank vs. Masa, et al., 48 Phil. 207, 211; Acuña vs,
Veloso and Xavier, supra; Daniel on Negotiable Instruments, 1933 ed.,
Vol. 3, p. 1598.
4 Tolentino, Commentaries and Jurisprudence on Commercial Laws of
the Philippines, Vol. I, p. 255, citing Blanchard vs. Blanchard, 201 N.Y. 134,
94 NE 630.
5
Daniel on Negotiable Instruments, id., p. 1597.
928
928 SUPREME COURT REPORTS ANNOTATED
Sadaya vs. Sevilla
may create liability on the other—in the category of mere joint
guarantors of the former.6 This is as it should be. Not one of them benefited
by the promissory note. They stand on the same f footing. In misfortune,
their burdens should be equally spread.
Manresa, commenting on Article 1844 of the Civil Code of
Spain,7 which is substantially reproduced in Article 20738of our Civil Code,
on this point stated:
“Otros, como Pothier, entienden que, si bien el principio es evidente en
estricto concepto juridico, se han extremado sus consecuencias hasta el
punto de que estas son contrarias, no solo a la logica, sino tambien a
la equidad, que debe ser el alma del Derecho, como ha dicho Laurent.
Esa acción—sostienen—no nace de la fianza, pues, en efecto, el
hecho de afianzar una misma deuda no crea ningun vinculo juridico, ni
ninguna razon de obligar entre los fiadores, sino que trae, por el contrario,
su origen de una acto posterior, cual es el pago de toda lat deuda realizado
por uno de ellos, y la equidad no permite que los demas fiadores, que
igualmente estaban obligados a dicho pago, se aprovechen de ese acto
en perjuicio del que lorealizo.”
“Lo cierto es que esa accion concedida al f iador nace, si, del hecho
del pago, pero es consecuencia del beneficio o del derecho de
division, como tenemos ya dicho. En efecto, por virtud de esta division,
todos los cofiadores vienen obligados a contribuir al pago de la parte que
a cada uno corresponde. De ese obligacion, contraida por todos ellos, se
libran los que no han pagado por consecuencia del acto realizado por el
que pago, y si bien este no hizo mas que cumplir el deber que el contracto
de fianza le imponia de responder de todo el debito cuando no limito su
________________
6 Daniel on Negotiable Instruments, id., p. 1595; and Footnote 65 x x x:
“The liability of cosureties to each other for contribution is not joint [joint
and several] but several”, citing Vansant vs. Gardner, 240 Ky. 318, 42 S.W.
(2nd) 300; Voss vs. Lewis, 126 Ind. 155, 25 N.E. 892.
7
”ARTICULO 1.844—Cuando son dos o mas los fiadores de un mismo
deudor y por una misma deuda, el que de ellos la haya pagado podra
reclamar de cada uno de los otros la parte que proporcionalmente le
corresponda satisfacer.
Si algundo de ellos resultara insolvente, le parte de este recaera sobre
todos en la misma proporcion.
Para que pueda tener lugar la disposicion de este articulo, es preciso
que se haya hecho el pago en virtud de demanda judicial o hallandose el
deudor principal en estado de concurso o quiebra.”
8 Article 2073 will hereafter be recited in full.
929
VOL. 19, APRIL 27, 1967 929
Sadaya vs. Sevilla
obligacion a parte alguna del mismo, dicho acto redunda en beneficio de
los otros cofiadores los cuales se aprovechan de el para quedar
desligados de todo compromiso con el acreedor"9
5. And now, to the requisites bef ore one accommodation maker can seek
reimbursement from a co-accommodation maker.
By Article 18 of the Civil Code in matters not covered by the special
laws, “their deficiency shall be supplied by the provisions of this Code”.
Nothing extant in the Negotiable Instruments Law would define the right of
one accommodation maker to seek reimbursement from another. Perforce,
we must go to the Civil Code.
Because Sevilla and Sadaya, in themselves, are but coguarantors of
Varona, their case comes within the ambit of Article 2073 of the Civil Code
which reads:
“ART. 2073. When there are two or more guarantors of the same debtor
and for the same debt, the one among them who has paid may demand of
each of the others the share which is proportionally owing from him,
If any of the guarantors should be insolvent, his share shall be borne
by the others, including the payer, in the same proportion.
The provisions of this article shall not be applicable, unless the payment
has been made in virtue of a judicial demand or unless the principal debtor
is insolvent"10
As Mr. Justice Street puts it: "[T]hat article deals with the situation which
arises when one surety has paid the debt to the creditor and is seeking
contribution from his cosureties."11
Not that the requirements in paragraph 3, Article 2073, just quoted, are
devoid of cogent reason. Says Manresa:12
_________________
9
Manresa, Comentarios al Codigo Civil Español [1951 ed] Tomo XII,
paginas 337, 38, 339; italics supplied.
10
The word quiebra [bankrupt] in the Spanish text of Article 1844 of the
Civil Code of Spain is eliminated in Article 2073 of the present Civil Code;
italics supplied.
11 Cacho vs. Valles, 45 Phil. 107, 110–111, referring to Article 1844 of
the Spanish Civil Code, now Article 2073 of the Civil Code.
12
Manresa, Codigo Civil Español, Tomo XII, paginas 342–343.
930
930 SUPREME COURT REPORTS ANNOTATED
Sadaya vs. Sevilla
“c) Requisitos para el ejercicio del derecho de reintegro o de reembolso
derivado de la corresponsabilidad de los cofiadores.—La tercera de las
prescripciones que comprende el articulo se ref iere a los requisitos que
deben concurrir para que pueda tener lugar lo dispuesto en el mismo. Ese
derecho que concede al fiador para reintegrarse directamente de los
fiadores de lo que pago por ellos en vez de dirigir su reclamacion contra el
deudor, es un beneficio otorgado por la ley solo en dos casos
determinados, cuya justificacion resulta evidenciada desde luego; y esa
limitacion este debidamente aconsejada por una razon de prudencia que
no puede desconocerse, cual es la de evitar que por la mera voluntad de
uno de los cofiadores pueda hacerse surgir la accion de reintegro contra
los demas en prejuicio de los mismos.
El perjuicio que con tal motivo puede inferirse a los cofiadores es bien
notorio, pues teniendo en primer termino el fiador que paga por
el deudor el derecho de indemnizacion contra este,sancionado por el art.
1,838, es de todo punto indudable que ejercitando esta accion pueden
quedar libres de toda responsabilidad los demas cofiadores si, a
consecuencia de ella, indemniza el f iado a aquel en los terminos
establecidos en el expresado articulo. Por el contrario de prescindir de
dicho derecho el fiador, reclamando de los confiadores en primer lugar el
oportuno reintegro, estos en tendrian mas remedio que satisfacer sus
ductares respectivas, repitiendo despues por ellas contra el deudor con la
imposicion de las molestias y gastos consiguientes.
No es aventurado asegurar que si el fiador que paga pudiera
libremente utilizar uno u otro de dichos derechos, el de indemnizacion por
el deudor y el del reintegro por los cofiadores, indudablemente optaria
siempre y en todo caso por el segundo, puesto que mucha mas garantias
de solvencia y mucha mas seguridad del cobro ha de encontrar en los
fiadores que en el deudor; y en la practica quedaria reducido el primero a
la indemnizacion por el deudor a los confiadores que hubieran hecho el
reintegro, obligando a estos, sin excepcion alguna, a soportar siempre los
gastos y las molestias que anteriormente hemos indicado. Y para evitar
estos perjuicios, la ley no ha podido menos de reducir el ejercicio de ese
derecho a los casos en que absolutamente sea indispensable.13
6. All of the foregoing postulate, the following rules: (1) A joint and several
accommodation maker of a negotiable promissory note may demand from
the principal debtor reimbursement for the amount that he paid to the
payee; and (2) a joint and several accommodation maker who pays on the
said promissory note may directly demand

________________
13
Manresa, id., pp. 342–348,
931
VOL. 19, APRIL 27, 1967 931
Hilario vs. City of Manila
reimbursement from his co-accommodation maker without first directing
his action against the principal debtor provided that (a) he made the
payment by virtue of a judicial demand, or (b) a principal debtor is insolvent.
The Court of Appeals found that Sadaya’s payment to the bank “was
made voluntarily and without any judicial demand,” and that “there is an
absolute absence of evidence showing that Varona is insolvent”. This
combination of f act and lack of fact epitomizes the f atal distance between
payment by Sadaya and Sadaya’s right to demand of Sevilla “the share
which is proportionately owing from him.”
For the reasons given, the judgment of the Court of Appeals under
review is hereby affirmed. No costs. So ordered.
Concepcion, C.J., Reyes,
J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and Castro,
JJ.,concur.
Judgment affirmed.

_____________
 VOL. 210, JUNE 26, 1992 351
Travel-On, Inc. vs. Court of Appeals
G.R. No. 56169. June 26, 1992.*
TRAVEL-ON, INC., petitioner, vs. COURT OF APPEALS and ARTURO S.
MIRANDA, respondents.
Evidence; Accounting; Obligations; Courts below erred in
considering only the variances in the statement of respondent’s account
payables rather than latter’s checks which were unpaid.—The appellate
court erred in considering only the statements of account in determining
whether private respondent was indebted to petitioner under the checks.
By doing so, it failed to give due importance to the most telling piece of
evidence of private respondent’s indebtedness—the checks themselves
which he had issued. Contrary to the view held by the Court of Appeals,
this Court finds that the checks are the all important evidence of petitioner’s
case; that these checks clearly established private respondent’s
indebtedness to petitioner; that private respondent was liable thereunder.
Same; Same; Same; Drawer of check, not payee, has burden of
proof to show that he no longer owes payee any amount.—In the case at
bar, the Court of Appeals, contrary to these established rules, placed the
burden of proving the existence of valuable consideration upon petitioner.
This cannot be countenanced; it was up to private respondent to show that
he had indeed issued the checks without sufficient consideration. The
Court considers that private respondent was unable to rebut satisfactorily
this legal presumption.
________________
*
THIRD DIVISION.
352
352 SUPREME COURT REPORTS ANNOTATED
Travel-On, Inc. vs. Court of Appeals
Same; Negotiable Instruments Law; Only clear and convincing
evidence, not the mere self-serving testimony of drawer, can rebut
presumption of holder in due course.—Travel-On was entitled to the
benefit of the statutory presumption that it was a holder in due course, that
the checks were supported by valuable consideration. Private respondent
maker of the checks did not successfully rebut these presumptions. The
only evidence aliundethat private respondent offered was his own self-
serving uncorroborated testimony. He claimed that he had issued the
checks to Travel-On as payee to “accommodate” its General Manager who
allegedly wished to show those checks to the Board of Directors of Travel-
On to “prove” that Travel-On’s account receivables were somehow “still
good.” It will be seen that this claim was in fact a claim that the checks
were merely simulated, that private respondent did not intend to bind
himself thereon. Only evidence of the clearest and most convincing kind
will suffice for that purpose; no such evidence was submitted by private
respondent. The latter’s explanation was denied by Travel-On’s General
Manager; that explanation, in any case, appears merely contrived and
quite hollow to us. Upon the other hand, the “accommodation” or
assistance extended to Travel-On’s passengers abroad as testified by
petitioner’s General Manager involved, not the accommodation
transactions recognized by the NIL, but rather the circumvention of then
existing foreign exchange regulations by passengers booked by Travel-
On, which incidentally involved receipt of full consideration by private
respondent.
PETITION for review on certiorari of the decision of the Court of Appeals.
The facts are stated in the resolution of the Court.
Eladio B. Samson for petitioner.
Benjamin Bernardino & Associates Law Offices for private
respondent.
RESOLUTION
FELICIANO, J.:
Petitioner Travel-On, Inc. (“Travel-On”) is a travel agency selling airline
tickets on commission basis for and in behalf of different airline companies.
Private respondent Arturo S. Miranda had a revolving credit line with
petitioner. He procured
353
VOL. 210, JUNE 26, 1992 353
Travel-On, Inc. vs. Court of Appeals
tickets from petitioner on behalf of airline passengers and derived
commissions therefrom.
On 14 June 1972, Travel-On filed suit before the Court of First Instance
(“CFI”) of Manila to collect on six (6) checks issued by private respondent
with a total face amount of P115,000.00. The complaint, with a prayer for
the issuance of a writ of preliminary attachment and attorney’s fees,
averred that from 5 August 1969 to 16 January 1970, petitioner sold and
delivered various airline tickets to respondent at a total price of
P278,201.57; that to settle said account, private respondent paid various
amounts in cash and in kind, and thereafter issued six (6) postdated checks
amounting to P115,000.00 which were all dishonored by the drawee
banks. Travel-On further alleged that in March 1972, private respondent
made another payment of P10,000.00 reducing his indebtedness to
P105,000.00. The writ of attachment was granted by the court a quo.
 In his answer, private respondent admitted having had transactions
with Travel-On during the period stipulated in the complaint. Private
respondent, however, claimed that he had already fully paid and even
overpaid his obligations and that refunds were in fact due to him. He
argued that he had issued the postdated checks for purposes of
accommodation, as he had in the past accorded similar favors to petitioner.
During the proceedings, private respondent contested several tickets
alleged to have been erroneously debited to his account. He claimed
reimbursement of his alleged overpayments, plus litigation expenses, and
exemplary and moral damages by reason of the allegedly improper
attachment of his properties.
In support of his theory that the checks were issued for accommodation,
private respondent testified that he had issued the checks in the name of
Travel-On in order that its General Manager, Elita Montilla, could show to
Travel-On’s Board of Directors that the accounts receivable of the
company were still good. He further stated that Elita Montilla tried to
encash the same, but that these were dishonored and were subsequently
returned to him after the accommodation purpose had been attained.
Travel-On’s witness, Elita Montilla, on the other hand explained that the
“accommodation” extended to Travel-On by private respondent related to
situations where one or more of
354
354 SUPREME COURT REPORTS ANNOTATED
Travel-On, Inc. vs. Court of Appeals
its passengers needed money in Hongkong, and upon request of Travel-
On respondent would contact his friends in Hongkong to advance
Hongkong money to the passenger. The passenger then paid Travel-On
upon his return to Manila and which payment would be credited by Travel-
On to respondent’s running account with it.
In its decision dated 31 January 1975, the court a quoordered Travel-
On to pay private respondent the amount of P8,894.91 representing net
overpayments by private respondent, moral damages of P10,000.00 for
the wrongful issuance of the writ of attachment and for the filing of this
case, P5,000.00 for attorney’s fees and the costs of the suit.
The trial court ruled that private respondent’s indebtedness to petitioner
was not satisfactorily established and that the postdated checks were
issued not for the purpose of encashment to pay his indebtedness but to
accommodate the General Manager of Travel-On to enable her to show to
the Board of Directors that Travel-On was financially stable.
Petitioner filed a motion for reconsideration that was, however, denied
by the trial court, which in fact then increased the award of moral damages
to P50,000.00.
On appeal, the Court of Appeals affirmed the decision of the trial court,
but reduced the award of moral damages to P20,000.00, with interest at
the legal rate from the date of the filing of the Answer on 28 August 1972.
Petitioner moved for reconsideration of the Court of Appeals’ decision,
without success.
In the instant Petition for Review, it is urged that the postdated checks
are per se evidence of liability on the part of private respondent. Petitioner
further argues that even assuming that the checks were for
accommodation, private respondent is still liable thereunder considering
that petitioner is a holder for value.
Both the trial and appellate courts had rejected the checks as evidence
of indebtedness on the ground that the various statements of account
prepared by petitioner did not show that private respondent had an
outstanding balance of P115,000.00 which is the total amount of the
checks he issued. It was pointed out that while the various exhibits of
petitioner showed various accountabilities of private respondent, they did
not satisfacto-
355
VOL. 210, JUNE 26, 1992 355
Travel-On, Inc. vs. Court of Appeals
rily establish the amount of the outstanding indebtedness of private
respondent. The appellate court made much of the fact that the figures
representing private respondent’s unpaid accounts found in the “Schedule
of Outstanding Account” dated 31 January 1970 did not tally with the
figures found in the statement which showed private respondent’s
transactions with petitioner for the years 1969 and 1970; that there was no
satisfactory explanation as to why the total outstanding amount
of P278,432.74 was still used as basis in the accounting of 7 April 1972
considering that according to the table of transactions for the year 1969
and 1970, the total unpaid account of private respondent amounted
to P239,794.57.
We have, however, examined the record and it shows that the 7 April
1972 Statement of Account had simply not been updated; that if we use as
basis the figure as of 31 January 1970 which is P278,432.74 and from it
deduct P38,638.17 which represents some of the payments subsequently
made by private respondent, the figure—P239,794.57 will be obtained.
Also, the fact alone that the various statements of account had
variances in figures, simply did not mean that private respondent had no
more financial obligations to petitioner. It must be stressed that private
respondent’s account with petitioner was a running or open one, which
explains the varying figures in each of the statements rendered as of a
given date.
The appellate court erred in considering only the statements of account
in determining whether private respondent was indebted to petitioner under
the checks. By doing so, it failed to give due importance to the most telling
piece of evidence of private respondent’s indebtedness—the checks
themselves which he had issued.
Contrary to the view held by the Court of Appeals, this Court finds that
the checks are the all important evidence of petitioner’s case; that these
checks clearly established private respondent’s indebtedness to petitioner;
that private respondent was liable thereunder.
It is important to stress that a check which is regular on its face is
deemed prima facie to have been issued for a valuable consideration and
every person whose signature appears thereon
356
356 SUPREME COURT REPORTS ANNOTATED
Travel-On, Inc. vs. Court of Appeals
is deemed to have become a party thereto for value.1 Thus, the mere
introduction of the instrument sued on in evidence prima facie entitles the
plaintiff to recovery. Further, the rule is quite settled that a negotiable
instrument is presumed to have been given or indorsed for a sufficient
consideration unless otherwise contradicted and overcome by other
competent evidence.2
In the case at bar, the Court of Appeals, contrary to these established
rules, placed the burden of proving the existence of valuable consideration
upon petitioner. This cannot be countenanced; it was up to private
respondent to show that he had indeed issued the checks without sufficient
consideration. The Court considers that private respondent was unable to
rebut satisfactorily this legal presumption. It must also be noted that those
checks were issued immediately after a letter demanding payment had
been sent to private respondent by petitioner Travel-On.
The fact that all the checks issued by private respondent to petitioner
were presented for payment by the latter would lead to no other conclusion
than that these checks were intended for encashment. There is nothing in
the checks themselves (or in any other document for that matter) that
states otherwise.
We are unable to accept the Court of Appeals’ conclusion that the
checks here involved were issued for “accommodation” and that
accordingly private respondent maker of those checks was not liable
thereon to petitioner payee of those checks.
In the first place, while the Negotiable Instruments Law does refer to
accommodation transactions, no such transaction was here shown.
Section 29 of the Negotiable Instruments Law
________________
1
Section 24 of the Negotiable Instruments Law provides:
“Section 24. Presumption of consideration.—Every negotiable instrument
is deemed prima facie to have been issued for a valuable consideration;
and every person whose signature appears thereon to have become a
party thereto for value.” Section 5 (s) of Rule 131 also establishes the
presumption “[t]hat a negotiable instrument was given or indorsed for a
sufficient consideration; x x x.”
2
Pineda vs. dela Rama, 121 SCRA 671 (1983); Bank of Philippine
Islands vs. Laguna Coconut Oil Co., 48 Phil. 5 (1925).
357
VOL. 210, JUNE 26, 1992 357
Travel-On, Inc. vs. Court of Appeals
provides as follows:
“Section 29. Liability of accommodation party.—1An accommodation party
is one who has signed the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for the purpose of lending
his name to some other person. Such a person is liable on the instrument
to a holder for value, notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation party.
In accommodation transactions recognized by the Negotiable Instruments
Law, an accommodating party lends his credit to the accommodated party,
by issuing or indorsing a check which is held by a payee or indorsee as a
holder in due course, who gave full value therefor to the accommodated
party. The latter, in other words, receives or realizes full value which the
accommodated party then must repay to the accommodating party, unless
of course the accommodating party intended to make a donation to the
accommodated party. But the accommodating party is bound on the check
to the holder in due course who is necessarily a third party and is not the
accommodated party. Having issued or indorsed the check, the
accommodating party has warranted to the holder in due course that he
will pay the same according to its tenor.3
________________
3
Section 60 of the Negotiable Instruments Law provides:
“Section 60. Liability of maker.—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.” Further, Section
61 provides:
“Section 61. Liability of drawer.—The drawer by drawing the instrument
admits the existence of the payee and his then capacity to indorse; and
engages that, on due presentment, the instrument will be accepted or paid,
or both, according to its tenor, 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. x x x”
358
358 SUPREME COURT REPORTS ANNOTATED
Travel-On, Inc. vs. Court of Appeals
In the case at bar, Travel-On was payee of all six (6) checks; it presented
these checks for payment at the drawee bank but the checks
bounced. Travel-On obviously was not an accommodated party; it realized
no value on the checks which bounced.
Travel-On was entitled to the benefit of the statutory presumption that
it was a holder in due course,4 that the checks were supported by valuable
consideration.5 Private respondent maker of the checks did not
successfully rebut these presumptions. The only evidence aliunde that
private respondent offered was his own self-serving uncorroborated
testimony. He claimed that he had issued the checks to Travel-On as
payee to “accommodate” its General Manager who allegedly wished to
show those checks to the Board of Directors of Travel-On to “prove” that
Travel-On’s account receivables were somehow “still good.” It will be seen
that this claim was in fact a claim that the checks were merely simulated,
that private respondent did not intend to bind himself thereon. Only
evidence of the
________________
Finally, Section 66 provides:
“Section 66. Liability of general indorser.—Every indorser who indorses
without qualification, warrants to all subsequent holders in due course:
xxx xxx xxx
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.”
4 Section 59 of the Negotiable Instruments Law provides: “Section 59—
Who is deemed holder in due course.—Every holder is deemed prima facie
to be a holder in due course; x x x.” See Also Fossum v. Fernandez
Hermanos, 44 Phil. 713 (1923).
5 Section 24, Negotiable Instruments Law, supra; A similar provision is
found in Article 1354, Civil Code of the Philippines:
“Art. 1354. Although the cause is not stated in the contract, it is presumed
that it exists and is lawful, unless the debtor proves the contrary.”
Also Penaco v. Ruaya, 110 SCRA 46 (1981).
359
VOL. 210, JUNE 26, 1992 359
Travel-On, Inc. vs. Court of Appeals
clearest and most convincing kind will suffice for that purpose,6 no such
evidence was submitted by private respondent. The latter’s explanation
was denied by Travel-On’s General Manager; that explanation, in any
case, appears merely contrived and quite hollow to us. Upon the other
hand, the “accommodation” or assistance extended to Travel-On’s
passengers abroad as testified by petitioner’s General Manager involved,
not the accommodation transactions recognized by the NIL, but rather the
circumvention of then existing foreign exchange regulations by passengers
booked by Travel-On, which incidentally involved receipt of full
consideration by private respondent.
Thus, we believe and so hold that private respondent must be held
liable on the six (6) checks here involved. Those checks in themselves
constituted evidence of indebtedness of private respondent, evidence not
successfully overturned or rebutted by private respondent.
Since the checks constitute the best evidence of private respondent’s
liability to petitioner Travel-On, the amount of such liability is the face
amount of the checks, reduced only by the P10,000.00 which Travel-On
admitted in its complaint to have been paid by private respondent
sometime in March 1992.
The award of moral damages to private respondent must be set aside,
for the reason that petitioner’s application for the writ of attachment rested
on sufficient basis and no bad faith was shown on the part of Travel-On. If
anyone was in bad faith, it was private respondent who issued bad checks
and then pretended to have “accommodated” petitioner’s General
Manager by assisting her in a supposed scheme to deceive petitioner’s
Board of Directors and to misrepresent Travel-On’s financial condition.
ACCORDINGLY, the Court Resolved to GRANT due course to the
Petition for Review on Certiorari and to REVERSE and SET ASIDE the
Decision dated 22 October 1980 and the Resolution of 23 January 1981 of
the Court of Appeals, as well as the Decision dated 31 January 1975 of the
trial court, and to enter a new decision requiring private respondent Arturo
S. Miranda
________________
6 See generally Cuyugan v. Santos, 34 Phil. 100 (1916); Tolentino v.
Gonzales, 50 Phil. 558 (1927).
360
360 SUPREME COURT REPORTS ANNOTATED
People vs. Galendez
to pay to petitioner Travel-On the amount of P105,000.00 with legal interest
thereon from 14 June 1972, plus ten percent (10%) of the total amount due
as attorney’s fees. Costs against private respondent.
 Gutierrez, Jr. (Chairman), Bidin, Davide, Jr. and Romero,
JJ., concur.
Decision reversed and set aside; petition granted.
Note.—A holder for value under Section 29 of the Negotiable
Instruments Law is one who must meet all the requirements of a holder in
due course under Section 52 of the same law except notice of want of
consideration (Prudencio vs. Court of Appeals, 143 SCRA 7).
450 SUPREME COURT REPORTS ANNOTATED
Agro Conglomerates, Inc. vs. Court of Appeals
G.R. No. 117660. December 18, 2000.*
AGRO CONGLOMERATES, INC. and MARIO SORIANO,
petitioners, vs. THE HON. COURT OF APPEALS and REGENT SAVINGS
and LOAN BANK, INC, respondents.
Contracts; Sales; A contract of sale is a reciprocal transaction, the
obligation or promise of each party being the cause or consideration for the
obligation or promise of the other.—A contract of sale is a reciprocal
transaction. The obligation or promise of each party is the cause or
consideration for the obligation or promise by the other. The vendee is
obliged to pay the price, while the vendor must deliver actual possession
of the land. In the instant case the original plan was that the initial payments
would be paid in cash. Subsequently, the parties (with the participation of
respondent bank) executed an addendum providing instead, that the
petitioners would secure a loan in the name of Agro Conglomerates Inc.
for the total amount of the initial payments, while the settlement of said loan
would be assumed by Wonderland. Thereafter, petitioner Soriano signed
several promissory notes and received the proceeds in behalf of petitioner-
company.
Same; Same; Suretyships; Accommodation Parties; Words and
Phrases; An accommodation party is a person who has signed the
instrument as maker, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to some other person
and is liable on
_______________
*
SECOND DIVISION.
451
VOL. 348, DECEMBER 18, 2000 451
Agro Conglomerates, Inc. vs. Court of Appeals
the instrument to a holder for value, notwithstanding such holder at
the time of taking the instrument knew (the signatory) to be an
accommodation party; Suretyship is defined as the relation which exists
where one person has undertaken an obligation and another person is also
under the obligation or other duty to the obligee, who is entitled to but one
performance, and as between the two who are bound, one rather than the
other should perform.—By this time, we note a subsidiary contract of
suretyship had taken effect since petitioners signed the promissory notes
as maker and accommodation party for the benefit of Wonderland.
Petitioners became liable as accommodation party. An accommodation
party is a person who has signed the instrument as maker, acceptor, or
indorser, without receiving value therefor, and for the purpose of lending
his name to some other person and is liable on the instrument to a holder
for value, notwithstanding such holder at the time of taking the instrument
knew (the signatory) to be an accommodation party. He has the right, after
paying the holder, to obtain reimbursement from the party accommodated,
since the relation between them has in effect become one of principal and
surety, the accommodation party being the surety. Suretyship is defined as
the relation which exists where one person has undertaken an obligation
and another person is also under the obligation or other duty to the obligee,
who is entitled to but one performance, and as between the two who are
bound, one rather than the other should perform. The surety’s liability to
the creditor or promisee of the principal is said to be direct, primary and
absolute; in other words, he is directly and equally bound with the principal.
And the creditor may proceed against any one of the solidary debtors.
Same; Novation; Requisites; Words and Phrases; Novation is the
extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which extinguishes or modifies the first,
either by changing the object or principal conditions, or by substituting
another in place of the debtor, or by subrogating a third person in the rights
of the creditor.—Novation is the extinguishment of an obligation by the
substitution or change of the obligation by a subsequent one which
extinguishes or modifies the first, either by changing the object or principal
conditions, or by substituting another in place of the debtor, or by
subrogating a third person in the rights of the creditor. In order that a
novation can take place, the concurrence of the following requisites are
indispensable: 1) There must be a previous valid obligation; 2) There must
be an agreement of the parties concerned to a new contract; 3) There must
be the extinguishment of the old contract; and 4) There must be the validity
of the new contract.
452
452 SUPREME COURT REPORTS ANNOTATED
Agro Conglomerates, Inc. vs. Court of Appeals
Same; Same; There is no novation by “substitution” of debtor where
there is no prior obligation which is substituted by a new contract.—In the
instant case, the first requisite for a valid novation is lacking. There was no
novation by “substitution” of debtor because there was no prior obligation
which was substituted by a new contract. It will be noted that the
promissory notes, which bound the petitioners to pay were executed after
the addendum. The addendum modified the contract of sale, not the
stipulations in the promissory notes which pertain to the surety contract. At
this instance, Wonderland apparently assured the payment of future debts
to be incurred by the petitioners. Consequently, only a contract of surety
arose. It was wrong for petitioners to presume a novation had taken place.
The well-settled rule is that novation is never presumed, it must be clearly
and unequivocally shown.
 Same; Interpretation of Contracts; In order to judge the intention of
the parties, their contemporaneous and subsequent acts should be
considered.—It is true that the basic and fundamental rule in the
interpretation of contract is that, if the terms thereof are clear and leave no
doubt as to the intention of the contracting parties, the literal meaning shall
control. However, in order to judge the intention of the parties, their
contemporaneous and subsequent acts should be considered.
Actions; Parties; Pleadings and Practice; The non-inclusion of a
necessary party does not prevent the court from proceeding in the action,
and the judgment rendered therein shall be without prejudice to the rights
of such necessary party.—Petitioners had no legal or just ground to retain
the proceeds of the loan at the expense of private respondent. Neither
could petitioners excuse themselves and hold Wonderland still liable to pay
the loan upon the rescission of their sales contract. If petitioners sustained
damages as a result of the rescission, they should have impleaded
Wonderland and asked damages. The non-inclusion of a necessary party
does not prevent the court from proceeding in the action, and the judgment
rendered therein shall be without prejudice to the rights of such necessary
party. But respondent appellate court did not err in holding that petitioners
are duty-bound under the law to pay the claims of respondent bank from
whom they had obtained the loan proceeds.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Quiason, Makalintal, Barot, Torres and Ibarra for petitioners.
453
VOL. 348, DECEMBER 18, 2000 453
Agro Conglomerates, Inc. vs. Court of Appeals
Cesar M. Cariño for private respondent.
QUISUMBING, J.:
This is a petition for review challenging the decision1 dated October 17,
1994 of the Court of Appeals in CA-G.R. No. 32933, which affirmed in
toto the judgment of the Manila Regional Trial Court, Branch 27, in
consolidated Cases Nos. 86-37374, 86-37388, 86-37543.
This petition springs from three complaints for sums of money filed by
respondent bank against herein petitioners. In the decision of the Court of
Appeals, petitioners were ordered to pay respondent bank, as follows:
Wherefore, judgment is hereby rendered in favor of plaintiff and against
defendants, as follows:
1. 1)In Civil Case No. 86-37374, defendants [petitioners, herein] are
ordered jointly and severally, to pay to plaintiff the amount of
P78,212.29, together with interest and service charge thereon, at
the rates of 14% and 3% per annum, respectively, computed from
November 10, 1982, until fully paid, plus stipulated penalty on
unpaid principal at the rate of 6% per annum, computed from
November 10, 1982, plus 15% as liquidated damage plus 10% of
the total amount due, as attorney’s fees, plus costs;
2. 2)In Civil Case No. 86-37388, defendant is ordered to pay plaintiff
the amount of P632,911.39, together with interest and service
charge thereon at the rate of 14% and 3% per
annum, respectively, computed from January 15, 1983, until fully
paid, plus stipulated penalty on unpaid principal at the rate of
6% per annum, computed from January 15, 1983, plus liquidated
damages equivalent to 15% of the total amount due, plus
attorney’s fees equivalent to 10% of the total amount due, plus
costs; and
3. 3)In Civil Case No. 86-37543, defendant is ordered to pay plaintiff,
on the first cause of action, the amount of P510,000.00, together
with interest and service charge thereon, at the rates of 14% and
2% per annum,respectively, computed from March 13, 1983, until
fully paid, plus a penalty of 6% per annum, based on the
outstanding principal of the loan, computed from March 13, 1983,
until fully paid; and on the second cause of action, the amount of
P494,936.71, together with interest and service charge thereon
at the rates of 14% and 2%, per annum, respectively, com-
_______________
1
Rollo, pp. 49-55.
454
454 SUPREME COURT REPORTS ANNOTATED
Agro Conglomerates, Inc. vs. Court of Appeals
1. puted from March 30, 1983, until fully paid, plus penalty of charge
6% per annum, based on the unpaid principal, computed from
March 30, 1983, until fully paid, plus (on both causes of action)
an amount equal to 15% of the total amounts due, as liquidated
damages, plus attorney’s fees equal to 10% of the total amounts
due, plus costs.2
Based on the records, the following are the factual antecedents.
On July 17, 1982, petitioner Agro-Conglomerates, Inc. as vendor, sold
two parcels of land to Wonderland Food Industries, Inc. In their
Memorandum of Agreement,3 the parties covenanted that the purchase
price of Five Million (P5,000,000.00) Pesos would be settled by the
vendee, under the following terms and conditions: (1) One Million
(P1,000,000.00) Pesos shall be paid in cash upon the signing of the
agreement; (2) Two Million (P2,000,000.00) Pesos worth of common
shares of stock of the Wonderland Food Industries, Inc.; and (3) The
balance of P2,000,000.00 shall be paid in four equal installments, the first
installment falling due, 180 days after the signing of the agreement and
every six months thereafter, with an interest rate of 18% per annum, to be
advanced by the vendee upon the signing of the agreement.
On July 19, 1982, the vendor, the vendee, and the respondent bank
Regent Savings & Loan Bank (formerly Summa Savings & Loan
Association), executed an Addendum4 to the previous Memorandum of
Agreement. The new arrangement pertained to the revision of settlement
of the initial payments of P1,000,000.00 and prepaid interest of
P360,000.00 (18% of P2,000,000.00) as follows:
Whereas, the parties have agreed to qualify the stipulated terms for the
payment of the said ONE MILLION THREE HUNDRED SIXTY
THOUSAND (P1,360,000.00) PESOS.
WHEREFORE, in consideration of the mutual covenant and agreement
of the parties, they do further covenant and agree as follows:
1. 1.That the VENDEE instead of paying the amount of ONE MILLION
THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS
in cash, hereby authorizes the VENDOR to obtain a loan
_______________
the balance of two million pesos stipulated upon in Item No. 1(c)
of the said agreement; provided however, that said loan shall be
made for and in the name of the VENDOR.
2. 2.The VENDEE also agrees that the full amount of ONE MILLION
THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS
be paid directly to the VENDOR; however, the VENDEE hereby
undertakes to pay the foil amount of the said loan to the Financier
on such terms and conditions agreed upon by the Financier and
the VENDOR, it being understood that while the loan will be
secured from and in the name of the VENDOR, the VENDEE will
be the one liable to pay the entire proceeds thereof including
interest and other charges.5
This addendum was not notarized.
Consequently, petitioner Mario Soriano signed as maker several
promissory notes,6 payable to the respondent bank. Thereafter, the bank
released the proceeds of the loan to petitioners. However, petitioners failed
to meet their obligations as they fell due. During that time, the bank was
experiencing financial turmoil and was under the supervision of the Central
Bank. Central Bank examiner and liquidator Cordula de Jesus endorsed
the subject promissory notes to the bank’s counsel for collection. The bank
gave petitioners opportunity to settle their account by extending payment
due dates. Mario Soriano manifested his intention to re-structure the loan,
yet did not show up nor submit his formal written request.
Respondent bank filed three separate complaints before the Regional
Trial Court of Manila for Collection of Sums of money. The corresponding
case histories are illustrated in the table below:

2 Id. at 68-70. _______________

3 Id. at 71-73.
5
4 Id. at 74-75. Id. at 74 only.
6
455 Records, pp. 159, 162, 167, 171.
VOL. 348, DECEMBER 18, 2000 455 456
Agro Conglomerates, Inc. vs. Court of Appeals 456 SUPREME COURT REPORTS
ANNOTATED
1. from Summa Savings and Loan Association with office address at Agro Conglomerates, Inc. vs. Court of Appeals
Valenzuela, Metro Manila, being represented herein by its Date of Loan Amount Payment Due Payment
President, Mr. Jaime Cariño and referred to hereafter as Date Extension
Financier; in the amount of ONE MILLION THREE HUNDRED Dates
SIXTY THOUSAND (P1,360,000.00) PESOS, plus interest
thereon at such rate as the VENDEE and the Financier may Civil Case 86- P 78,212.29 Nov. 10, 1982 Feb. 8, 1983
agree, which amount shall cover the ONE MILLION 37374
(P1,000,000.00) PESOS cash which was agreed to be paid upon August 12, 1982 May 9, 1983
signing of the Memorandum of Agreement, plus 18% interest on Aug. 7, 1983
 PETITIONERS FROM ANY LIABILITY OVER THE PROMISSORY
Civil Case 86- P Jan. 15, 1983 May 16, 1983 NOTES.
37388 632,911.39 Revealed by the facts on record, the conflict among the parties started from
July 19, 1982 Aug. 14, 1983 a contract of sale of a farmland between petitioners and Wonderland Food
Industries, Inc. As found by the trial court, no such sale materialized.
Civil Case 86- P March 13, 1983 June 11, 1983 A contract of sale is a reciprocal transaction. The obligation or promise
37543 510,000.00 of each party is the cause or consideration for the obligation or promise by
September 14, Sept. 9, 1983 the other. The vendee is obliged to pay the price, while the vendor must
1982 deliver actual possession of the land. In the instant case the original plan
was that the initial payments would be paid in cash. Subsequently, the
October 1, 1982 P March 30, 1983 June 28, 1983 parties (with the participation of respondent bank) executed an addendum
494,936.71 providing instead, that the petitioners would secure a loan in the name of
Sept. 26, 1983 Agro Conglomerates Inc. for the total amount of the initial payments, while
In their answer, petitioners interposed the defense of novation and insisted the settlement of said loan would be assumed by Wonderland. Thereafter,
there was a valid substitution of debtor. They alleged that the addendum petitioner Soriano signed several promissory notes and received the
specifically states that although the promissory notes were in their names, proceeds in behalf of petitioner-company.
Wonderland shall be responsible for the payment thereof. By this time, we note a subsidiary contract of suretyship had taken
The trial court held that petitioners are liable, to wit: effect since petitioners signed the promissory notes as maker and
The evidences, however, disclose that Wonderland did not comply with its accommodation party for the benefit of Wonderland. Petitioners became
obligation under said ‘Addendum’ (Exh. ‘S’) as the agreement to turn over liable as accommodation party. An accommodation party is a person who
the farmland to it, did not materialize (57 tsn, May 29, 1990), and there has signed the instrument as maker, acceptor, or indorser, without
was, actually no sale of the land (58 tsn, ibid.). Hence, Wonderland is not receiving value therefor, and for the purpose of lending his name to some
answerable. And since the loans obtained under the four promissory notes other person and is liable on the instrument to a holder for value,
(Exhs. ‘A’ ‘C,’ ‘G,’ and ‘E’) have not been paid, despite opportunities given notwithstanding such holder at the time of taking the instrument knew (the
by plaintiff to defendants to make payments, it stands to reason that signatory) to be an accommodation party.8 He has the right, after paying
defendants are liable to pay their obligations thereunder to plaintiff. In fact, the holder, to obtain reimbursement from the party accommodated, since
defendants failed to file a third-party complaint against Wonderland, which the
shows the weakness of its stand that Wonderland is answerable to make
said payments.7 _______________
Petitioners appealed to the Court of Appeals. The trial court’s decision was
8
affirmed by the appellate court. The Negotiable Instruments Law, Section 29.
458
_______________ 458 SUPREME COURT REPORTS ANNOTATED
Agro Conglomerates, Inc. vs. Court of Appeals
7
Rollo, p. 68. relation between them has in effect become one of principal and
457 surety, the accommodation party being the surety.9Suretyship is defined
VOL. 348, DECEMBER 18, 2000 457 as the relation which exists where one person has undertaken an obligation
Agro Conglomerates, Inc. vs. Court of Appeals and another person is also under the obligation or other duty to the obligee,
Hence, this recourse, wherein petitioners raise the sole issue of: who is entitled to but one performance, and as between the two who are
WHETHER THE COURT OF APPEALS ERRED IN NOT FINDING THAT bound, one rather than the other should perform.10 The surety’s liability to
THE ADDENDUM, SIGNED BY THE PETITIONERS, RESPONDENT the creditor or promisee of the principal is said to be direct, primary and
BANK AND WONDERLAND INC., CONSTITUTES A NOVATION OF THE absolute; in other words, he is directly and equally bound with the
CONTRACT BY SUBSTITUTION OF DEBTOR, WHICH EXEMPTS THE principal.11 And the creditor may proceed against any one of the solidary
debtors.12
 We do not give credence to petitioners’ assertion that, as provided by
the addendum, their obligation to pay the promissory notes was novated
by “substitution” of a new debtor, Wonderland. Contrary to petitioners’
contention, the attendant facts herein do not make a case of novation.
Novation is the extinguishment of an obligation by the substitution or
change of the obligation by a subsequent one which extinguishes or
modifies the first, either by changing the object or principal conditions, or by
substituting another in place of the debtor, or by subrogating a third person
in the rights of the creditor.13 In order that a novation can take place, the
concurrence of the following requisites14 are indispensable:
1. 1)There must be a previous valid obligation;
2. 2)There must be an agreement of the parties concerned to a new
contract;
3. 3)There must be the extinguishment of the old contract; and
_______________
9
People vs. Maniego, 148 SCRA 30, 35 (1987); Philippine National
Bank vs. Maza and Mecenas, 48 Phil. 207 (1925).
10 74 Am Jur 2d, Suretyship, Sec. 1.
11 Garcia, Jr. vs. Court of Appeals, 191 SCRA 493, 496 (1990).
12 Civil Code of the Philippines, Art. 1216.
13 Ajax Marketing & Development Corporation vs. Court of
Appeals, 248 SCRA 222, 226 (1995); citing FRANCISCO, V. J. Civil Code
of the Philippines Annotated and Commented, Bk IV Part 1, p. 676, citing
8 Manresa 417; De Cortes vs. Venturanza, 79 SCRA 709, 722-723 (1977).
14 Reyes vs. Court of Appeals, 264 SCRA 35, 43 (1996).
459
VOL. 348, DECEMBER 18, 2000 459
Agro Conglomerates, Inc. vs. Court of Appeals
1. 4)There must be the validity of the new contract.
In the instant case, the first requisite for a valid novation is lacking. There
was no novation by “substitution” of debtor because there was no prior
obligation which was substituted by a new contract. It will be noted that the
promissory notes, which bound the petitioners to pay, were executed after
the addendum. The addendum modified the contract of sale, not the
stipulations in the promissory notes which pertain to the surety contract. At
this instance, Wonderland apparently assured the payment of future debts
to be incurred by the petitioners. Consequently, only a contract of surety
arose. It was wrong for petitioners to presume a novation had taken place.
The well-settled rule is that novation is never presumed,15 it must be clearly
and unequivocally shown.16
As it turned out, the contract of surety between Wonderland and the
petitioners was extinguished by the rescission of the contract of sale of the
farmland. With the rescission, there was confusion or merger in the
persons of the principal obligor and the surety, namely the petitioners
herein. The addendum which was dependent thereon likewise lost its
efficacy.
It is true that the basic and fundamental rule in the interpretation of
contract is that, if the terms thereof are clear and leave no doubt as to the
intention of the contracting parties, the literal meaning shall control.
However, in order to judge the intention of the parties, their
contemporaneous and subsequent acts should be considered.17
_______________
15
Ajax Marketing and Development Corporation vs. Court of
Appeals, 248 SCRA 222, 227 (1995); Goñi vs. Court of Appeals, 144
SCRA 222, (1986).
16 Mercantile Insurance Co., Inc. vs. Court of Appeals, 196 SCRA 197,
204 (1991).
17 Manila Surety & Fidelity Co., Inc. vs. Court of Appeals, 191 SCRA
805, 812 (1990); citing Mercantile Insurance Co., Inc. vs. Felipe Ysmael,
Jr. & Co., Inc., 169 SCRA 66, 74 (1989); Sy vs. Court of Appeals, 131
SCRA 116 (1984); GSIS vs. Court of Appeals, et al., 145 SCRA
311 (1986).
460
460 SUPREME COURT REPORTS ANNOTATED
Agro Conglomerates, Inc. vs. Court of Appeals
The contract of sale between Wonderland and petitioners did not
materialize. But it was admitted that petitioners received the proceeds of
the promissory notes obtained from respondent bank.
Sec. 22 of the Civil Code provides:
Every person who through an act of performance by another, or any other
means, acquires or comes into possession of something at the expense of
the latter without just or legal ground, shall return the same to him.
Petitioners had no legal or just ground to retain the proceeds of the loan at
the expense of private respondent. Neither could petitioners excuse
themselves and hold Wonderland still liable to pay the loan upon the
rescission of their sales contract. If petitioners sustained damages as a
result of the rescission, they should have impleaded Wonderland and
asked damages. The non-inclusion of a necessary party does not prevent
the court from proceeding in the action, and the judgment rendered therein
shall be without prejudice to the rights of such necessary party.18But
respondent appellate court did not err in holding that petitioners are duty-
bound under the law to pay the claims of respondent bank from whom they
had obtained the loan proceeds.
WHEREFORE, the petition is DENIED for lack of merit. The assailed
decision of the Court of Appeals dated October 17, 1994 is AFFIRMED.
Costs against petitioners.
SO ORDERED.
Bellosillo (Chairman), Mendoza, Buena and De Leon, Jr., JJ.,
concur.
Petition denied, judgment affirmed.
Notes.—A party to a contract cannot just evade compliance with his
contractual obligations by the simple expedient of denying the execution of
such contract. (Hemedes vs. Court of Appeals, 316 SCRA 347 [1999])

_______________
18
Revised Rules of Court, Civil Procedure, Sec. 9, Rule 3, par. 3.
461
VOL. 348, DECEMBER 18, 2000 461
People vs. Dumanon
While it is true that contracts are respected as the law between the
contracting parties, this principle is tempered by the rule that the intention
of the parties is primordial. (Golden Diamond, Inc. vs. Court of
Appeals, 332 SCRA 605[2000])

VOL. 508, NOVEMBER 29, 2006 459
Gonzales vs. Rizal Commercial Banking Corporation
G.R. No. 156294. November 29, 2006.*
MELVA THERESA ALVIAR GONZALES, petitioner, vs. RIZAL
COMMERCIAL BANKING CORPORATION, respondent.
Negotiable Instruments; Checks; A subsequent party which caused
the defect in the instrument cannot have any recourse against any of the
prior endorsers in good faith.—The dollar-check 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
_______________
*
SECOND DIVISION.
460
460 SUPREME COURT REPORTS ANNOTATED
Gonzales vs. Rizal Commercial Banking Corporation
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 Alviar’s
and the petitioner’s liability to subsequent holders of the foreign check is
governed by the Negotiable Instruments Law.
Same; Same; Equity; 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; Courts of law, being also courts of equity, may not
countenance grossly unfair results without doing violence to their solemn
obligation to administer fair and equal justice for all.—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, 302 SCRA 718
(1999), 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.”
461
VOL. 508, NOVEMBER 29, 2006 461
Gonzales vs. Rizal Commercial Banking Corporation
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Jinky Rose L. Go for petitioner.
Siguion Reyna, Montecillo & Ongsiako for respondent.
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 decision1 dated
August 30, 2002, affirmed the RTC minus the award of attorney’s 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 check’s value without awaiting the clearing
period, Gonzales presented the foreign check to Olivia Gomez,
the RCBC’s Head of Retail Banking. After examining this, Olivia Gomez
_______________
1
Penned by Associate Justice Roberto A. Barrios, with Associate
Justices Bienvenido L. Reyes and Edgardo F. Sundiam, concurring; Rollo,
pp. 29–38.
462
462 SUPREME COURT REPORTS ANNOTATED
Gonzales vs. Rizal Commercial Banking Corporation
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 RCBCHead 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 x x x
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 Gonzalesresigned 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 RCBCfiled a complaint
for a sum of money against Eva Alviar, Melva Theresa Alviar-
Gonzales and the latter’s husband Gino Gonzales. The
spouses Gonzales filed an Answer with Counterclaim praying for the
dismissal of the complaint as well as
463
VOL. 508, NOVEMBER 29, 2006 463
Gonzales vs. Rizal Commercial Banking Corporation
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
attorney’s 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. 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. 2.To pay the amount of P40,000.00 as and for attorney’s fees; and
to
3. 3.Pay the costs of this suit.
SO ORDERED.”
On appeal, the CA, except for the award of attorney’s fees, affirmed the
RTC judgment.
 Hence, this recourse by the petitioner on her submission that the CA
erred—
X X X IN FINDING [PETITIONER], AN ACCOMMODATION PARTY TO A
CHECK SUBSEQUENTLY ENDORSED PARTIALLY, LIABLE
TO RCBC AS GUARANTOR;
X X X 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;
_______________
2
Id., at pp. 130–132.
464
464 SUPREME COURT REPORTS ANNOTATED
Gonzales vs. Rizal Commercial Banking Corporation
X X X 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 Alviar’s and the petitioner’s liability
to subsequent holders of the foreign check is governed by the Negotiable
Instruments Law as follows:
_______________
3
Exhibits “J” and “J-1”; Id., at p. 48.
465
VOL. 508, NOVEMBER 29, 2006 465
Gonzales vs. Rizal Commercial Banking Corporation
“Sec. 66. Liability of general indorser.—Every indorser who indorses
without qualification, warrants to all subsequent holders in due course;
1. (a)The matters and things mentioned in subdivisions (a), (b), and
(c) of the next preceding section; and
2. (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:
1. (a)That the instrument is genuine and in all respects what it
purports to be;
2. (b)That he has a good title to it;
3. (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 to P17,500.00 only”) of Olivia Gomez, who is the
466
466 SUPREME COURT REPORTS ANNOTATED
Gonzales vs. Rizal Commercial Banking Corporation
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
_______________
4
362 Phil. 332; 302 SCRA 718 (1999).
467
VOL. 508, NOVEMBER 29, 2006 467
Gonzales vs. Rizal Commercial Banking Corporation
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 petitioner’s counterclaim against RCBCfor the amount
of P12,822.20 which it admittedly deducted from petitioner’s salary, the
Court must order the return thereof to the petitioner, with legal interest of
12% per annum, notwithstanding the petitioner’s 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 petitioner’s
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
dollar-check in question, RCBC may likewise be held liable for moral and
exemplary damages and attorney’s 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. Petitioner’s counter-
_______________
5
Valderama v. Macalde, G.R. No. 165005, September 16, 2005, 470
SCRA 168.
468
468 SUPREME COURT REPORTS ANNOTATED
Gonzales vs. Rizal Commercial Banking Corporation
claim 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 attorney’s
fees.
Costs against the respondent.
SO ORDERED.
Puno (Chairperson), Sandoval-Gutierrez, Coronaand Azcuna,
JJ., concur.
Assailed decision reversed and set aside, complaint dismissed.
Notes.—Where what was stamped on the check is “DAUD” meaning
drawn against uncollected deposits, the bank may still honor the check at
its discretion in favor of favored clients, in which case there would be no
violation of B.P. 22. (Tan vs. People, 349 SCRA 777 [2001])
 The mere fact that the forgery was committed by a drawerpayor’s
confidential employee or agent, who by virtue of his position had unusual
facilities for perpetrating the fraud and imposing the forged paper upon the
bank, does not entitle the bank to shift the loss to the drawer-payor, in the
absence of some circumstances raising estoppel against the drawer.
(Philippine Commercial International Bank vs. Court of Appeals, 350
SCRA 446[2001])

244 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
G.R. No. 146511. September 5, 2007.*
TOMAS ANG, petitioner, vs. ASSOCIATED BANK AND
ANTONIO ANG ENG LIONG, respondents.
Appeals; Assignment of Errors; Pleadings and Practice; It is well
within the authority of the Court of Appeals to raise, if it deems proper under
the circumstances obtaining, error/s not assigned on an appealed case—
an appellate court has the broad discretionary power to waive the lack of
proper assignment of errors and to consider errors not assigned.—
Procedurally, it is well within the authority of the Court of Appeals to raise,
if it deems proper under the circumstances obtaining, error/s not assigned
on an appealed case. In Mendoza v. Bautista, 453 SCRA 691 (2005), this
Court recognized the broad discretionary power of an appellate court to
waive the lack of proper assignment of errors and to consider errors not
assigned, thus: As a rule, no issue may be raised on appeal unless it has
been brought before the lower tribunal for its consideration. Higher courts
are precluded from entertaining matters neither alleged in the pleadings
nor raised during the proceedings below, but ventilated for the first time
only in a motion for reconsideration or on appeal. However, as with most
procedural rules, this maxim is subject to exceptions. Indeed, our rules
recognize the broad discretionary power of an appellate court to waive the
lack of proper assignment of errors and to consider errors not assigned.
Section 8 of Rule 51 of the Rules of Court provides: SEC. 8. Questions that
may be decided.—No error which does not affect the jurisdiction over the
subject matter or the validity of the judgment appealed from or the
proceedings therein will be considered, unless stated in the assignment of
errors, or closely related to or dependent on an assigned error and properly
argued in the brief, save as the court may pass upon plain errors and
clerical errors. Thus, an appellate court is clothed with ample authority to
review rulings even if they are not assigned as errors in the appeal in these
instances: (a) grounds not assigned as errors but affecting jurisdiction over
the subject matter; (b) matters not assigned as errors on appeal but are
evidently plain or clerical errors within contemplation of law; (c) matters not
assigned as errors on appeal but consideration of which is necessary in
arriving at a just
_______________
*
FIRST DIVISION.
245
VOL. 532, SEPTEMBER 5, 2007 245
Ang vs. Associated Bank
decision and complete resolution of the case or to serve the interests
of justice or to avoid dispensing piecemeal justice; (d) matters not
specifically assigned as errors on appeal but raised in the trial court and
are matters of record having some bearing on the issue submitted which
the parties failed to raise or which the lower court ignored; (e) matters not
assigned as errors on appeal but closely related to an error assigned; and
(f) matters not assigned as errors on appeal but upon which the
determination of a question properly assigned is dependent.
Asset Privatization Trust; History.—Taking into account the
imperative need of formally launching a program for the rationalization of
the government corporate sector, then President Corazon C. Aquino
issued Proclamation No. 50 on December 8, 1986. As one of the twin
cornerstones of the program was to establish the privatization of a good
number of government corporations, the proclamation created the Asset
Privatization Trust, which would, for the benefit of the National
Government, take title to and possession of, conserve, provisionally
manage and dispose of transferred assets that were identified for
privatization or disposition. In accordance with the provisions of Section 23
of the proclamation, then President Aquino subsequently issued
Administrative Order No. 14 on February 3, 1987, which approved the
identification of and transfer to the National Government of certain assets
(consisting of loans, equity investments, accrued interest receivables,
acquired assets and other assets) and liabilities (consisting of deposits,
borrowings, other liabilities and contingent guarantees) of the
Development Bank of the Philippines (DBP) and the Philippine National
Bank (PNB). The transfer of assets was implemented through a Deed of
Transfer executed on February 27, 1987 between the National
Government, on one hand, and the DBP and PNB, on the other. In turn,
the National Government designated the Asset Privatization Trust to act as
its trustee through a Trust Agreement, whereby the non-performing
accounts of DBP and PNB, including, among others, the DBP’s equity with
respondent Bank, were entrusted to the Asset Privatization Trust. As
provided for in the Agreement, among the powers and duties of the Asset
Privatization Trust with respect to the trust properties consisting of
receivables was to handle their administration and collection by bringing
suit to enforce payment of the obligations or any installment thereof or
settling or compromising any of such obligations or any other claim or
demand which the Govern-
246
246 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
ment may have against any person or persons, and to do all acts,
institute all proceedings, and to exercise all other rights, powers, and
privileges of ownership that an absolute owner of the properties would
otherwise have the right to do.
Same; Actions; Parties; While a bank held by the Asset Privatization
Trust may not appear to be the real party in interest at the time the action
for collection was instituted, the issue had been rendered moot with the
occurrence of a supervening event—the reacquisition of the bank by its
former owner when the case was still pending in the lower court, thus
reclaiming its real and actual interest over the unpaid promissory notes.—
Based on the above backdrop, respondent Bank does not appear to be the
real party in interest when it instituted the collection suit on August 28, 1990
against Antonio Ang Eng Liong and petitioner Tomas Ang. At the time the
complaint was filed in the trial court, it was the Asset Privatization Trust
which had the authority to enforce its claims against both debtors. In fact,
during the pre-trial conference, Atty. Roderick Orallo, counsel for the bank,
openly admitted that it was under the trusteeship of the Asset Privatization
Trust. The Asset Privatization Trust, which should have been represented
by the Office of the Government Corporate Counsel, had the authority to
file and prosecute the case. The foregoing notwithstanding, this Court can
not, at present, readily subscribe to petitioner’s insistence that the case
must be dismissed. Significantly, it stands without refute, both in the
pleadings as well as in the evidence presented during the trial and up to
the time this case reached the Court, that the issue had been rendered
moot with the occurrence of a supervening event—the “buy-back” of the
bank by its former owner, Leonardo Ty, sometime in October 1993. By
such re-acquisition from the Asset Privatization Trust when the case was
still pending in the lower court, the bank reclaimed its real and actual
interest over the unpaid promissory notes; hence, it could rightfully qualify
as a “holder” thereof under the NIL.
Negotiable Instruments Law; Accommodation
Party; Requisites; Words and Phrases; An accommodation party is a
person “who has signed the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for the purpose of lending
his name to some other person.”—Notably, Section 29 of the NIL defines
an accommodation party as a person “who has signed the instrument as
maker, drawer, acceptor, or indorser, without receiving value there-
247
VOL. 532, SEPTEMBER 5, 2007 247
Ang vs. Associated Bank
for, and for the purpose of lending his name to some other person.”
As gleaned from the text, an accommodation party is one who meets all
the three requisites, viz.: (1) he must be a party to the instrument, signing
as maker, drawer, acceptor, or indorser; (2) he must not receive value
therefor; and (3) he must sign for the purpose of lending his name or credit
to some other person. An accommodation party lends his name to enable
the accommodated party to obtain credit or to raise money; he receives no
part of the consideration for the instrument but assumes liability to the other
party/ies thereto. The accommodation party is liable on the instrument to a
holder for value even though the holder, at the time of taking the
instrument, knew him or her to be merely an accommodation party, as if
the contract was not for accommodation.
Same; Same; Suretyship; The relation between an accommodation
party and the accommodated party is one of principal and surety—the
accommodation party being the surety; Although a contract of suretyship
is in essence accessory or collateral to a valid principal obligation, the
surety’s liability to the creditor is immediate, primary and absolute—he is
directly and equally bound with the principal.—As petitioner acknowledged
it to be, the relation between an accommodation party and the
accommodated party is one of principal and surety—the accommodation
party being the surety. As such, he is deemed an original promisor and
debtor from the beginning; he is considered in law as the same party as
the debtor in relation to whatever is adjudged touching the obligation of the
latter since their liabilities are interwoven as to be inseparable. Although a
contract of suretyship is in essence accessory or collateral to a valid
principal obligation, the surety’s liability to the creditor
is immediate, primary and absolute; he is directly and equally bound with
the principal. As an equivalent of a regular party to the undertaking, a
surety becomes liable to the debt and duty of the principal obligor even
without possessing a direct or personal interest in the obligations nor does
he receive any benefit therefrom.
Obligations and Contracts; Suretyship; Article 2080 of the Civil Code
does not apply in a contract of suretyship—Articles 1207 up to 1222 of the
Code (on joint and solidary obligations) govern the relationship.—Contrary
to petitioner’s adamant stand, however, Article 2080 of the Civil Code does
not apply in a contract of suretyship. Art. 2047 of the Civil Code states that
if a person binds himself solidarily
248
248 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
with the principal debtor, the provisions of Section 4, Chapter 3, Title
I, Book IV of the Civil Code must be observed. Accordingly, Articles 1207
up to 1222 of the Code (on joint and solidary obligations) shall govern the
relationship of petitioner with the bank.
Negotiable Instruments Law; Accommodation Party; Words and
Phrases; The phrase “without receiving value therefor” used in Sec. 29 of
the Negotiable Instruments Law (NIL) means “without receiving value by
virtue of the instrument” and not as it is apparently supposed to mean,
“without receiving payment for lending his name”—when a third person
advances the face value of the note to the accommodated party at the time
of its creation, the consideration for the note as regards its maker is the
money advanced to the accommodated party.—In issuing the two
promissory notes, petitioner as accommodating party warranted to the
holder in due course that he would pay the same according to its tenor. It
is no defense to state on his part that he did not receive any value therefor
because the phrase “without receiving value therefore” used in Sec. 29 of
the NIL means “without receiving value by virtue of the instrument” and not
as it is apparently supposed to mean, “without receiving payment for
lending his name.” Stated differently, when a third person advances the
face value of the note to the accommodated party at the time of its creation,
the consideration for the note as regards its maker is the money advanced
to the accommodated party. It is enough that value was given for the note
at the time of its creation. As in the instant case, a sum of money was
received by virtue of the notes, hence, it is immaterial so far as the bank is
concerned whether one of the signers, particularly petitioner, has or has
not received anything in payment of the use of his name.
Same; Same; Upon the maturity of the note, a surety may pay the
debt, demand the collateral security, if there be any, and dispose of it to
his benefit, or, if applicable, subrogate 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.—Under
the law, upon the maturity of the note, a surety may pay the debt, demand
the collateral security, if there be any, and dispose of it to his benefit, or, if
applicable, subrogate 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. Regrettably,
none of these were
249
VOL. 532, SEPTEMBER 5, 2007 249
Ang vs. Associated Bank
prudently done by petitioner. When he was first notified by the bank
sometime in 1982 regarding his accountabilities under the promissory
notes, he lackadaisically relied on Antonio Ang Eng Liong, who
represented that he would take care of the matter, instead of directly
communicating with the bank for its settlement. Thus, petitioner cannot
now claim that he was prejudiced by the supposed “extension of time”
given by the bank to his co-debtor.
Same; Same; Since the liability of an accommodation party remains
not only primary but also unconditional to a holder for value, even if the
accommodated party receives an extension of the period for payment
without the consent of the accommodation party, the latter is still liable for
the whole obligation and such extension does not release him because as
far as a holder for value is concerned, he is a solidary co-debtor; 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.—Since the liability of an
accommodation party remains not only primary but also unconditional to a
holder for value, even if the accommodated party receives an extension of
the period for payment without the consent of the accommodation party,
the latter is still liable for the whole obligation and such extension does not
release him because as far as a holder for value is concerned, he is a
solidary co-debtor. In Clark v. Sellner, 42 Phil. 384 (1921), this Court held:
x x x 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.
250
250 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
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)
PETITION for review on certiorari of the decision and resolution of the
Court of Appeals.
The facts are stated in the opinion of the Court.
Breva and Breva Law Firm for petitioner.
Hildegardo F. Iñigo for Associated Bank.
Bernardino Bolcan, Jr. for Ang Eng Liong.
AZCUNA, J.:
This petition for certiorari under Rule 45 of the Rules on Civil Procedure
seeks to review the October 9, 2000 Decision1 and December 26, 2000
Resolution2 of the Court of Appeals in CA-G.R. CV No. 53413 which
reversed and set aside the January 5, 1996 Decision3 of the Regional Trial PN-No. DVO-78-382 PN-No. DVO-78-390
Court, Branch 16, Davao City, in Civil Case No. 20,299-90, dismissing the 12% Overdue P69,983.34 P42,530.00
complaint filed by respondents for collection of a sum of money. Charge
On August 28, 1990, Total P285,186.21 P174,952.75
respondent Associated Bank(formerly Associated Banking Corporation Less: Charges P500.00 None
and now known as United Overseas Bank Philippines) filed a collection paid
suit against Antonio Ang Eng Liong and petitioner Tomas Ang for the two Amount Due P334,686.21 P204,952.75
(2) promissory notes that they executed as principal debtor and co-maker,
respectively. _______________

_______________ 4
Records, pp. 1-5.
5
Id., at pp. 500, 563.
1
Penned by Associate Justice Martin S. Villarama, Jr., with Associate 6
Id., at pp. 501, 564.
Justices Romeo J. Callejo, Sr. (now retired Supreme Court Associate 252
Justice) and Juan Q. Enriquez, Jr. concurring. 252 SUPREME COURT REPORTS ANNOTATED
2
CA Rollo, p. 137. Ang vs. Associated Bank
3
Penned by Judge Romeo D. Marasigan. In his Answer,7 Antonio Ang Eng Liong only admitted to have secured a
251 loan amounting to P80,000. He pleaded though that the bank “be ordered
VOL. 532, SEPTEMBER 5, 2007 251 to submit a more reasonable computation” considering that there had been
Ang vs. Associated Bank “no correct and reasonable statement of account” sent to him by the bank,
In the Complaint,4 respondent Bank alleged that on October 3 and 9, which was allegedly collecting excessive interest, penalty charges, and
1978, the defendants obtained a loan of P50,000, evidenced by a attorney’s fees despite knowledge that his business was destroyed by fire,
promissory note bearing PN-No. DVO-78-382, and P30,000, evidenced by hence, he had no source of income for several years.
a promissory note bearing PN-No. DVO-78-390. As agreed, the loan would For his part, petitioner Tomas Ang filed an Answer with Counterclaim
be payable, jointly and severally, on January 31, 1979 and December 8, and Cross-claim.8 He interposed the affirmative defenses that: the bank is
1978, respectively. In addition, subsequent amendments5 to the not the real party in interest as it is not the holder of the promissory notes,
promissory notes as well as the disclosure statements6 stipulated that the much less a holder for value or a holder in due course; the bank knew that
loan would earn 14% interest rate per annum, 2% service charge per he did not receive any valuable consideration for affixing his signatures on
annum, 1% penalty charge per month from due date until fully paid, and the notes but merely lent his name as an accommodation party; he
attorney’s fees equivalent to 20% of the outstanding obligation. accepted the promissory notes in blank, with only the printed provisions
Despite repeated demands for payment, the latest of which were on and the signature of Antonio Ang Eng Liong appearing therein; it was
September 13, 1988 and September 9, 1986, on Antonio Ang Eng Liong the bank which completed the notes upon the orders, instructions, or
and Tomas Ang, respectively, respondent Bank claimed that the representations of his co-defendant; PN-No. DVO-78-382 was completed
defendants failed and refused to settle their obligation, resulting in a total in excess of or contrary to the authority given by him to his co-defendant
indebtedness of P539,638.96 as of July 31, 1990, broken down as follows: who represented that he would only borrow P30,000 from the bank; his
PN-No. DVO-78-382 PN-No. DVO-78-390 signature in PN-No. DVO-78-390 was procured through fraudulent means
Outstanding P50,000.00 P30,000.00 when his co-defendant claimed that his first loan did not push through; the
Balance promissory notes did not indicate in what capacity he was intended to be
Add Past due charges for Past due charges for bound; the bank granted his co-defendant successive extensions of time
4,199 days (from 01-31- 4,253 days (from 12-8-78 within which to pay, without his (Tomas Ang) knowledge and consent;
79 to 07-31-90) to 07-31-90) the bank imposed new and additional stipulations on interest, penalties,
14% Interest P203,538.98 P125,334.41 services charges and attorney’s fees more onerous than the terms of the
2% Service P11,663.89 P7,088.34 notes, without his knowledge and consent, in the absence of legal and
Charge factual basis and in violation of the Usury Law; the bank caused the
_______________
7
Id., at pp. 14-16.
8
Id., at pp. 20-26.
253
VOL. 532, SEPTEMBER 5, 2007 253
Ang vs. Associated Bank
inclusion in the promissory notes of stipulations such as waiver of
presentment for payment and notice of dishonor which are against public
policy; and the notes had been impaired since they were never presented
for payment and demands were made only several years after they fell due
when his co-defendant could no longer pay them.
Regarding his counterclaim, Tomas Ang argued that by reason of
the bank’s acts or omissions, it should be held liable for the amount of
P50,000 for attorney’s fees and expenses of litigation. Furthermore, on his
cross-claim against Antonio Ang Eng Liong, he averred that he should be
reimbursed by his co-defendant any and all sums that he may be adjudged
liable to pay, plus P30,000, P20,000 and P50,000 for moral and exemplary
damages, and attorney’s fees, respectively.
In its Reply,9 respondent Bank countered that it is the real party in
interest and is the holder of the notes since the Associated Banking
Corporation and AssociatedCitizens Bank are its predecessors-in-
interest. The fact that Tomas Ang never received any moneys in
consideration of the two (2) loans and that such was known to the bank are
immaterial because, as an accommodation maker, he is considered as a
solidary debtor who is primarily liable for the payment of the promissory
notes. Citing Section 29 of the Negotiable Instruments Law (NIL),
the bank posited that absence or failure of consideration is not a matter of
defense; neither is the fact that the holder knew him to be only an
accommodation party.
Respondent Bank likewise retorted that the promissory notes were
completely filled up at the time of their delivery. Assuming that such was
not the case, Sec. 14 of the NIL provides that the bank has the prima
facie authority to complete the blank form. Moreover, it is presumed that
one who has signed as a maker acted with care and had signed the
document with full knowledge of its content. The banknoted that
Tomas Ang is a prominent businessman in Davao City who
_______________
9
Id., at pp. 32-46.
254
254 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
has been engaged in the auto parts business for several years, hence,
certainly he is not so naïve as to sign the notes without knowing or
bothering to verify the amounts of the loans covered by them. Further, he
is already in estoppel since despite receipt of several demand letters there
was not a single protest raised by him that he signed for only one note in
the amount of P30,000.
It was denied by the bank that there were extensions of time for
payment accorded to Antonio Ang Eng Liong. Granting that such were the
case, it said that the same would not relieve Tomas Ang from liability as
he would still be liable for the whole obligation less the share of his co-
debtor who received the extended term.
The bank also asserted that there were no additional or new
stipulations imposed other than those agreed upon. The penalty charge,
service charge, and attorney’s fees were reflected in the amendments to
the promissory notes and disclosure statements. Reference to the Usury
Law was misplaced as usury is legally non-existent; at present, interest
can be charged depending on the agreement of the lender and the
borrower.
Lastly, the bank contended that the provisions on presentment for
payment and notice of dishonor were expressly waived by Tomas Ang and
that such waiver is not against public policy pursuant to Sections 82 (c)
and 109 of the NIL. In fact, there is even no necessity therefor since being
a solidary debtor he is absolutely required to pay and primarily liable on
both promissory notes.
On October 19, 1990, the trial court issued a preliminary pre-trial order
directing the parties to submit their respective pre-trial guide.10 When
Antonio Ang Eng Liong failed to submit his brief, the bank filed an ex
parte motion to declare him in default.11 Per Order of November 23, 1990,
the court
_______________
10
Id., at pp. 27-28.
11 Id., at pp. 59-60.
255
VOL. 532, SEPTEMBER 5, 2007 255
Ang vs. Associated Bank
granted the motion and set the ex parte hearing for the presentation of
the bank’s evidence.12 Despite Tomas Ang’s motion13 to modify the Order
so as to exclude or cancel the ex parte hearing based on then Sec. 4, Rule
18 of the old Rules of Court (now Sec. 3[c.], Rule 9 of the Revised Rules
on Civil Procedure), the hearing nonetheless proceeded.14
Eventually, a decision15 was rendered by the trial court on February 21,
1991. For his supposed bad faith and obstinate refusal despite several
demands from the bank, Antonio Ang Eng Liong was ordered to pay the
principal amount of P80,000 plus 14% interest per annum and 2% service
charge per annum. The overdue penalty charge and attorney’s fees were,
however, reduced for being excessive, thus:
“WHEREFORE, judgment is rendered against defendant Antonio Ang Eng
Liong and in favor of plaintiff, ordering the former to pay the latter:
On the first cause of action:
1. 1)the amount of P50,000.00 representing the principal obligation
with 14% interest per annum from June 27, 1983 with 2% service
charge and 6% overdue penalty charges per annum until fully
paid;
2. 2)P11,663.89 as accrued service charge; and
3. 3)P34,991.67 as accrued overdue penalty charge.
On the second cause of action:
1. 1)the amount of P50,000.00 (sic) representing the principal
account with 14% interest from June 27, 1983 with 2% service
charge and 6% overdue penalty charges per annumuntil fully
paid;
2. 2)P7,088.34 representing accrued service charge;
3. 3)P21,265.00 as accrued overdue penalty charge;
4. 4)the amount of P10,000.00 as attorney’s fees; and
_______________
12
Id., at p. 62.
13
Id., at pp. 64-66.
14 Id., at pp. 72-73.
15 Id., at pp. 84-86.
256
256 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
5) the amount of P620.00 as litigation expenses and to pay the costs.
SO ORDERED.”16
The decision became final and executory as no appeal was taken
therefrom. Upon the bank’s ex parte motion, the court accordingly issued
a writ of execution on April 5, 1991.17
Thereafter, on June 3, 1991, the court set the pre-trial conference
between the bank and Tomas Ang,18 who, in turn, filed a Motion to
Dismiss19 on the ground of lack of jurisdiction over the case in view of the
alleged finality of the February 21, 1991 Decision. He contended that Sec.
4, Rule 18 of the old Rules sanctions only one judgment in case of several
defendants, one of whom is declared in default. Moreover, in his
Supplemental Motion to Dismiss,20Tomas Ang maintained that he is
released from his obligation as a solidary guarantor and accommodation
party because, by the bank’s actions, he is now precluded from asserting
his cross-claim against Antonio Ang Eng Liong, upon whom a final and
executory judgment had already been issued.
The court denied the motion as well as the motion for reconsideration
thereon.21 Tomas Ang subsequently filed a petition for certiorari and
prohibition before this Court, which, however, resolved to refer the same
to the Court of Appeals.22 In accordance with the prayer of Tomas Ang,
the appellate court promulgated its Decision on January 29, 1992 in CA-
G.R. SP No. 26332, which annulled and set aside the portion of the Order
dated November 23, 1990 setting the ex parte presentation of the bank’s
evidence against Antonio Ang Eng
_______________
16 Id., at p. 86.
17
Id., at pp. 88-90, 144.
18 Id., at p. 91.
19 Id., at pp. 92-94.
20
Id., at pp. 95-96.
21 Id., at pp. 119-120, 123-127, 140.
22 Id., at p. 152.
257
VOL. 532, SEPTEMBER 5, 2007 257
Ang vs. Associated Bank
Liong, the Decision dated February 21, 1991 rendered against him based
on such evidence, and the Writ of Execution issued on April 5, 1991.23
Trial then ensued between the bank and Tomas Ang. Upon the latter’s
motion during the pre-trial conference, Antonio Ang Eng Liong was again
declared in default for his failure to answer the cross-claim within the
reglementary period.24
When Tomas Ang was about to present evidence in his behalf, he filed
a Motion for Production of Documents,25reasoning:
“x x x
2. That corroborative to, and/or preparatory or incident to his
testimony[,] there is [a] need for him to examine original records in the
custody and possession of plaintiff, viz.:
1. a.original Promissory Note (PN for brevity) # DVO-78-382 dated
October 3, 1978[;]
 2. b.original of Disclosure Statement in reference to PN # DVO-78-
382;
3. c.original of PN # DVO-78-390 dated October 9, 1978;
4. d.original of Disclosure Statement in reference to PN # DVO-78-
390;
5. e.Statement or Record of Account with the AssociatedBanking
Corporation or its successor, of Antonio Ang in CA No. 470 (cf.
Exh. “O”) including bank records, withdrawal slips, notices, other
papers and relevant dates relative to the overdraft of Antonio Eng
Liong in CA No. 470;
6. f.Loan Applications of Antonio Ang Eng Liong or borrower relative
to PN Nos. DVO-78-382 and DVO-78-390 (supra);
7. g.Other supporting papers and documents submitted by
Antonio Ang Eng Liong relative to his loan application vis-à-
vis PN. Nos. DVO-78-382 and DVO-78-390 such as financial
_______________
23 Id., at pp. 164-170.
24
TSN, January 18, 1993, p. 2.
25 Records, pp. 223-226.
258
258 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
1. statements, income tax returns, etc. as required by the
Central Bank or bank rules and regulations.
3. That the above matters are very material to the defenses of defendant
Tomas Ang, viz.:
– the bank is not a holder in due course when it
accepted the [PNs] in blank.
– The real borrower is Antonio Ang Eng Liong which
fact is known to the bank.
– That the PAYEE not being a holder in due course and
knowing that defendant Tomas Ang is merely an
accommodation party, the latter may raise against such
payee or holder or successor-in-interest (of the notes)
PERSONAL and EQUITABLE DEFENSES such as
FRAUD in INDUCEMENT, DISCHARGE ON NOTE,
Application of [Articles] 2079, 2080 and 1249 of the
Civil Code, NEGLIGENCE in delaying collection
despite Eng Liong’s OVERDRAFT in C.A. No.
470, etc.”26
In its Order dated May 16, 1994,27 the court denied the motion stating that
the promissory notes and the disclosure statements have already been
shown to and inspected by Tomas Ang during the trial, as in fact he has
already copies of the same; the Statements or Records of Account of
Antonio Ang Eng Liong in CA No. 470, relative to his overdraft, are
immaterial since, pursuant to the previous ruling of the court, he is being
sued for the notes and not for the overdraft which is personal to
Antonio Ang Eng Liong; and besides its nonexistence in the bank’s
records, there would be legal obstacle for the production and inspection of
the income tax return of Antonio Ang Eng Liong if done without his
consent.
When the motion for reconsideration of the aforesaid Order was denied,
Tomas Ang filed a petition for certiorariand prohibition with application for
preliminary injunction and restraining order before the Court of Appeals
docketed as CA-G.R. SP No. 34840.28 On August 17, 1994, however, the
Court
_______________
26 Id., at pp. 223-224.
27
Id., at pp. 234-235.
28 Id., at pp. 236-240, 247, 250-275.
259
VOL. 532, SEPTEMBER 5, 2007 259
Ang vs. Associated Bank
of Appeals denied the issuance of a Temporary Restraining Order.29
Meanwhile, notwithstanding its initial rulings that Tomas Ang was
deemed to have waived his right to present evidence for failure to appear
during the pendency of his petition before the Court of Appeals, the trial
court decided to continue with the hearing of the case.30
After the trial, Tomas Ang offered in evidence several documents,
which included a copy of the Trust Agreement between the Republic of the
Philippines and the Asset Privatization Trust, as certified by the notary
public, and news clippings from the Manila Bulletin dated May 18, 1994
and May 30, 1994.31 All the documentary exhibits were admitted for failure
of the bank to submit its comment to the formal offer.32 Thereafter,
Tomas Angelected to withdraw his petition in CA-G.R. SP No. 34840
before the Court of Appeals, which was then granted.33
On January 5, 1996, the trial court rendered judgment against
the bank, dismissing the complaint for lack of cause of action.34 It held that:
“Exh. “9” and its [sub-markings], the Trust Agreement dated 27 February
1987 for the defense shows that: the Associated Bankas of June 30,
1986 is one of DBP’s or Development Bank of the [Philippines’] non-
performing accounts for transfer; on February 27, 1987 through Deeds of
Transfer executed by and between the Philippine National Bank and
Development Bank of the Philippines and the National Government, both
financial institutions assigned, transferred and conveyed their non-
performing assets to the National Government; the National Government
in turn and as TRUSTOR,
_______________
29
Id., at p. 350.
30
Id., at pp. 358, 395, 401-402.
31
Id., at pp. 450, 529-542, 560-561; Exhibit “9” and its submarkings.
32
Id., at p. 487.
33
Rollo, p. 182.
34 Records, pp. 490-493.
260
260 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
transferred, conveyed and assigned by way of trust unto the Asset
Privatization Trust said non-performing assets, [which] took title to and
possession of, [to] conserve, provisionally manage and dispose[,] of said
assets identified for privatization or disposition; one of the powers and
duties of the APT with respect to trust properties consisting of receivables
is to handle the administration, collection and enforcement of the
receivables; to bring suit to enforce payment of the obligations or any
installment thereof or to settle or compromise any of such obligations, or
any other claim or demand which the government may have against any
person or persons[.]
The Manila Bulletin news clippings dated May 18, 1994 and May 30,
1994, Exh. “9-A,” “9-B, “9-C,” and “9-D,” show that the Monetary Board of
the Bangko Sentral ng Pilipinas approved the rehabilitation plan of
the Associated Bank. One main feature of the rehabilitation plan included
the financial assistance for the bank by the Philippine Deposit Insurance
Corporation (PDIC) by way of the purchase of AB Assets worth P1.3945
billion subject to a buy-back arrangement over a 10 year period. The PDIC
had approved of the rehab scheme, which included the purchase of AB’s
bad loans worth P1.86 at 25% discount. This will then be paid by AB within
a 10-year period plus a yield comparable to the prevailing market rates x x
x.
Based then on the evidence presented by the defendant Tomas Ang,
it would readily appear that at the time this suit for Sum of Money was filed
which was on August [28], 1990, the notes were held by the Asset
Privatization Trust by virtue of the Deeds of Transfer and Trust Agreement,
which was empowered to bring suit to enforce payment of the obligations.
Consequently, defendant Tomas Ang has sufficiently established that
plaintiff at the time this suit was filed was not the holder of the notes to
warrant the dismissal of the complaint.”35
Respondent Bank then elevated the case to the Court of Appeals. In the
appellant’s brief captioned, “ASSOCIATED BANK, Plaintiff-Appellant
versus ANTONIO ANG ENG LIONG and TOMAS ANG, Defendants,
TOMAS ANG, Defendant-Appellee,” the following errors were alleged:
_______________
35
Id., at pp. 492-493.
261
VOL. 532, SEPTEMBER 5, 2007 261
Ang vs. Associated Bank
I.
THE LOWER COURT ERRED IN NOT HOLDING DEFENDANT
ANTONIO ANG ENG LIONG AND DEFENDANT-APPELLEE
TOMAS ANG LIABLE TO PLAINTIFF-APPELLANT ON THEIR UNPAID
LOANS DESPITE THE LATTER’S DOCUMENTARY EXHIBITS
PROVING THE SAID OBLIGATIONS.
II.
THE LOWER COURT ERRED IN DISMISSING PLAINTIFF-
APPELLANT’S COMPLAINT ON THE BASIS OF NEWSPAPER
CLIPPINGS WHICH WERE COMPLETELY HEARSAY IN CHARACTER
AND IMPROPER FOR JUDICIAL NOTICE.36
The bank stressed that it has established the causes of action outlined in
its Complaint by a preponderance of evidence. As regards the Deed of
Transfer and Trust Agreement, it contended that the same were never
authenticated by any witness in the course of the trial; the Agreement,
which was not even legible, did not mention the promissory notes subject
of the Complaint; the bank is not a party to the Agreement, which showed
that it was between the Government of the Philippines, acting through the
Committee on Privatization represented by the Secretary of Finance as
trustor and the Asset Privatization Trust, which was created by virtue of
Proclamation No. 50; and the Agreement did not reflect the signatures of
the contracting parties. Lastly, the bank averred that the news items
appearing in the Manila Bulletin could not be the subject of judicial notice
since they were completely hearsay in character.37
On October 9, 2000, the Court of Appeals reversed and set aside the
trial court’s ruling. The dispositive portion of the Decision38 reads:

_______________
36
CA Rollo, p. 23.
37
Id., at pp. 27-30.
38
Id., at pp. 79-84.
262
262 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
“WHEREFORE, premises considered, the Decision of the Regional Trial
Court of Davao City, Branch 16, in Civil Case No. 20,299-90 is hereby
REVERSED AND SET ASIDE and another one entered ordering
defendant-appellee Tomas Ang to pay plaintiff-
appellant Associated Bank the following:
1. 1.P50,000.00 representing the principal amount of the loan under
PN-No. DVO-78-382 plus 14% interest thereon per
annum computed from January 31, 1979 until the full amount
thereof is paid;
2. 2.P30,000.00 representing the principal amount of the loan under
PN-No. DVO-78-390 plus 14% interest thereon per
annum computed from December 8, 1978 until the full amount
thereof is paid;
All other claims of the plaintiff-appellant are DISMISSED for lack of
legal basis. Defendant-appellee’s counterclaim is likewise DISMISSED for
lack of legal and factual bases.
No pronouncement as to costs.
SO ORDERED.”39
The appellate court disregarded the bank’s first assigned error for being
“irrelevant in the final determination of the case” and found its second
assigned error as “not meritorious.” Instead, it posed for resolution the
issue of whether the trial court erred in dismissing the complaint for
collection of sum of money for lack of cause of action as the bank was said
to be not the “holder” of the notes at the time the collection case was filed.
In answering the lone issue, the Court of Appeals held that the bank is
a “holder” under Sec. 191 of the NIL. It concluded that despite the
execution of the Deeds of Transfer and Trust Agreement, the Asset
Privatization Trust cannot be declared as the “holder” of the subject
promissory notes for the reason that it is neither the payee or indorsee of
the notes in possession thereof nor is it the bearer of said notes. The Court
of Appeals observed that the bank, as the payee, did not indorse
_______________
39
Id., at p. 83.
263
VOL. 532, SEPTEMBER 5, 2007 263
Ang vs. Associated Bank
the notes to the Asset Privatization Trust despite the execution of the
Deeds of Transfer and Trust Agreement and that the notes continued to
remain with the bankuntil the institution of the collection suit.
With the bank as the “holder” of the promissory notes, the Court of
Appeals held that Tomas Ang is accountable therefor in his capacity as an
accommodation party. Citing Sec. 29 of the NIL, he is liable to the bank in
spite of the latter’s knowledge, at the time of taking the notes, that he is
only an accommodation party. Moreover, as a co-maker who agreed to be
jointly and severally liable on the promissory notes, Tomas Ang cannot
validly set up the defense that he did not receive any consideration therefor
as the fact that the loan was granted to the principal debtor already
constitutes a sufficient consideration.
Further, the Court of Appeals agreed with the bankthat the experience
of Tomas Ang in business rendered it implausible that he would just sign
the promissory notes as a comaker without even checking the real amount
of the debt to be incurred, or that he merely acted on the belief that the first
loan application was cancelled. According to the appellate court, it is
apparent that he was negligent in falling for the alibi of Antonio Ang Eng
Liong and such fact would not serve to exonerate him from his
responsibility under the notes.
Nonetheless, the Court of Appeals denied the claims of the bank for
service, penalty and overdue charges as well as attorney’s fees on the
ground that the promissory notes made no mention of such charges/fees.
In his motion for reconsideration,40 Tomas Ang raised for the first time
the assigned errors as follows:
“x x x
2) Related to the above jurisdictional issues, defendant-appellee
Tomas Ang has recently discovered that upon the filing of
_______________
40
Id., at pp. 89-133.
264
264 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
the complaint on August 28, 1990, under the jurisdictional rule laid down in
BP Blg. 129, appellant bank fraudulently failed to specify the amount
of compounded interest at 14% per annum, service charges at 2% per
annum and overdue penalty charges at 12% per annum in the prayer of
the complaint as of the time of its filing, paying a total of only P640.00(!!!)
as filing and court docket fees although the total sum involved as of that
time was P647,566.75 including 20% attorney’s fees. In fact, the stated
interest in the body of the complaint alone amount to P328,373.39 (which
is actually compounded and capitalized) in both causes of action and the
total service and overdue penalties and charges and attorney’s fees further
amount to P239,193.36 in both causes of action, as of July 31, 1990, the
time of filing of the complaint. Significantly, appellant fraudulently misled
the Court, describing the 14% imposition as interest, when in fact the
same was capitalized as principal by appellant bank every month to earn
more interest, as stated in the notes. In view thereof, the trial court never
acquired jurisdiction over the case and the same may not be now corrected
by the filing of deficiency fees because the causes of action had already
prescribed and more importantly, the jurisdiction of the Municipal Trial
Court had been increased to P100,000.00 in principal claims last March
20, 1999, pursuant to SC Circular No. 21-99, section 5 of RA No. 7691,
and section 31, Book I of the 1987 Administrative Code. In other words, as
of today, jurisdiction over the subject falls within the exclusive jurisdiction
of the MTC, particularly if the bank foregoes capitalization of the stipulated
interest.
3) BY FAILING TO GIVE NOTICE OF ITS APPEAL AND APPEAL
BRIEF TO APPELLEE ANG ENG LIONG, THE APPEALED JUDGMENT
OF THE TRIAL COURT WHICH LEFT OUT TOMAS ANG’S CROSS-
CLAIM AGAINST ENG LIONG (BECAUSE IT DISMISSED THE MAIN
CLAIM), HAD LONG BECOME FINAL AND EXECUTORY, AS AGAINST
ENG LIONG. Accordingly, Tomas Ang’s right of subrogation
against Ang Eng Liong, expressed in his cross-claim, is now SEVERAL
TIMES foreclosed because of the fault or negligence of
appellant bank since 1979 up to its insistence of an ex parte trial, and now
when it failed to serve notice of appeal and appellant’s brief upon him.
Accordingly, appellee Tomas Ang should be released from his suretyship
obligation pursuant to Art. 2080 of the Civil Code. The above is related to
the issues abovestated.
265
VOL. 532, SEPTEMBER 5, 2007 265
Ang vs. Associated Bank
4) This Court may have erred in ADDING or ASSIGNING its own bill of
error for the benefit of appellant bank which defrauded the judiciary by the
payment of deficient docket fees.”41
Finding no cogent or compelling reason to disturb the Decision, the Court
of Appeals denied the motion in its Resolution dated December 26, 2000.42
Petitioner now submits the following issues for resolution:
1. “1.Is [A]rticle 2080 of the Civil Code applicable to discharge
petitioner Tomas Ang as accommodation maker or surety
because of the failure of [private] respondent bank to serve its
notice of appeal upon the principal debtor, respondent Eng
Liong?
2. 2.Did the trial court have jurisdiction over the case at all?
3. 3.Did the Court of Appeals [commit] error in assigning its own error
and raising its own issue?
4. 4.Are petitioner’s other real and personal defenses such as
successive extensions coupled with fraudulent collusion to hide
Eng Liong’s default, the payee’s grant of additional burdens,
coupled with the insolvency of the principal debtor, and the
defense of incomplete but delivered instrument, meritorious?”43
Petitioner allegedly learned after the promulgation of the Court of Appeals’
decision that, pursuant to the parties’ agreement on the compounding of
interest with the principal amount (per month in case of default), the interest
on the promissory notes as of July 31, 1990 should have been only
P81,647.22 for PN No. DVO-78-382 (instead of P203,538.98) and
P49,618.33 for PN No. DVO-78-390 (instead of P125,334.41) while the
principal debt as of said date should increase to P647,566.75 (instead of
P539,638.96). He submits that the bank carefully and shrewdly hid the fact
by describing the amounts as interest instead of being part of either the
principal or penalty in order to pay a lesser amount of docket
_______________
41
Id., at pp. 90-91.
42
Id., at p. 137.
43 Rollo, pp. 33-34.
266
266 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
fees. According to him, the total fees that should have been paid at the
time of the filing of the complaint on August 28, 1990 was P2,216.30 and
not P614.00 or a shortage of 71%. Petitioner contends that the bank may
not now pay the deficiency because the last demand letter sent to him was
dated September 9, 1986, or more than twenty years have elapsed such
that prescription had already set in. Consequently, the bank’s claim must
be dismissed as the trial court loses jurisdiction over the case.
Petitioner also argues that the Court of Appeals should not have
assigned its own error and raised it as an issue of the case, contending
that no question should be entertained on appeal unless it has been
advanced in the court below or is within the issues made by the parties in
the pleadings. At any rate, he opines that the appellate court’s decision
that the bank is the real party in interest because it is the payee named in
the note or the holder thereof is too simplistic since: (1) the power and
control of Asset Privatization Trust over the bank are clear from the explicit
terms of the duly certified trust documents and deeds of transfer and are
confirmed by the newspaper clippings; (2) even under P.D. No. 902-A or
the General Banking Act, where a corporation or a bank is under
receivership, conservation or rehabilitation, it is only the representative
(liquidator, receiver, trustee or conservator) who may properly act for said
entity, and, in this case, the bank was held by Asset Privatization Trust as
trustee; and (3) it is not entirely accurate to say that the payee who has not
indorsed the notes in all cases is the real party in interest because the
rights of the payee may be subject of an assignment of incorporeal rights
under Articles 1624 and 1625 of the Civil Code.
Lastly, petitioner maintains that when respondent Bank served its
notice of appeal and appellant’s brief only on him, it rendered the judgment
of the trial court final and executory with respect to Antonio Ang Eng Liong,
which, in effect, released him (Antonio Ang Eng Liong) from any and all
liability under the promissory notes and, thereby, foreclosed peti-
267
VOL. 532, SEPTEMBER 5, 2007 267
Ang vs. Associated Bank
tioner’s cross-claims. By such act, the bank, even if it be the “holder” of the
promissory notes, allegedly discharged a simple contract for the payment
of money (Sections 119 [d] and 122, NIL [Act No. 2031]), prevented a
surety like petitioner from being subrogated in the shoes of his principal
(Article 2080, Civil Code), and impaired the notes, producing the effect of
payment (Article 1249, Civil Code).
The petition is unmeritorious.
Procedurally, it is well within the authority of the Court of Appeals to
raise, if it deems proper under the circumstances obtaining, error/s not
assigned on an appealed case. In Mendoza v. Bautista,44 this Court
recognized the broad discretionary power of an appellate court to waive
the lack of proper assignment of errors and to consider errors not assigned,
thus:
“As a rule, no issue may be raised on appeal unless it has been brought
before the lower tribunal for its consideration. Higher courts are precluded
from entertaining matters neither alleged in the pleadings nor raised during
the proceedings below, but ventilated for the first time only in a motion for
reconsideration or on appeal.
However, as with most procedural rules, this maxim is subject to
exceptions. Indeed, our rules recognize the broad discretionary power of
an appellate court to waive the lack of proper assignment of errors and to
consider errors not assigned. Section 8 of Rule 51 of the Rules of Court
provides:
SEC. 8. Questions that may be decided.—No error which does not
affect the jurisdiction over the subject matter or the validity of the judgment
appealed from or the proceedings therein will be considered, unless stated
in the assignment of errors, or closely related to or dependent on an
assigned error and properly argued in the brief, save as the court may pass
upon plain errors and clerical errors.
Thus, an appellate court is clothed with ample authority to review
rulings even if they are not assigned as errors in the appeal in these
instances: (a) grounds not assigned as errors but affecting
_______________
44
G.R. No. 143666, March 18, 2005, 453 SCRA 691.
268
268 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
jurisdiction over the subject matter; (b) matters not assigned as errors on
appeal but are evidently plain or clerical errors within contemplation of law;
(c) matters not assigned as errors on appeal but consideration of which is
necessary in arriving at a just decision and complete resolution of the case
or to serve the interests of justice or to avoid dispensing piecemeal justice;
(d) matters not specifically assigned as errors on appeal but raised in the
trial court and are matters of record having some bearing on the issue
submitted which the parties failed to raise or which the lower court ignored;
(e) matters not assigned as errors on appeal but closely related to an error
assigned; and (f) matters not assigned as errors on appeal but upon which
the determination of a question properly assigned is dependent. (Citations
omitted)”45
To the Court’s mind, even if the Court of Appeals regarded petitioner’s two
assigned errors as “irrelevant” and “not meritorious,” the issue of whether
the trial court erred in dismissing the complaint for collection of sum of
money for lack of cause of action (on the ground that the bank was not the
“holder” of the notes at the time of the filing of the action) is in reality closely
related to and determinant of the resolution of whether the lower court
correctly ruled in not holding Antonio Ang Eng Liong and petitioner
Tomas Angliable to the bank on their unpaid loans despite documentary
exhibits allegedly proving their obligations and in dismissing the complaint
based on newspaper clippings. Hence, no error could be ascribed to the
Court of Appeals on this point.
Now, the more relevant question is: who is the real party in interest at
the time of the institution of the complaint, is it the bank or the Asset
Privatization Trust?
To answer the query, a brief history on the creation of the Asset
Privatization Trust is proper.

Taking into account the imperative need of formally launching a
program for the rationalization of the government corporate sector, then
President Corazon C. Aquino
_______________
45 Id., at pp. 702-703.
269
VOL. 532, SEPTEMBER 5, 2007 269
Ang vs. Associated Bank
issued Proclamation No. 5046 on December 8, 1986. As one of the twin
cornerstones of the program was to establish the privatization of a good
number of government corporations, the proclamation created the Asset
Privatization Trust, which would, for the benefit of the National
Government, take title to and possession of, conserve, provisionally
manage and dispose of transferred assets that were identified for
privatization or disposition.47
In accordance with the provisions of Section 2348 of the proclamation,
then President Aquino subsequently issued Administrative Order No. 14
on February 3, 1987, which
_______________
46 PROCLAIMING AND LAUNCHING APROGRAM FOR THE
EXPEDITIOUS DISPOSITION AND PRIVATIZATION OF CERTAIN
GOVERNMENT CORPORATIONS AND/OR THE ASSETS THEREOF
AND CREATING THE COMMITTEE ON PRIVATIZATION AND THE
ASSET PRIVATIZATION TRUST.
47 Sec. 3, Art. II and Sec. 9, Art. III of Proclamation No. 50. In addition,
the term “assets” is defined under Sec. 2 (1) of the Proclamation as:
1) Assets shall include (i) receivables and other obligations due to
government institutions under credit, lease, indemnity and other
agreements together with all collateral security and other rights (including
but not limited to rights in relation to shares of stock in corporations such
as voting rights as well as rights to appoint directors of corporations or
otherwise engage in the management thereof) granted to such institutions
by contract or operation of law to secure or enforce the right of payment of
such obligations; (ii) real and personal property of any kind owned or held
by the government institutions, including shares of stock in corporations,
obtained by such government institutions, whether directly or indirectly,
through foreclosure or other means, in settlement of such obligations; (iii)
shares of stock and other investments held by government institutions; and
(iv) the government institutions themselves, whether as parent or
subsidiary corporations.
48
Sec. 23 of the Proclamation reads:
SEC. 23. Mechanics of Transfer of Assets.—As soon as practicable, but
not later than six months from the date of the issuance of this Proclamation,
the President, acting through
270
270 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
approved the identification of and transfer to the National Government of
certain assets (consisting of loans, equity investments, accrued interest
receivables, acquired assets and other assets) and liabilities (consisting of
deposits, borrowings, other liabilities and contingent guarantees) of the De-
_______________
the Committee on Privatization, shall identify such assets of government
institutions as appropriate for privatization and divestment in an
appropriate instrument describing such assets or identifying the loan or
other transactions giving rise to the receivables, obligations and other
property constituting assets to be transferred.
The Committee shall, from the list of assets deemed appropriate for
divestment, identify assets to be transferred to the Trust or to be referred
to the government institutions in an appropriate instrument, which upon
execution by the Committee shall constitute as the operative act of transfer
or referral of the assets described therein, and the Trust or the government
institution may thereupon proceed with the divestment in accordance with
the provisions of this Proclamation and guidelines issued by the
Committee.
Nothing in this Proclamation shall:
1. (1)Affect the rights of the National Government to pursue the
enforcement of any claim of a government institution in respect of
or in relation to any asset transferred hereunder;
2. (2)In relation to any debt hereby assigned and transferred to the
National Government of which a government institution is the
original creditor, give rise to any novation or requirement to obtain
the consent of the debtor; and
3. (3)In relation to any share of stock or any interest therein, give rise
to any claim by any other stockholder for enforcement of rights of
pre-emption or of first refusal or other similar rights, the provision
of any law to the contrary notwithstanding.
Where the contractual rights of creditors of any of the government
institutions involved may be affected by the exercise of the Committee or
the Trust of the powers granted herein, the Committee or the Trust shall
see to it that such rights are not impaired.
271
VOL. 532, SEPTEMBER 5, 2007 271
Ang vs. Associated Bank
velopment Bank of the Philippines (DBP) and the Philippine
National Bank (PNB). The transfer of assets was implemented through a
Deed of Transfer executed on February 27, 1987 between the National
Government, on one hand, and the DBP and PNB, on the other. In turn,
the National Government designated the Asset Privatization Trust to act as
its trustee through a Trust Agreement, whereby the nonperforming
accounts of DBP and PNB, including, among others, the DBP’s equity with
respondent Bank, were entrusted to the Asset Privatization Trust.49 As
provided for in the Agreement, among the powers and duties of the Asset
Privatization Trust with respect to the trust properties consisting of
receivables was to handle their administration and collection by bringing
suit to enforce payment of the obligations or any installment thereof or
settling or compromising any of such obligations or any other claim or
demand which the Government may have against any person or persons,
and to do all acts, institute all proceedings, and to exercise all other rights,
powers, and privileges of ownership that an absolute owner of the
properties would otherwise have the right to do.50Incidentally, the existence
of the Asset Privatization Trust would have expired five (5) years from the
date of issuance of Proclamation No. 50.51 However, its original term was
extended from December 8, 1991 up to August 31, 1992,52and again from
December 31, 1993 until June 30, 1995,53and then from July 1, 1995 up to
December 31, 1999,54 and further from January 1, 2000 until December
31, 2000.55Thenceforth, the Privatization and Management Office was
established and
_______________
49
Records, pp. 529-533, 543.
50
Id., at p. 530.
51 Sec. 9, Art. III of Proclamation No. 50.
52 Sec. 1 of Republic Act (R.A.) No. 7181.
53 Sec. 1 of R.A. No. 7661.
54 Sec. 1 of R.A. No. 7886.
55 Sec. 1 of R.A. No. 8758.
272
272 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
took over, among others, the powers, duties and functions of the Asset
Privatization Trust under the proclamation.56
Based on the above backdrop, respondent Bank does not appear to be
the real party in interest when it instituted the collection suit on August 28,
1990 against Antonio AngEng Liong and petitioner Tomas Ang. At the
time the complaint was filed in the trial court, it was the Asset Privatization
Trust which had the authority to enforce its claims against both debtors. In
fact, during the pre-trial conference, Atty. Roderick Orallo, counsel for
the bank, openly admitted that it was under the trusteeship of the Asset
Privatization Trust.57 The Asset Privatization Trust, which should have
been represented by the Office of the Government Corporate Counsel, had
the authority to file and prosecute the case.
The foregoing notwithstanding, this Court can not, at present, readily
subscribe to petitioner’s insistence that the case must be dismissed.
Significantly, it stands without refute, both in the pleadings as well as in the
evidence presented during the trial and up to the time this case reached
the Court, that the issue had been rendered moot with the occurrence of a
supervening event—the “buy-back” of the bank by its former owner,
Leonardo Ty, sometime in October 1993. By such re-acquisition from the
Asset Privatization Trust when the case was still pending in the lower court,
the bank reclaimed its real and actual interest over the unpaid promissory
notes; hence, it could rightfully qualify as a “holder”58 thereof under the NIL.
Notably, Section 29 of the NIL defines an accommodation party as a
person “who has signed the instrument as maker, drawer, acceptor, or
indorser, without receiving value there-
_______________
56
Sec. 2, Art. III of Executive Order No. 323, Series of 2000.
57
TSN, January 18, 1993, p. 7.
58 A “Holder” is defined under Sec. 191 of the NIL, as:
“Holder” means the payee or indorsee of a bill or note, who is in possession
of it, or the bearer thereof.
273
VOL. 532, SEPTEMBER 5, 2007 273
Ang vs. Associated Bank
for, and for the purpose of lending his name to some other person.” As
gleaned from the text, an accommodation party is one who meets all the
three requisites, viz.: (1) he must be a party to the instrument, signing as
maker, drawer, acceptor, or indorser; (2) he must not receive value
therefor; and (3) he must sign for the purpose of lending his name or credit
to some other person.59 An accommodation party lends his name to enable
the accommodated party to obtain credit or to raise money; he receives no
part of the consideration for the instrument but assumes liability to the other
party/ies thereto.60 The accommodation party is liable on the instrument to
a holder for value even though the holder, at the time of taking the
instrument, knew him or her to be merely an accommodation party, as if
the contract was not for accommodation.61
As petitioner acknowledged it to be, the relation between an
accommodation party and the accommodated party is one of principal and
surety—the accommodation party being the surety.62 As such, he is
deemed an original promisor and
_______________
59
Lim v. Saban, G.R. No. 163720, December 16, 2004, 447 SCRA
232, 244 and Crisologo-Jose v. Court of Appeals, G.R. No. 80599,
September 15, 1989, 177 SCRA 594, 598.
60
Spouses Gardose v. Tarroza, 352 Phil. 797, 807; 290 SCRA 186,
195-196 (1998) citing Philippine Bank of Commerce v. Aruego, G.R. Nos.
L-25836-37, January 31, 1981, 102 SCRA 530, 539-540.
61
Lim v. Saban, supra at p. 244; Garcia v. Llamas, G.R. No. 154127,
December 8, 2003, 417 SCRA 292, 304-305; Spouses Gardose v.
Tarroza, supra at p. 807; p. 196; Travel-On, Inc. v. Court of Appeals, G.R.
No. 56169, June 26, 1992, 210 SCRA 351, 357; and Ang Tiong v.
Ting, 130 Phil. 741, 744; 22 SCRA 713, 716 (1968).
62 Garcia v. Llamas, supra at p. 305; Agro Conglomerates, Inc. v. Court
of Appeals, 401 Phil. 644, 654-655; 348 SCRA 450, 457-458
(2000); Spouses Gardose v. Tarroza, supra at p. 807; p. 196; Caneda, Jr.
v. Court of Appeals, G.R. No. 81322, February 5, 1990, 181 SCRA 762,
772; Crisologo-Jose v. Court of Appeals, supra at p. 598; Prudencio v.
Court of Appeals, 227 Phil. 7, 12; 143 SCRA 7, 14 (1986); and Philippine
Bank of Commerce v. Aruego, supra at p. 539.
274
274 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
debtor from the beginning;63 he is considered in law as the same party as
the debtor in relation to whatever is adjudged touching the obligation of the
latter since their liabilities are interwoven as to be inseparable.64 Although
a contract of suretyship is in essence accessory or collateral to a valid
principal obligation, the surety’s liability to the creditor
is immediate, primary and absolute; he is directlyand equally bound with
the principal.65 As an equivalent of a regular party to the undertaking, a
surety becomes liable to the debt and duty of the principal obligor even
without possessing a direct or personal interest in the obligations nor does
he receive any benefit therefrom.66
Contrary to petitioner’s adamant stand, however, Article 208067 of the
Civil Code does not apply in a contract of suretyship.68 Art. 2047 of the Civil
Code states that if a person binds
_______________
63
Garcia v. Llamas, supra at p. 305.
64
Trade & Investment Development Corp. v. Roblett Industrial
Construction Corp., G.R. No. 139290, November 11, 2005, 474 SCRA
510, 531.
65
International Finance Corporation v. Imperial Textile Mills, Inc., G.R.
No. 160324, November 15, 2005, 475 SCRA 149, 160; Trade &
Investment Development Corp. v. Roblett Industrial Construction
Corp., Id., at p. 531; Garcia v. Llamas, supra at p. 305; Agro
Conglomerates, Inc. v. Court of Appeals, supra at p. 655; p. 458;
and Philippine Bank of Commerce v. Aruego, supra at p. 540.
66
International Finance Corporation v. Imperial Textile Mills, Inc., Id., at
pp. 160-161 and Trade & Investment Development Corp. v. Roblett
Industrial Construction Corp., Id., at p. 531.
67
Art. 2080 of the Civil Code provides:
Art. 2080. The guarantors, even though they be solidary, are released from
their obligation whenever by some act of the creditor they cannot be
subrogated to the rights, mortgages, and preferences of the latter.
68 E. Zobel, Inc. v. Court of Appeals, 352 Phil. 608, 618; 290 SCRA 1,
10 (1998); Inciong, Jr. v. Court of Appeals, 327 Phil. 364, 372-373; 257
SCRA 578, 586 (1996); and Bicol Savings & Loan Association v.
Guinhawa, G.R. No. 62415, August 20, 1990, 188 SCRA 642, 647.
275
VOL. 532, SEPTEMBER 5, 2007 275
Ang vs. Associated Bank
himself solidarily with the principal debtor, the provisions of Section 4,
Chapter 3, Title I, Book IV of the Civil Code must be observed. Accordingly,
Articles 1207 up to 1222 of the Code (on joint and solidary obligations)
shall govern the relationship of petitioner with the bank.
The case of Inciong, Jr. v. CA69 is illuminating:
“Petitioner also argues that the dismissal of the complaint against Naybe,
the principal debtor, and against Pantanosas, his comaker, constituted a
release of his obligation, especially because the dismissal of the case
against Pantanosas was upon the motion of private respondent itself. He
cites as basis for his argument, Article 2080 of the Civil Code which
provides that:
“The guarantors, even though they be solidary, are released from their
obligation whenever by come act of the creditor, they cannot be subrogated
to the rights, mortgages, and preferences of the latter.”
It is to be noted, however, that petitioner signed the promissory note as
a solidary co-maker and not as a guarantor. This is patent even from the
first sentence of the promissory note which states as follows:
 “Ninety one (91) days after date, for value received, I/we, JOINTLY and
SEVERALLY promise to pay to the PHILIPPINE BANK OF
COMMUNICATIONS at its office in the City of Cagayan de Oro, Philippines
the sum of FIFTY THOUSAND ONLY (P50,000.00) Pesos, Philippine
Currency, together with interest x x x at the rate of SIXTEEN (16)
percent per annumuntil fully paid.”
A solidary or joint and several obligation is one in which each debtor is
liable for the entire obligation, and each creditor is entitled to demand the
whole obligation. On the other hand, Article 2047 of the Civil Code states:
“By guaranty a person, called the guarantor, binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter
should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be
_______________
69
327 Phil. 364; 257 SCRA 578 (1996).
276
276 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
observed. In such a case the contract is called a suretyship.” (Italics
supplied.)
While a guarantor may bind himself solidarily with the principal debtor,
the liability of a guarantor is different from that of a solidary debtor. Thus,
Tolentino explains:
“A guarantor who binds himself in solidum with the principal debtor
under the provisions of the second paragraph does not become a solidary
co-debtor to all intents and purposes. There is a difference between a
solidary co-debtor, and a fiador in solidum(surety). The later, outside of the
liability he assumes to pay the debt before the property of the principal
debtor has been exhausted, retains all the other rights, actions and benefits
which pertain to him by reason of rights of the fiansa; while a solidary co-
debtor has no other rights than those bestowed upon him in Section 4,
Chapter 3, Title I, Book IV of the Civil Code.”
Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on
joint and several obligations. Under Art. 1207 thereof, when there are two
or more debtors in one and the same obligation, the presumption is that
obligation is joint so that each of the debtors is liable only for a
proportionate part of the debt. There is a solidarily liability only when the
obligation expressly so states, when the law so provides or when the
nature of the obligation so requires.
Because the promissory note involved in this case expressly states that
the three signatories therein are jointly and severally liable, any one, some
or all of them may be proceeded against for the entire obligation. The
choice is left to the solidary creditor to determine against whom he will
enforce collection. (Citations omitted)”70
In the instant case, petitioner agreed to be “jointly and severally” liable
under the two promissory notes that he cosigned with Antonio Ang Eng
Liong as the principal debtor. This being so, it is completely immaterial if
the bank would opt to proceed only against petitioner or Antonio Ang Eng
Liong or both of them since the law confers upon the creditor the
prerogative to choose whether to enforce the entire obligation against any
one, some or allof the debtors. Nonetheless, petitioner, as an
accommodation party, may seek reimburse-
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70 Id., at pp. 372-374; pp. 586-588.
277
VOL. 532, SEPTEMBER 5, 2007 277
Ang vs. Associated Bank
ment from Antonio Ang Eng Liong, being the party accommodated.71
It is plainly mistaken for petitioner to say that just because
the bank failed to serve the notice of appeal and appellant’s brief to
Antonio Ang Eng Liong, the trial court’s judgment, in effect, became final
and executory as against the latter and, thereby, bars his (petitioner’s)
cross-claims against him: First, although no notice of appeal and
appellant’s brief were served to Antonio Ang Eng Liong, he was
nonetheless impleaded in the case since his name appeared in the caption
of both the notice and the brief as one of the defendants-
appellees;72 Second, despite including in the caption of the appellee’s brief
his co-debtor as one of the defendants-appellees, petitioner did not also
serve him a copy thereof;73 Third, in the caption of the Court of Appeals’
decision, Antonio Ang Eng Liong was expressly named as one of the
defendants-appellees;74 and Fourth, it was only in his motion for
reconsideration from the adverse judgment of the Court of Appeals that
petitioner belatedly chose to serve notice to the counsel of his co-
defendant-appellee.75
Likewise, this Court rejects the contention of Antonio Ang Eng Liong,
in his “special appearance” through counsel, that the Court of Appeals,
much less this Court, already lacked jurisdiction over his person or over
the subject matter relating to him because he was not a party in CA-G.R.
CV No. 53413. Stress must be laid of the fact that he had twice put himself
in default—one, in not filing a pre-trial brief and another, in not filing his
answer to petitioner’s cross-claims. As a matter of course,
Antonio Ang Eng Liong, being a party declared in
_______________
71
Lim v. Saban, supra at p. 244; Agro Conglomerates, Inc. v. Court of
Appeals, supra at p. 654; p. 457; and Caneda, Jr. v. Court of Appeals,
supra at p. 772.
72 CA Rollo, p. 21.
73
Id., at pp. 40, 75.
74
Id., at p. 79.
75
Id., at p. 133.
278
278 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
default, already waived his right to take part in the trial proceedings and
had to contend with the judgment rendered by the court based on the
evidence presented by the bank and petitioner. Moreover, even without
considering these default judgments, Antonio Ang Eng Liong even
categorically admitted having secured a loan totaling P80,000. In his
Answer to the complaint, he did not deny such liability but merely pleaded
that the bank“be ordered to submit a more reasonable computation”
instead of collecting excessive interest, penalty charges, and attorney’s
fees. For failing to tender an issue and in not denying the material
allegations stated in the complaint, a judgment on the pleadings76 would
have also been proper since not a single issue was generated by the
Answer he filed.
As the promissory notes were not discharged or impaired through any
act or omission of the bank, Sections 119 (d)77
_______________
76
Sec. 1, Rule 34 of the 1997 Revised Rules on Civil Procedure states:
Section 1. Judgment on the pleadings.—Where an answer fails to tender
an issue, or otherwise admits the material allegations of the adverse party’s
pleading, the court may, on motion of that party, direct judgment on such
pleading. However, in actions for declaration of nullity or annulment of
marriage or for legal separation, the material facts alleged in the complaint
shall always be proved.
77 Sec. 119 of the NIL provides:
SECTION 119. Instrument; how discharged.—A negotiable instrument is
discharged:
1. (a.)By payment in due course by or on behalf of the principal
debtor;
2. (b.)By payment in due course by the party accommodated, where
the instrument is made or accepted for his accommodation;
3. (c.)By the intentional cancellation thereof by the holder;
4. (d.)By any other act which will discharge a simple contract for
the payment of money;
279
VOL. 532, SEPTEMBER 5, 2007 279
Ang vs. Associated Bank
and 12278 of the NIL as well as Art. 124979 of the Civil Code would
necessarily find no application. Again, neither was petitioner’s right of
reimbursement barred nor was the bank’s right to proceed against
Antonio Ang Eng Liong expressly renounced by the omission to serve
notice of appeal and appellant’s brief to a party already declared in default.
Consequently, in issuing the two promissory notes, petitioner as
accommodating party warranted to the holder in due course that he would
pay the same according to its tenor.80 It is no defense to state on his part
that he did not receive any
_______________
1. (e.)When the principal debtor becomes the holder of the instrument
at or after maturity in his own right. (Emphasis ours)
78
Sec. 122 of the NIL states:
SECTION 122. Renunciation by holder.—The holder may expressly
renounce his rights against any party to the instrument before, at, or after
its maturity. An absolute and unconditional renunciation of his rights
against the principal debtor made at or after the maturity of the instrument
discharges the instrument. But a renunciation does not affect the rights of
a holder in due course without notice. A renunciation must be in writing
unless the instrument is delivered up to the person primarily liable thereon.
79 Art. 1249 of the Civil Code provides:
Art. 1249. The payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then in the
currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange
or other mercantile documents shall produce the effect of payment only
when they have been cashed, or when through the fault of the creditor
they have been impaired. (Emphasis ours)
80 Travel-On, Inc. v. Court of Appeals, supra at p. 357.
280
280 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
value therefor81 because the phrase “without receiving value therefor” used
in Sec. 29 of the NIL means “without receiving value by virtue of the
instrument” and not as it is apparently supposed to mean, “without
receiving payment for lending his name.”82 Stated differently, when a third
person advances the face value of the note to the accommodated party at
the time of its creation, the consideration for the note as regards its maker
is the money advanced to the accommodated party. It is enough that value
was given for the note at the time of its creation.83 As in the instant case, a
sum of money was received by virtue of the notes, hence, it is immaterial
so far as the bank is concerned whether one of the signers, particularly
petitioner, has or has not received anything in payment of the use of his
name.84
Under the law, upon the maturity of the note, a surety may pay the debt,
demand the collateral security, if there be any, and dispose of it to his
benefit, or, if applicable, subrogate 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.85 Regrettably, none of these were prudently done by petitioner.
When he was first notified by the banksometime in 1982 regarding his
accountabilities under the promissory notes, he lackadaisically relied on
Antonio AngEng Liong, who represented that he would take care of the
matter, instead of directly communicating with the bankfor its
settlement.86 Thus, petitioner cannot now claim that he was prejudiced by
the
_______________
81 Caneda, Jr. v. Court of Appeals, supra at p. 772; Crisologo-Jose v.
Court of Appeals, supra at p. 598; and Ang Tiong v. Ting, supra at p. 744;
p. 716.
82 Clark v. Sellner, 42 Phil. 384, 386 (1921).
83 Caneda, Jr. v. Court of Appeals, supra at p. 772.
84 Clark v. Sellner, supra at p. 386.
85 Id., at pp. 386-387.
86 TSN, February 21, 1995, p. 27 and TSN, April 4, 1995, p. 15.
281
VOL. 532, SEPTEMBER 5, 2007 281
Ang vs. Associated Bank
supposed “extension of time” given by the bank to his co-debtor.
Furthermore, since the liability of an accommodation party remains not
only primary but also unconditional to a holder for value, even if the
accommodated party receives an extension of the period for payment
without the consent of the accommodation party, the latter is still liable for
the whole obligation and such extension does not release him because as
far as a holder for value is concerned, he is a solidary co-debtor.87 In Clark
v. Sellner,88 this Court held:
“x x x 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)”89
_______________
87 Prudencio v. Court of Appeals, supra at pp. 12-13; p. 14.
88 42 Phil. 384 (1921).
89 Id., at pp. 387-388.
282
282 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
Neither can petitioner benefit from the alleged “insolvency” of
Antonio Ang Eng Liong for want of clear and convincing evidence proving
the same. Assuming it to be true, he also did not exercise diligence in
demanding security to protect himself from the danger thereof in the event
that he (petitioner) would eventually be sued by the bank. Further, whether
petitioner may or may not obtain security from Antonio Ang Eng Liong
cannot in any manner affect his liability to the bank; the said remedy is a
matter of concern exclusively between themselves as accommodation
party and accommodated party. The fact that petitioner stands only as a
surety in relation to Antonio Ang Eng Liong is immaterial to the claim of
the bank and does not a whit diminish nor defeat the rights of the latter as
a holder for value. To sanction his theory is to give unwarranted legal
recognition to the patent absurdity of a situation where a co-maker, when
sued on an instrument by a holder in due course and for value, can escape
liability by the convenient expedient of interposing the defense that he is a
merely an accommodation party.90
In sum, as regards the other issues and errors alleged in this petition,
the Court notes that these were the very same questions of fact raised on
appeal before the Court of Appeals, although at times couched in different
terms and explained more lengthily in the petition. Suffice it to say that the
same, being factual, have been satisfactorily passed upon and considered
both by the trial and appellate courts. It is doctrinal that only errors of law
and not of fact are reviewable by this Court in petitions for review
on certiorari under Rule 45 of the Rules of Court. Save for the most cogent
and compelling reason, it is not our function under the rule to examine,
evaluate or weigh the probative value of the evidence presented by the
parties all over again.91

_______________
90
Ang Tiong v. Ting, supra at p. 744; p. 716.
91
Batangas State University v. Bonifacio, G.R. No. 167762, December
15, 2005, 478 SCRA 142, 147-148 and Local Superior of the Servants of
Charity (Guanellians), Inc. v. Jody King Construction &
283
VOL. 532, SEPTEMBER 5, 2007 283
Ang vs. Associated Bank
WHEREFORE, the October 9, 2000 Decision and December 26, 2000
Resolution of the Court of Appeals in CA-G.R. CV No. 53413 are
AFFIRMED. The petition is DENIED for lack of merit.
No costs.
SO ORDERED.
Puno (C.J., Chairperson), Sandoval-
Gutierrez, Corona and Garcia, JJ., concur.
Judgment and resolution affirmed, petition denied.
Notes.—Payment is a mode of extinguishing an obligation—it should
be made to the person in whose favor the obligation has been constituted,
or his successor-in-interest, or any person authorized to receive it. (Culaba
vs. Court of Appeals, 427 SCRA 721 [2004])
Payment of the entire obligation by one or some of the solidary debtors
results in a corresponding obligation of the other debtors to reimburse the
paying debtor. (Republic Glass Corporation vs. Qua, 435 SCRA
480 [2004])
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
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 Decision1 which reversed the trial court's ruling, and (2)
the May 26, 2005 Resolution2which 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
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
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. 16096 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.7Respondent 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 same9-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.
173088112 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 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 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 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,31which
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 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 NIL39 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.

296 SUPREME COURT REPORTS ANNOTATED
Salas vs. Court of Appeals
G.R. No. 76788. January 22, 1990.*
JUANITA SALAS, petitioner, vs. HON. COURT OF APPEALS and
FILINVEST FINANCE & LEASING CORPORATION, respondents.
Commercial Law; Negotiable Instruments Law; The instrument in
order to be considered negotiable must contain the so-called “words of
negotiability i.e., must be payable to ‘order’ or ‘bearer’ ”.—Among others,
the instrument in order to be considered negotiable must contain the so-
called “words of negotiability___i.e., must be payable to ‘order’ or ‘bearer’. ”
Under Section 8 of the Negotiable Instruments Law, there are only two
ways by which an instrument may be made payable to order. There must
always be a specified person named in the instrument and the bill or note
is to be paid to the person designated in the instrument or to any person to
whom he has indorsed and delivered the same. Without the words “or
order” or “to the order of”, the instrument is payable only to the person
designated therein and is therefore non-negotiable. Any subsequent
purchaser thereof will not enjoy the advantages of being a holder of a
negotiable instrument, but will merely “step into the shoes” of the person
designated in the instrument and will thus be open to all defenses available
against the latter.
Same; Same; Same; The requisites under the law having been
complied with, the questioned promissory note shows that it is a negotiable
instrument.—A careful study of the questioned promissory note shows that
it is a negotiable instrument, having complied with the requisites under the
law as follows: [a] it is in writing and signed by the maker Juanita Salas; [b]
it contains an unconditional promise to pay the amount of P58,138.20; [c]
it is payable at a fixed or determinable future time which is “P1,614.95
monthly for 36 months due and payable on the 21st day of each month
starting March 21, 1980 thru and inclusive of Feb. 21, 1983;” [d] it is
payable to Violago Motor Sales Corporation, or order and as such, [e] the
drawee is named or indicated with certainty.
Same; Same; Same; Same; Filinvest is a holder in due course.—
Under the circumstances, there appears to be no question that Filinvest is
a holder in due course, having taken the instrument under the following
conditions: [a] it is complete and regular upon its face; [b] it became the
holder thereof before it was overdue, and
_______________
* THIRD DIVISION.
297
VOL. 181, JANUARY 22, 1990 297
Salas vs. Court of Appeals
without notice that it had previously been dishonored; [c] it took the
same in good faith and for value; and [d] when it is was negotiated to
Filinvest, the latter had no notice of any infirmity in the instrument or defect
in the title of VMS Corporation.
Same; Same; Same; Same; Same; Respondent corporation holds
the instrument free from any defect of title of prior parties and free from
defenses available to prior parties among themselves and may enforce
payment of the instrument for the full amount thereof.—Accordingly,
respondent corporation holds the instrument free from any defect of title of
prior parties, and free from defenses available to prior parties among
themselves, and may enforce payment of the instrument for the full amount
thereof. This being so, petitioner cannot set up against respondent the
defense of nullity of the contract of sale between her and VMS.
PETITION for certiorari to review the decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Arsenio C. Villalon, Jr. for petitioner.
Labaguis, Loyola, Angara & Associates for private respondent.
FERNAN, C.J.:
Assailed in this petition for review on certiorari is the decision of the Court
of Appeals in C.A.-G.R. CV No. 00757 entitled “Filinvest Finance & Leasing
Corporation v. Salas”, which modified the decision of the Regional Trial
Court of San Fernando, Pampanga in Civil Case No. 5915, a collection suit
between the same parties.
Records disclose that on February 6, 1980, Juanita Salas (hereinafter
referred to as petitioner) bought a motor vehicle from the Violago Motor
Sales Corporation (VMS for brevity) for P58,138.20 as evidenced by a
promissory note. This note was subsequently endorsed to Filinvest
Finance & Leasing Corporation (hereinafter referred to as private
respondent) which financed the purchase.
Petitioner defaulted in her installments beginning May 21, 1980
allegedly due to a discrepancy in the engine and chassis numbers of the
vehicle delivered to her and those indicated in
298
298 SUPREME COURT REPORTS ANNOTATED
Salas vs. Court of Appeals
the sales invoice, certificate of registration and deed of chattel mortgage,
which fact she discovered when the vehicle figured in an accident on 9 May
1980.
 This failure to pay prompted private respondent to initiate Civil Case
No. 5915 for a sum of money against petitioner before the Regional Trial
Court of San Fernando, Pampanga. In its decision dated September 10,
1982, the trial court held, thus:
“WHEREFORE, and in view of all the foregoing, judgment is hereby
rendered ordering the defendant to pay the plaintiff the sum of P28,414.40
with interest thereon at the rate of 14% from October 2, 1980 until the said
sum is fully paid; and the further amount of P1,000.00 as attorney’s fees.
“The counterclaim of defendant is dismissed. “With costs against
defendant.”1
Both petitioner and private respondent appealed the aforesaid decision to
the Court of Appeals.
Imputing fraud, bad faith and misrepresentation against VMS for having
delivered a different vehicle to petitioner, the latter prayed for a reversal of
the trial court’s decision so that she may be absolved from the obligation
under the contract.
On October 27, 1986, the Court of Appeals rendered its assailed
decision, the pertinent portion of which is quoted hereunder:
“The allegations, statements, or admissions contained in a pleading are
conclusive as against the pleader. A party cannot subsequently take a
position contradictory of, or inconsistent with his pleadings (Cunanan vs.
Amparo, 80 Phil. 227). Admissions made by the parties in the pleadings,
or in the course of the trial or other proceedings, do not require proof and
cannot be contradicted unless previously shown to have been made
through palpable mistake (Sec. 2, Rule 129, Revised Rules of Court; Sta.
Ana vs. Maliwat, L-23023, Aug. 31, 1968, 24 SCRA 1018).
“When an action or defense is founded upon a written instrument,
copied in or attached to the corresponding pleading as provided in the
preceding section, the genuineness and due execution of the instrument
shall be deemed admitted unless the adverse party, under oath,
_______________
1 Rollo, p. 21.
299
VOL. 181, JANUARY 22, 1990 299
Salas vs. Court of Appeals
specifically denied them, and sets forth what he claims to be the facts (Sec.
8, Rule 8, Revised Rules of Court; Hibbered vs. Rohde and Mc Millian, 32
Phil. 476).
“A perusal of the evidence shows that the amount of P58,138.20 stated
in the promissory note is the amount assumed by the plaintiff in financing
the purchase of defendant’s motor vehicle from the Violago Motor Sales
Corp., the monthly amortization of which is P1,614.95 for 36 months.
Considering that the defendant was able to pay twice (as admitted by the
plaintiff, defendant’s account became delinquent only beginning May,
1980) or in the total sum of P3,229.90, she is therefore liable to pay the
remaining balance of P54,908.30 at 14% per annumfrom October 2, 1980
until full payment.
“WHEREFORE, considering the foregoing, the appealed decision is
hereby modified ordering the defendant to pay the plaintiff the sum of
P54,908.30 at 14% per annum from October 2, 1980 until full payment.
The decision is AFFIRMED in all other respects. With costs to defendant.”2
Petitioner’s motion for reconsideration was denied; hence, the present
recourse.
In the petition before us, petitioner assigns twelve (12) errors which
focus on the alleged fraud, bad faith and misrepresentation of Violago
Motor Sales Corporation in the conduct of its business and which fraud,
bad faith and misrepresentation supposedly released petitioner from any
liability to private respondent who should instead proceed against VMS.3
Petitioner argues that in the light of the provision of the law on sales by
description4 which she alleges is applicable here, no contract ever existed
between her and VMS and therefore none had been assigned in favor of
private respondent.
She contends that it is not necessary, as opined by the appellate court,
to implead VMS as a party to the case before it can be made to answer for
damages because VMS was earlier sued by her for “breach of contract
with damages” before the Regional Trial Court of Olongapo City, Branch
LXXII, docketed as Civil Case No. 2916-0. She cites as authority the
decision therein where the court originally ordered petitioner to pay the
remaining balance of the motor vehicle installments in the amount of
_______________
2
Rollo, pp. 23-24.
3
Rollo, pp. 57-59.
4 Art. 1481, New Civil Code.
300
300 SUPREME COURT REPORTS ANNOTATED
Salas vs. Court of Appeals
P31,644.30 representing the difference between the agreed consideration
of P49,000.00 as shown in the sales invoice and petitioner’s initial
downpayment of P17,855.70 allegedly evidenced by a receipt. Said
decision was however reversed later on, with the same court ordering
defendant VMS instead to return to petitioner the sum of P17,855.70.
Parenthetically, said decision is still pending consideration by the First Civil
Case Division of the Court of Appeals, upon an appeal by VMS, docketed
as AC-G.R. No. 02922.5
 Private respondent in its comment, prays for the dismissal of the
petition and counters that the issues raised and the allegations adduced
therein are a mere rehash of those presented and already passed upon in
the court below, and that the judgment in the “breach of contract” suit
cannot be invoked as an authority as the same is still pending
determination in the appellate court.
We see no cogent reason to disturb the challenged decision. The
pivotal issue in this case is whether the promissory note in question is a
negotiable instrument which will bar completely all the available defenses
of the petitioner against private respondent.
Petitioner’s liability on the promissory note, the due execution and
genuineness of which she never denied under oath is, under the foregoing
factual milieu, as inevitable as it is clearly established.
The records reveal that involved herein is not a simple case of
assignment of credit as petitioner would have it appear, where the
assignee merely steps into the shoes of, is open to all defenses available
against and can enforce payment only to the same extent as, the assignor-
vendor.
Recently, in the case of Consolidated Plywood Industries Inc. v. IFC
Leasing and Acceptance Corp.,6 this Court had the occasion to clearly
distinguish between a negotiable and a nonnegotiable instrument.
Among others, the instrument in order to be considered negotiable must
contain the so-called “words of negotiability—i.e., must be payable to
‘order’ or ‘bearer.’ ” Under Section 8 of the
private respondent is not a holder in due course but a mere assignee
against whom all defenses available to the assignor may be raised.7
In the case at bar, however, the situation is different. Indubitably, the
basis of private respondent’s claim against petitioner is a promissory note
which bears all the earmarks of negotiability.
The pertinent portion of the note reads:
“PROMISSORY NOTE
(MONTHLY)
“P58,138.20
San Fernando, Pampanga, Philippines
Feb. 11, 1980
“For value received, I/We jointly and severally, promise to pay Violago
Motor Sales Corporation or order, at its office in San Fernando,
Pampanga, the sum of FIFTY EIGHT THOUSAND ONE HUNDRED
THIRTY EIGHT & 20/100 ONLY (P58,138.20)Philippine currency, which
amount includes interest at 14% per annum based on the diminishing
balance, the said principal sum, to be payable, without need of notice or
demand, in installments of the amounts following and at the dates
hereinafter set forth, to wit: P1,614.95 monthly for “36” months due and
payable on the 21st day of each month starting March 21, 1980 thru and
inclusive of February

_______________ __________
5 7
Rollo, p. 10. Ibid.
6 149 SCRA 459 (1987). 302
301 302 SUPREME COURT REPORTS ANNOTATED
VOL. 181, JANUARY 22, 1990 301 Salas vs. Court of Appeals
Salas vs. Court of Appeals 21, 1983. P_________ monthly for _________ months due and payable
Negotiable Instruments Law, there are only two ways by which an on the _________day of each month starting ________________,
instrument may be made payable to order. There must always be a ______198_______ thru and inclusive of ______, 198___ provided that
specified person named in the instrument and the bill or note is to be paid interest at 14% per annum shall be added on each unpaid installment from
to the person designated in the instrument or to any person to whom he maturity hereof until fully paid.
has indorsed and delivered the same. Without the words “or order” or “to xxx xxx xxx
the order of”, the instrument is payable only to the person designated “Maker: Co-Maker:
therein and is therefore non-negotiable. Any subsequent purchaser thereof (SIGNED) JUANITA SALAS ________________________
will not enjoy the advantages of being a holder of a negotiable instrument, _
but wil merely “step into the shoes” of the person designated in the Address:
instrument and will thus be open to all defenses available against the latter. _______________________ ________________________
Such being the situation in the above-cited case, it was held that therein _
 “W I T N E S S E S
SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE
TAN # TAN #
“PAY TO THE ORDER OF
FILINVEST FINANCE AND LEASING CORPORATION
“VIOLAGO MOTOR SALES CORPORATION
By: (SIGNED) GENEVEVA V. BALTAZAR
Cash Manager”8
A careful study of the questioned promissory note shows that it is a
negotiable instrument, having complied with the requisites under the law
as follows: [a] it is in writing and signed by the maker Juanita Salas; [b] it
contains an unconditional promise to pay the amount of P58,138.20; [c] it
is payable at a fixed or determinable future time which is “P1,614.95
monthly for 36 months due and payable on the 21st day of each month
starting March 21, 1980 thru and inclusive of Feb. 21, 1983;” [d] it is
payable to Violago Motor Sales Corporation, or order and as such, [e] the
drawee is named or indicated with certainty. 9
It was negotiated by indorsement in writing on the instrument itself
payable to the Order of Filinvest Finance and Leas-
__________
8
Ex. “7”; Folder of Exhibits.
9
Section 1, Negotiable Instruments Law, underscoring supplied.
303
VOL. 181, JANUARY 22, 1990 303
Salas vs. Court of Appeals
ing Corporation10 and it is an indorsement of the entire instrument.11
Under the circumstances, there appears to be no question that Filinvest
is a holder in due course, having taken the instrument under the following
conditions: [a] it is complete and regular upon its face; [b] it became the
holder thereof before it was overdue, and without notice that it had
previously been dishonored; [c] it took the same in good faith and for value;
and [d] when it was negotiated to Filinvest, the latter had no notice of any
infirmity in the instrument or defect in the title of VMS Corporation.12
Accordingly, respondent corporation holds the instrument free from any
defect of title of prior parties, and free from defenses available to prior
parties among themselves, and may enforce payment of the instrument for
the full amount thereof.13 This being so, petitioner cannot set up against
respondent the defense of nullity of the contract of sale between her and
VMS.
Even assuming for the sake of argument that there is an iota of truth in
petitioner’s allegation that there was in fact deception made upon her in
that the vehicle she purchased was different from that actually delivered to
her, this matter cannot be passed upon in the case before us, where the
VMS was never impleaded as a party.
Whatever issue is raised or claim presented against VMS must be
resolved in the “breach of contract” case.
Hence, we reach a similar opinion as did respondent court when it held:
“We can only extend our sympathies to the defendant (herein petitioner) in
this unfortunate incident. Indeed, there is nothing We can do as far as the
Violago Motor Sales Corporation is concerned since it is not a party in this
case. To even discuss the issue as to whether or not the Violago Motor
Sales Corporation is liable in the
__________
10 Section 31, NIL.
11 Section 32, NIL.
12 Section 52, NIL.
13 Section 57, Negotiable Instruments Law; Consolidated Plywood
Industries, Inc. v. IFC Leasing and Acceptance Corporation, (supra).
304
304 SUPREME COURT REPORTS ANNOTATED
Marina Port Services, Inc. vs. Iniego
transaction in question would amount, to denial of due process, hence,
improper and unconstitutional. She should have impleaded Violago Motor
Sales.”14
IN VIEW OF THE FOREGOING, the assailed decision is hereby
AFFIRMED. With costs against petitioner. SO ORDERED.
Gutierrez, Jr., Feliciano, Bidin and Cortés, JJ.,concur.
Decision affirmed.
Note.—The instrument is payable to order where it is drawn payable to
the order of a specified person or to him or his order (Consolidated
Plywood Industries Inc. vs. IFC Leasing and Acceptance Corporation, 149
SCRA 448).
 G.R. No. 107508. April 25, 1996.*
PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS,
CAPITOL CITY DEVELOPMENT BANK, PHILIPPINE BANK OF
COMMUNICATIONS, and F. ABANTE MARKETING, respondents.
Banks and Banking; Negotiable Instruments Law (Act No. 2031);
Checks; Words and Phrases; An alteration is said to be material if it alters
the effect of the instrument.—We shall first deal with the effect of the
alteration of the serial number on the negotiability of the check in question.
Petitioner anchors its position on Section 125 of the Negotiable
Instruments Law (ACT No. 2031). Petitioner alleges that there is no hard
and fast rule in the interpretation of the aforequoted provision of the
Negotiable Instruments Law. It maintains that under Section 125(f), any
change that alters the effect of the instrument is a material alteration. We
do not agree. An alteration is said to be material if it alters the effect of the
instrument. It means an unauthorized change in an instrument that
purports to modify in any respect the obligation of a party or an
unauthorized addition of words or numbers or other change to an
incomplete instrument relating to the obligation of a party. In other
______________
*
FIRST DIVISION.
492
492 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Court of Appeals
words, a material alteration is one which changes the items which are
required to be stated under Section 1 of the Negotiable Instruments Law.
Same; Same; Same; The drawee bank cannot refuse to accept a
check on the ground that the serial number of said check was altered, since
the serial number is an item which is not an essential requisite for
negotiability under Section 1 of the Negotiable Instruments Law.—The
case at bench is unique in the sense that what was altered is the serial
number of the check in question, an item which, it can readily be observed,
is not an essential requisite for negotiability under Section 1 of the
Negotiable Instruments Law. The aforementioned alteration did not change
the relations between the parties. The name of the drawer and the drawee
were not altered. The intended payee was the same. The sum of money
due to the payee remained the same. The check’s serial number is not the
sole indication of its origin. As succinctly found by the Court of Appeals,
the name of the government agency which issued the subject check was
prominently printed therein. The check’s issuer was therefore sufficiently
identified, rendering the referral to the serial number redundant and
inconsequential. Petitioner, thus cannot refuse to accept the check in
question on the ground that the serial number was altered, the same being
an immaterial or innocent one.
Damages; Attorney’s Fees; Where the lower courts fail to explicitly
state the rationale for the award of attorney’s fees, the same shall be
disallowed.—The amount of P10,000.00 as attorney’s fees is hereby
deleted. In their respective decisions, the trial court and the Court of
Appeals failed to explicitly state the rationale for the said award. The
foregoing is in conformity with the guiding principles laid down in a long line
of cases and reiterated recently in Consolidated Bank & Trust Corporation
(Solidbank) v. Court of Appeals: The award of attorney’s fees lies within
the discretion of the court and depends upon the circumstances of each
case. However, the discretion of the court to award attorney’s fees under
Article 2208 of the Civil Code of the Philippines demands factual, legal and
equitable justification, without which the award is a conclusion without a
premise and improperly left to speculation and conjecture. It becomes a
violation of the proscription against the imposition of a penalty on the right
to litigate (Universal Shipping Lines, Inc. v. Intermediate Appellate Court,
188 SCRA 170 [1990]). The reason for the award must be stated in the text
of the court’s decision. If it is
493
VOL. 256, APRIL 25, 1996 493
Philippine National Bank vs. Court of Appeals
stated only in the dispositive portion of the decision, the same shall
be disallowed. As to the award of attorney’s fees being an exception rather
than the rule, it is necessary for the court to make findings of fact and law
that would bring the case within the exception and justify the grant of the
award (Refractories Corporation of the Philippines v. Intermediate
Appellate Court, 176 SCRA 539 [1989]).
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Monsod, Tamargo, Valencia & Associates for private respondent
Capitol City Development Bank.
Siguion Reyna, Montecillo & Ongsiako for private respondent
Philippine Bank of Communications.
KAPUNAN, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court
assailing the decision dated April 29, 1992 of respondent Court of Appeals
in CA-G.R. CV No. 24776 and its resolution dated September 16, 1992,
denying petitioner Philippine National Bank’s motion for reconsideration of
said decision.
 The facts of the case are as follows:
A check with serial number 7-3666-223-3, dated August 7, 1981 in the
amount of P97,650.00 was issued by the Ministry of Education and Culture
(now Department of Education, Culture and Sports [DECS]) payable to F.
Abante Marketing. This check was drawn against Philippine National Bank
(herein petitioner).
On August 11, 1981, F. Abante Marketing, a client of Capitol City
Development Bank (Capitol), deposited the questioned check in its savings
account with said bank. In turn, Capitol deposited the same in its account
with the Philippine Bank of Communications (PBCom) which, in turn, sent
the check to petitioner for clearing.
494
494 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Court of Appeals
Petitioner cleared the check as good and, thereafter, PBCom credited
Capitol’s account for the amount stated in the check. However, on October
19, 1981, petitioner returned the check to PBCom and debited PBCom’s
account for the amount covered by the check, the reason being that there
was a “material alteration” of the check number.
PBCom, as collecting agent of Capitol, then proceeded to debit the
latter’s account for the same amount, and subsequently, sent the check
back to petitioner. Petitioner, however, returned the check to PBCom.
On the other hand, Capitol could not, in turn, debit F. Abante
Marketing’s account since the latter had already withdrawn the amount of
the check as of October 15, 1981. Capitol sought clarification from PBCom
and demanded the recrediting of the amount. PBCom followed suit by
requesting an explanation and re-crediting from petitioner.
Since the demands of Capitol were not heeded, it filed a civil suit with
the Regional Trial Court of Manila against PBCom which, in turn, filed a
third-party complaint against petitioner for reimbursement/indemnity with
respect to the claims of Capitol. Petitioner, on its part, filed a fourth-party
complaint against F. Abante Marketing.
On October 3, 1989, the Regional Trial Court rendered its decision the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered as follows:
1. 1.)On plaintiff’s complaint, defendant Philippine Bank of
Communications is ordered to re-credit or reimburse plaintiff
Capitol City Development Bank the amount of P97,650.00, plus
interest of 12 percent thereto from October 19, 1981 until the
amount is fully paid;
2. 2.)On Philippine Bank of Communications third-party complaint,
third-party defendant PNB is ordered to reimburse and indemnify
Philippine Bank of Communications for whatever amount PBCom
pays to plaintiff;
3. 3.)On Philippine National Bank’s fourth-party complaint, F. Abante
Marketing is ordered to reimburse and indemnify PNB for
whatever amount PNB pays to PBCom;
495
VOL. 256, APRIL 25, 1996 495
Philippine National Bank vs. Court of Appeals
1. 4.)On attorney’s fees, Philippine Bank of Communications is
ordered to pay Capitol City Development Bank attorney’s fees in
the amount of Ten Thousand (P10,000.00) Pesos; but PBCom is
entitled to reimbursement/indemnity from PNB; and Philippine
National Bank to be, in turn, reimbursed or indemnified by F.
Abante Marketing for the same amount;
2. 5.)The Counterclaims of PBCom and PNB are hereby dismissed;
3. 6.)No pronouncement as to costs.
SO ORDERED.1
An appeal was interposed before the respondent Court of Appeals which
rendered its decision on April 29, 1992, the decretal portion of which reads:
WHEREFORE, the judgment appealed from is modified by exempting
PBCom from liability to plaintiff-appellee for attorney’s fees and ordering
PNB to honor the check for P97,650.00, with interest as declared by the
trial court, and pay plaintiff-appellee attorney’s fees of P10,000.00. After
the check shall have been honored by PNB, PBCom shall re-credit plaintiff-
appellee’s account with it with the amount. No pronouncement as to costs.
SO ORDERED.2
A motion for reconsideration of the decision was denied by the respondent
Court in its resolution dated September 16, 1992 for lack of merit.3
Hence, petitioner filed the instant petition which raises the following
issues:
I
WHETHER OR NOT AN ALTERATION OF THE SERIAL NUMBER OF A
CHECK IS A MATERIAL ALTERATION UNDER THE NEGOTIABLE
INSTRUMENTS LAW.
_____________
1 CA Rollo, p. 28.
2 Rollo, pp. 21-28.
 3
Id., at 30-31. Philippine National Bank vs. Court of Appeals
496
496 SUPREME COURT REPORTS ANNOTATED 1. (f)Or which adds a place of payment where no place of payment is
Philippine National Bank vs. Court of Appeals specified, or any other change or addition which alters the effect
of the instrument in any respect, is a material alteration.
II
Petitioner alleges that there is no hard and fast rule in the interpretation of
WHETHER OR NOT A CERTIFICATION HEREIN ISSUED BY THE the aforequoted provision of the Negotiable Instruments Law. It maintains
MINISTRY OF EDUCATION CAN BE GIVEN WEIGHT IN EVIDENCE. that under Section 125(f), any change that alters the effect of the
instrument is a material alteration.6
III We do not agree.
An alteration is said to be material if it alters the effect of the
WHETHER OR NOT A DRAWEE BANK WHO FAILED TO RETURN A instrument.7 It means an unauthorized change in an instrument that
CHECK WITHIN THE TWENTY FOUR (24) HOUR CLEARING PERIOD purports to modify in any respect the obligation of a party or an
MAY RECOVER THE VALUE OF THE CHECK FROM THE COLLECTING unauthorized addition of words or numbers or other change to an
BANK. incomplete instrument relating to the obligation of a party.8 In other words,
a material alteration is one which changes the items which are required to
IV be stated under Section 1 of the Negotiable Instruments Law.
Section 1 of the Negotiable Instruments Law provides:
WHETHER OR NOT IN THE ABSENCE OF MALICE OR ILL WILL Section 1.—Form of negotiable instruments. An instrument to be
PETITIONER PNB MAY BE HELD LIABLE FOR ATTORNEY’S FEES.4 negotiable must conform to the following requirements:
We find no merit in the petition.
We shall first deal with the effect of the alteration of the serial number
1. (a)It must be in writing and signed by the maker or drawer;
on the negotiability of the check in question.
2. (b)Must contain an unconditional promise or order to pay a sum
Petitioner anchors its position on Section 125 of the Negotiable
certain in money;
Instruments Law (ACT No. 2031)5 which provides:
3. (c)Must be payable on demand, or at a fixed or determinable future
Section 125. What constitutes a material alteration.—Any alteration which
time;
changes:
4. (d)Must be payable to order or to bearer; and
5. (e)Where the instrument is addressed to a drawee, he must be
1. (a)The date; named or otherwise indicated therein with reasonable certainty.
2. (b)The sum payable, either for principal or interest;
3. (c)The time or place of payment;
_____________
4. (d)The number or the relations of the parties;
5. (e)The medium or currency in which payment is to be made; 6
Rollo, p. 11.
7
Agbayani, Commentaries and Jurisprudence on the COMMERCIAL
______________ LAWS OF THE PHILIPPINES, Vol. 1, 1992 ed., p. 403.
8 Nickles, Negotiable Instruments and other related Commercial
4
Id., at 10-11. Paper,1993 2nd ed., p. 168.
5
The Negotiable Instruments Law of the Philippines was patterned 498
after the draft approved by the Commissioner on Uniform State Laws in the 498 SUPREME COURT REPORTS ANNOTATED
United States. (Agbayani, Commentaries and Jurisprudence on the Philippine National Bank vs. Court of Appeals
COMMERCIAL LAWS OF THE PHILIPPINES, Vol. 1, pp. 99-100.) In his book entitled “Pandect of Commercial Law and Jurisprudence,”
497 Justice Jose C. Vitug opines that “an innocent alteration (generally,
VOL. 256, APRIL 25, 1996 497
changes on items other than those required to be stated under Sec. 1,
N.I.L.) and spoliation (alterations done by a stranger) will not avoid the
instrument, but the holder may enforce it only accordingly to its original
tenor.”9
Reproduced hereunder are some examples of material and immaterial
alterations:
A. Material Alterations:
1. (1)Substituting the words “or bearer” for “order.”
2. (2)Writing “protest waived” above blank indorsements.
3. (3)A change in the date from which interest is to run.
4. (4)A check was originally drawn as follows: “Iron County Bank,
Crystal Falls, Mich. Aug. 5, 1901. Pay to G.L. or order $9 fifty
cents CTR.” The insertion of the figure 5 before the figure 9, the
instrument being otherwise unchanged.
5. (5)Adding the words “with interest” with or without a fixed rate.
6. (6)An alteration in the maturity of a note, whether the time for
payment is thereby curtailed or extended.
7. (7)An instrument was payable “First Nat’l. Bank,” the plaintiff added
the word “Marion.”
8. (8)Plaintiff, without consent of the defendant, struck out the name
of the defendant as payee and inserted the name of the maker of
the original note.
9. (9)Striking out the name of the payee and substituting that of the
person who actually discounted the note.
10. (10)Substituting the address of the maker for the name of a co-
maker.10
______________
9 Vitug, Pandect of Commercial Law and Jurisprudence, 1990 ed., p.
55.
10
Agbayani, Commentaries & Jurisprudence on the COMMERCIAL
LAWS OF THE PHILIPPINES, Vol. 1, 1992 ed., pp. 403-404.
499
VOL. 256, APRIL 25, 1996 499
Philippine National Bank vs. Court of Appeals
B. Immaterial Alterations:
1. (1)Changing “I promise to pay” to “We promise to pay,” where there
are two makers.
2. (2)Adding the word “annual” after the interest clause.
3. (3)Adding the date of maturity as a marginal notation.
4. (4)Filling in the date of actual delivery where the makers of a note
gave it with the date in blank, “July . . . .”
5. (5)An alteration of the marginal figures of a note where the sum
stated in words in the body remained unchanged.
6. (6)The insertion of the legal rate of interest where the note had a
provision for “interest at . . . . . . . per cent.”
7. (7)A printed form of promissory note had on the margin the printed
words, “Extended to . . . .” The holder on or after maturity wrote in
the blank space the words “May 1, 1913,” as a reference
memorandum of a promise made by him to the principal maker at
the time the words were written to extend the time of payment.
8. (8)Where there was a blank for the place of payment, filling in the
blank with the place desired.
9. (9)Adding to an indorsee’s name the abbreviation “Cash” when it
had been agreed that the draft should be discounted by the trust
company of which the indorsee was cashier.
10. (10)The indorsement of a note by a stranger after its delivery to
the payee at the time the note was negotiated to the plaintiff.
11. (11)An extension of time given by the holder of a note to the
principal maker, without the consent of a surety co-maker.11
The case at bench is unique in the sense that what was altered is the serial
number of the check in question, an item which, it can readily be observed,
is not an essential requisite for negotiability under Section 1 of the
Negotiable Instruments Law. The aforementioned alteration did not change
the relations between the parties. The name of the drawer and the drawee
were not altered. The intended payee was the same. The sum of money
due to the payee remained the same. Despite these findings, however,
petitioner insists, that:
______________
11
Id., at 404-405.
500
500 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Court of Appeals
x x x.
It is an accepted concept, besides being a negotiable instrument itself,
that a TCAA check by its very nature is the medium of exchange of
governments (sic) instrumentalities or agencies. And as (a) safety
measure, every government office o(r) agency (is) assigned TCAA checks
bearing different number series.
 A concrete example is that of the disbursements of the Ministry of
Education and Culture. It is issued by the Bureau of Treasury sizeable
bundles of checks in booklet form with serial numbers different from other
government office or agency. Now, for fictitious payee to succeed in its
malicious intentions to defraud the government, all it need do is to get hold
of a TCAA Check and have the serial numbers of portion (sic) thereof
changed or altered to make it appear that the same was issued by the
MEC.
Otherwise, stated, it is through the serial numbers that (a) TCAA Check
is determined to have been issued by a particular office or agency of the
government.12
xxx
Petitioner’s arguments fail to convince. The check’s serial number is not
the sole indication of its origin. As succinctly found by the Court of Appeals,
the name of the government agency which issued the subject check was
prominently printed therein. The check’s issuer was therefore sufficiently
identified, rendering the referral to the serial number redundant and
inconsequential. Thus, we quote with favor the findings of the respondent
court:
xxx
If the purpose of the serial number is merely to identify the issuing
government office or agency, its alteration in this case had no material
effect whatsoever on the integrity of the check. The identity of the issuing
government office or agency was not changed thereby and the amount of
the check was not charged against the account of another government
office or agency which had no liability under the check. The owner and
issuer of the check is boldly and clearly printed on its face, second line
from the top: ”MINISTRY OF EDUCATION AND CULTURE,” and below
the name of the payee
______________
12
Rollo, p. 78.
501
VOL. 256, APRIL 25, 1996 501
Philippine National Bank vs. Court of Appeals
are the rubber-stamped words: ”Ministry of Educ. & Culture.” These words
are not alleged to have been falsely or fraudulently intercalated into the
check. The ownership of the check is established without the necessity of
recourse to the serial number. Neither is there any proof that the amount
of the check was erroneously charged against the account of a government
office or agency other than the Ministry of Education and Culture. Hence,
the alteration in the number of the check did not affect or change the liability
of the Ministry of Education and Culture under the check and, therefore, is
immaterial. The genuineness of the amount and the signatures therein of
then Deputy Minister of Education Hermenegildo C. Dumlao and of the
resident Auditor, Penomio C. Alvarez are not challenged. Neither is the
authenticity of the different codes appearing therein questioned x x
x.13 (Italics ours.)
Petitioner, thus cannot refuse to accept the check in question on the
ground that the serial number was altered, the same being an immaterial
or innocent one.
We now go to the second issue. It is petitioner’s submission that the
certification issued by Minrado C. Batonghinog, Cashier III of the MEC
clearly shows that the check was altered. Said certification reads:
July 22, 1985
TO WHOM IT MAY CONCERN:
This is to certify that according to the records of this Office, TCAA PNB
Check No. SN7-3666223-3 dated August 7, 1981 drawn in favor of F.
Abante Marketing in the amount of NINETY (S)EVEN THOUSAND SIX
HUNDRED FIFTY PESOS ONLY (P97,650.00) was not issued by this
Office nor released to the payee concerned. The series number of said
check was not included among those requisition by this Office from the
Bureau of Treasury.
Very truly yours,
(SGD.) MINRADO C. BATONGHINOG
Cashier III.14
______________
13
Rollo, pp. 21-28.
14
Rollo, p. 26.
502
502 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Court of Appeals
Petitioner claims that even if the author of the certification issued by the
Ministry of Education and Culture (MEC) was not presented, still the best
evidence of the material alteration would be the disputed check itself and
the serial number thereon. Petitioner thus assails the refusal of respondent
court to give weight to the certification because the author thereof was not
presented to identify it and to be cross-examined thereon.15
We agree with the respondent court.
The one who signed the certification was not presented before the trial
court to prove that the said document was really the document he prepared
and that the signature below the said document is his own signature.
Neither did petitioner present an eyewitness to the execution of the
questioned document who could possibly identify it.16Absent this proof, we
cannot rule on the authenticity of the contents of the certification. Moreover,
as we previously emphasized, there was no material alteration on the
check, the change of its serial number not being substantial to its
negotiability.
Anent the third issue—whether or not the drawee bank may still recover
the value of the check from the collecting bank even if it failed to return the
check within the twenty-four (24) hour clearing period because the check
was tampered—suffice it to state that since there is no material alteration
in the check, petitioner has no right to dishonor it and return it to PBCom,
the same being in all respects negotiable.
______________
15
Ibid.
16 R.J. Francisco, Evidence, 1993 ed., p. 505.
The due execution of a document could be proved through the testimony
of (1) the person who executed it; (2) the person before whom its execution
was acknowledged; or (3) any person who was present and saw it
executed and delivered, or who, after its execution and delivery, saw it and
recognized the signatures, or by a person to whom the parties to the
instrument had previously confessed the execution thereof . . . .
503
VOL. 256, APRIL 25, 1996 503
Philippine National Bank vs. Court of Appeals
However, the amount of P10,000.00 as attorney’s fees is hereby deleted.
In their respective decisions, the trial court and the Court of Appeals failed
to explicitly state the rationale for the said award. The trial court merely
ruled as follows:
With respect to Capitol’s claim for damages consisting of alleged loss of
opportunity, this Court finds that Capitol failed to adequately substantiate
its claim. What Capitol had presented was a self-serving, unsubstantiated
and speculative computation of what it allegedly could have earned or
realized were it not for the debit made by PBCom which was triggered by
the return and debit made by PNB. However, this Court finds that it would
be fair and reasonable to impose interest at 12% per annum on the
principal amount of the check computed from October 19, 1981 (the date
PBCom debited Capitol’s account) until the amount is fully paid and
reasonable attorney’s fees.17 (Italics ours.)
And contrary to the Court of Appeals’ resolution, petitioner unambiguously
questioned before it the award of attorney’s fees, assigning the latter as
one of the errors committed by the trial court.18
The foregoing is in conformity with the guiding principles laid down in a
long line of cases and reiterated recently in Consolidated Bank & Trust
Corporation (Solidbank) v. Court of Appeals:19
The award of attorney’s fees lies within the discretion of the court and
depends upon the circumstances of each case. However, the discretion of
the court to award attorney’s fees under Article 2208 of the Civil Code of
the Philippines demands factual, legal and equitable justification, without
which the award is a conclusion without a premise and improperly left to
speculation and conjecture. It becomes a violation of the proscription
against the imposition of a penalty on the right to litigate (Universal
Shipping Lines, Inc. v.
_______________
17
CA Rollo, Decision of RTC, p. 5.
18
CA Rollo, Brief of Appellant PNB, pp. 15-16.
19 246 SCRA 193 (1995); See also, Toyota Shaw, Inc. v. CA, 244
SCRA 320(1995).
504
504 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Court of Appeals
Intermediate Appellate Court, 188 SCRA 170 [1990]). The reason for the
award must be stated in the text of the court’s decision. If it is stated only
in the dispositive portion of the decision, the same shall be disallowed. As
to the award of attorney’s fees being an exception rather than the rule, it is
necessary for the court to make findings of fact and law that would bring
the case within the exception and justify the grant of the award
(Refractories Corporation of the Philippines v. Intermediate Appellate
Court, 176 SCRA 539 [1989]).
WHEREFORE, premises considered, except for the deletion of the award
of attorney’s fees, the decision of the Court of Appeals is hereby
AFFIRMED.
SO ORDERED.
Padilla (Chairman), Bellosillo, Vitug and Hermosisima, Jr.,
JJ., concur.
Judgment affirmed.
Notes.—The award of attorney’s fees must be disallowed where the
award of exemplary damages is eliminated. (Albenson Enterprises
Corporation vs. Court of Appeals, 217 SCRA 16 [1993])
Where a party had been paying his indebtedness in checks even when
the amount was only P6,350.00, with more reason then should he be
expected to pay in checks when the amount involved was P95,730.00.
(Rubio vs. Court of Appeals, 246 SCRA 255 [1995])
20 SUPREME COURT REPORTS ANNOTATED
International Corporate Bank, Inc. vs. Court of Appeals
G.R. No. 129910. September 5, 2006.*
THE INTERNATIONAL CORPORATE BANK, INC., petitioner, vs. COURT
OF APPEALS and PHILIPPINE NATIONAL BANK, respondents.
Appeals; Petitioners may not delegate upon the court the task of
determining under which rule the petition should fall; A petition cannot be
subsumed simultaneously under Rule 45 and Rule 65 of the Rules of
Court, and neither may petitioners delegate upon the court the task of
determining under which rule the petition should fall.—Respondent asserts
that the petition should be dismissed outright since petitioner availed of a
wrong mode of appeal. Respondent cites Ybañez v. Court of Appeals, 253
SCRA 540 (1996), where the Court ruled that “a petition cannot be
subsumed simultaneously under Rule 45 and Rule 65 of the Rules of
Court, and neither may petitioners delegate upon the court the task of
determining under which rule the petition should fall.”
Same; Certiorari; The remedies of appeal and certiorari are mutually
exclusive and not alternative or successive; However, this Court may set
aside technicality for justifiable reasons and in the interest of justice, we
will treat the petition as having been filed under Rule 45.—The remedies
of appeal and certiorari are mutually exclusive and not alternative or
successive. However, this Court may set aside technicality for justifiable
reasons. The petition before the Court is clearly meritorious. Further, the
petition was filed on time both under Rules 45 and 65. Hence, in
accordance with the liberal spirit which pervades the Rules of Court and in
the interest of justice, we will treat the petition as having been filed under
Rule 45.
Negotiable Instruments Law; Material Alterations; The alteration on
the serial number of a check is not a material alteration.—The question on
whether an alteration of the serial number of a check is a material alteration
under the Negotiable Instruments Law is already a settled matter.
In Philippine National Bank v. Court of Appeals, 256 SCRA 491 (1996), this
Court ruled that the alteration on the serial number of a check is not a
material alteration. Thus:
_______________
* THIRD DIVISION.
21
VOL. 501, SEPTEMBER 5, 2006 21
International Corporate Bank, Inc. vs. Court of Appeals
An alteration is said to be material if it alters the effect of the
instrument. It means an unauthorized change in an instrument that
purports to modify in any respect the obligation of a party or an
unauthorized addition of words or numbers or other change to an
incomplete instrument relating to the obligation of a party. In other words,
a material alteration is one which changes the items which are required to
be stated under Section 1 of the Negotiable Instrument[s] Law.
Appeals; There are instances when rules of procedure are relaxed in
the interest of justice, however, in this case, respondent did not proffer any
explanation for the late filing of the motion of reconsideration.—There are
instances when rules of procedure are relaxed in the interest of justice.
However, in this case, respondent did not proffer any explanation for the
late filing of the motion for reconsideration. Instead, there was a deliberate
attempt to deceive the Court of Appeals by claiming that the copy of the 10
October 1991 Decision was received on 22 October 1991 instead of on 16
October 1991. We find no justification for the posture taken by the Court of
Appeals in admitting the motion for reconsideration. Thus, the late filing of
the motion for reconsideration rendered the 10 October 1991 Decision final
and executory.
Banks and Banking; Material Alterations; Since there were no
material alterations on the checks, respondent as drawee bank has no right
to dishonor them and return them to petitioner, the collecting bank.—The
Court will not rule on the proper application of Central Bank Circular No.
580 in this case. Since there were no material alterations on the checks,
respondent as drawee bank has no right to dishonor them and return them
to petitioner, the collecting bank. Thus, respondent is liable to petitioner for
the value of the checks, with legal interest from the time of filing of the
complaint on 16 March 1982 until full payment. Further, considering that
respondent’s motion for reconsideration was filed late, the 10 October
1991 Decision, which held respondent liable for the value of the checks
amounting to P1,447,920, had become final and executory.
PETITION for review on certiorari of the amended decision and resolution
of the Court of Appeals.
The facts are stated in the opinion of the Court.
22
22 SUPREME COURT REPORTS ANNOTATED
International Corporate Bank, Inc. vs. Court of Appeals
Macalino & Associates for petitioner.
Salvador A. Uy for respondent.
CARPIO, J.:
The Case 7-4697011-6 10-02-81 Wintrade Marketing 90,960.00
Before the Court is a petition for review1 assailing the 9 August 1994 7-4697909-4 10-02-81 ABC Trading, Inc. 99,300.00
Amended Decision2 and the 16 July 1997 Resolution3 of the Court of 7-4697922-3 10-05-81 Golden Enterprises 96,630.00
Appeals in CA-G.R. CV No. 25209. The checks were deposited on the following dates for the following
The Antecedent Facts accounts:
The case originated from an action for collection of sum of money filed on Check Number Date Deposited Account Deposited
16 March 1982 by the International Corporate Bank, Inc.4 (“petitioner”) 7-3694621-4 7-23-81 CA 0060 02360 3
against the Philippine National Bank (“respondent”). The case was raffled 7-3694609-6 7-28-81 CA 0060 02360 3
to the then Court of First Instance (CFI) of Manila, Branch 6. The complaint 7-3666224-4 8-4-81 CA 0060 02360 3
was amended on 19 March 1982. The case was eventually reraffled to the 7-3528348-4 8-11-81 CA 0060 02360 3
Regional Trial Court of Manila, Branch 52 (“trial court”). 7-3666225-5 8-11-81 SA 0061 32331 7
The Ministry of Education and Culture issued 15 checks5drawn against 7-3688945-6 8-17-81 CA 0060 30982 5
respondent which petitioner accepted for deposit on various dates. The 7-4535674-1 8-26-81 CA 0060 02360 3
checks are as follows: 7-4535675-2 8-27-81 CA 0060 02360 3
7-4535699-5 8-31-81 CA 0060 30982 5
_______________ 7-4535700-6 8-24-81 SA 0061 32331 7
7-4697902-2 9-23-81 CA 0060 02360 3
1
Petitioner denominated the petition as filed under both Rule 45 and 7-4697925-6 9-23-81 CA 0060 30982 5
Rule 65 of the 1997 Rules of Civil Procedure. 7-4697011-6 10-7-81 CA 0060 02360 3
2 Penned by Associate Justice Serafin V.C. Guingona with Associate
7-4697909-4 10-7-81 CA 0060 30982 56
Justices Jorge S. Imperial and Justo P. Torres, Jr., concurring. Rollo, pp.
25-34. _______________
3 Penned by Associate Justice Jorge S. Imperial with Associate
6
Justices Ramon U. Mabutas, Jr. and Hilarion L. Aquino, concurring. Rollo, The deposit slip of Check No. 7-4697922-3 was not presented before
p. 23. the trial court.
4 Now the Union Bank of the Philippines. 24
5 The first 14 checks were the subject of the complaint while the last
24 SUPREME COURT REPORTS ANNOTATED
check was included in the amended complaint. International Corporate Bank, Inc. vs. Court of Appeals
23 After 24 hours from submission of the checks to respondent for clearing,
VOL. 501, SEPTEMBER 5, 2006 23 petitioner paid the value of the checks and allowed the withdrawals of the
International Corporate Bank, Inc. vs. Court of Appeals deposits. However, on 14 October 1981, respondent returned all the
Check Number Date Payee Amount checks to petitioner without clearing them on the ground that they were
7-3694621-4 7-20-81 Trade Factors, Inc. P 97,500.00 materially altered. Thus, petitioner instituted an action for collection of
7-3694609-6 7-27-81 Romero D. Palmares 98,500.50 sums of money against respondent to recover the value of the checks.
7-3666224-4 8-03-81 Trade Factors, Inc. 99,800.00 The Ruling of the Trial Court
7-3528348-4 8-07-81 Trade Factors, Inc. 98,600.00 The trial court ruled that respondent is expected to use reasonable
7-3666225-5 8-10-81 Antonio Lisan 98,900.00 business practices in accepting and paying the checks presented to it.
7-3688945-6 8-10-81 Antonio Lisan 97,700.00 Thus, respondent cannot be faulted for the delay in clearing the checks
7-4535674-1 8-21-81 Golden City Trading 95,300.00 considering the ingenuity in which the alterations were effected. The trial
7-4535675-2 8-21-81 Red Arrow Trading 96,400.00 court observed that there was no attempt from petitioner to verify the status
7-4535699-5 8-24-81 Antonio Lisan 94,200.00 of the checks before petitioner paid the value of the checks or allowed
7-4535700-6 8-24-81 Antonio Lisan 95,100.00 withdrawal of the deposits. According to the trial court, petitioner, as
7-4697902-2 9-18-81 Ace Enterprises, Inc. 96,000.00 collecting bank, could have inquired by telephone from respondent, as
7-4697925-6 9-18-81 Golden City Trading 93,030.00 drawee bank, about the status of the checks before paying their value.
Since the immediate cause of petitioner’s loss was the lack of caution of
its personnel, the trial court held that petitioner is not entitled to recover the
value of the checks from respondent.
The dispositive portion of the trial court’s Decision reads:
“WHEREFORE, judgment is hereby rendered dismissing both the
complaint and the counterclaim. Costs shall, however be assessed against
the plaintiff.
SO ORDERED.”7
Petitioner appealed the trial court’s Decision before the Court of Appeals.
_______________
7
Rollo, p. 295.
25
VOL. 501, SEPTEMBER 5, 2006 25
International Corporate Bank, Inc. vs. Court of Appeals
The Ruling of the Court of Appeals
In its 10 October 1991 Decision,8 the Court of Appeals reversed the trial
court’s Decision. Applying Section 4(c) of Central Bank Circular No. 580,
series of 1977,9 the Court of Ap-peals held that checks that have been
materially altered shall be returned within 24 hours after discovery of the
alteration. However, the Court of Appeals ruled that even if the drawee
bank returns a check with material alterations after discovery of the
alteration, the return would not relieve the drawee bank from any liability
for its failure to return the checks within the 24-hour clearing period. The
Court of Appeals explained:
_______________
8
Penned by Associate Justice Serafin V.C. Guingona with Associate
Justices Luis A. Javellana and Jorge S. Imperial, concurring. Rollo, pp. 47-
58.
9 Section 4(c) provides:
SECTION 4. Clearing Procedures.—
xxxx
(c) Procedure for Returned Items
Items which should be returned for any reason whatsoever shall be
presented not later than the next regular clearing for local exchanges. Out-
of-town exchanges shall be returned within the period specified in the
Memorandum to Authorized Agent Banks announcing the opening of
clearing facilities in each of the authorized regional clearing centers. x x x
Items which have been the subject of a material alteration or items
bearing a forged endorsement when such endorsement is necessary for
negotiation shall be returned within twenty-four (24) hours after discovery
of the alteration or the forgery but in no event beyond the period fixed or
provided by law for filing of a legal action by the returning bank/branch,
institution or entity against the bank/branch, institution or entity sending the
same.
xxxx
26
26 SUPREME COURT REPORTS ANNOTATED
International Corporate Bank, Inc. vs. Court of Appeals
“Does this mean that, as long as the drawee bank returns a check with
material alteration within 24 hour[s] after discovery of such alteration, such
return would have the effect of relieving the bank of any liability whatsoever
despite its failure to return the check within the 24-hour clearing house
rule?
We do not think so.
Obviously, such bank cannot be held liable for its failure to return the
check in question not later than the next regular clearing. However, this
Court is of the opinion and so holds that it could still be held liable if it fails
to exercise due diligence in verifying the alterations made. In other words,
such bank would still be expected, nay required, to make the proper
verification before the 24-hour regular clearing period lapses, or in cases
where such lapses may be deemed inevitable, that the required verification
should be made within a reasonable time.
The implication of the rule that a check shall be returned within the 24-
hour clearing period is that if the collecting bank paid the check before the
end of the aforesaid 24-hour clearing period, it would be responsible
therefor such that if the said check is dishonored and returned within the
24-hour clearing period, the drawee bank cannot be held liable. Would
such an implication apply in the case of materially altered checks returned
within 24 hours after discovery? This Court finds nothing in the letter of the
above-cited C.B. Circular that would justify a negative answer.
Nonetheless, the drawee bank could still be held liable in certain instances.
Even if the return of the check/s in question is done within 24 hours after
discovery, if it can be shown that the drawee bank had been patently
negligent in the performance of its verification function, this Court finds no
reason why the said bank should be relieved of liability.
Although banking practice has it that the presumption of clearance is
conclusive when it comes to the application of the 24-hour clearing period,
the same principle may not be applied to the 24-hour period vis-à-
vis material alterations in the sense that the drawee bank which returns
materially altered checks within 24 hours after discovery would be
conclusively relieved of any liability thereon. This is because there could
well be various intervening events or factors that could affect the rights and
obligations of the parties in cases such as the instant one including patent
negligence on the part of the drawee bank resulting in an unreasonable
delay in detecting the alterations. While it is true that the pertinent proviso
27
VOL. 501, SEPTEMBER 5, 2006 27
International Corporate Bank, Inc. vs. Court of Appeals
in C.B. Circular No. 580 allows the drawee bank to return the altered check
within the period “provided by law for filing a legal action,” this does not
mean that this would entitle or allow the drawee bank to be grossly
negligent and, in spite thereof, avail itself of the maximum period allowed
by the above-cited Circular. The discovery must be made within a
reasonable time taking into consideration the facts and circumstances of
the case. In other words, the aforementioned C.B. Circular does not
provide the drawee bank the license to be grossly negligent on the one
hand nor does it preclude the collecting bank from raising available
defenses even if the check is properly returned within the 24-hour period
after discovery of the material alteration.”10
The Court of Appeals rejected the trial court’s opinion that petitioner could
have verified the status of the checks by telephone call since such
imposition is not required under Central Bank rules. The dispositive portion
of the 10 October 1991 Decision reads:
“PREMISES CONSIDERED, the decision appealed from is hereby
REVERSED and the defendant-appellee Philippine National Bank is
declared liable for the value of the fifteen checks specified and enumerated
in the decision of the trial court (page 3) in the amount of P1,447,920.00.
SO ORDERED.”11
Respondent filed a motion for reconsideration of the 10 October 1991
Decision. In its 9 August 1994 Amended Decision, the Court of Appeals
reversed itself and affirmed the Decision of the trial court dismissing the
complaint.
In reversing itself, the Court of Appeals held that its 10 October 1991
Decision failed to appreciate that the rule on the return of altered checks
within 24 hours from the discovery of the alteration had been duly passed
by the Central Bank and accepted by the members of the banking system.
Until the rule is repealed or amended, the rule has to be applied.
_______________
10
Rollo, pp. 53-54.
11Id., at p. 58.
28
28 SUPREME COURT REPORTS ANNOTATED
International Corporate Bank, Inc. vs. Court of Appeals
Petitioner moved for the reconsideration of the Amended Decision. In its
16 July 1997 Resolution, the Court of Appeals denied the motion for lack
of merit.
Hence, the recourse to this Court.
The Issues
Petitioner raises the following issues in its Memorandum:
1. 1.Whether the checks were materially altered;
2. 2.Whether respondent was negligent in failing to recognize within
a reasonable period the altered checks and in not returning the
checks within the period; and
3. 3.Whether the motion for reconsideration filed by respondent was
out of time thus making the 10 October 1991 Decision final and
executory.12
The Ruling of This CourtFiling of the Petition under both Rules 45 and 65
Respondent asserts that the petition should be dismissed outright since
petitioner availed of a wrong mode of appeal. Respondent cites Ybañez v.
Court of Appeals,13 where the Court ruled that “a petition cannot be
subsumed simultaneously under Rule 45 and Rule 65 of the Rules of
Court, and neither may petitioners delegate upon the court the task of
determining under which rule the petition should fall.”
The remedies of appeal and certiorari are mutually exclusive and not
alternative or successive.14 However, this Court may set aside technicality
for justifiable reasons. The petition before the Court is clearly meritorious.
Further, the petition
_______________
12 Id., at pp. 251-252.
13 323 Phil. 643; 253 SCRA 540 (1996).
14 Ligon v. Court of Appeals, 355 Phil. 503; 294 SCRA 73 (1998).
29
VOL. 501, SEPTEMBER 5, 2006 29
International Corporate Bank, Inc. vs. Court of Appeals
was filed on time both under Rules 45 and 65.15 Hence, in accordance with
the liberal spirit which pervades the Rules of Court and in the interest of
justice,16 we will treat the petition as having been filed under Rule 45.
Alteration of Serial Number Not Material
The alterations in the checks were made on their serial numbers.
Sections 124 and 125 of Act No. 2031, otherwise known as the
Negotiable Instruments Law, provide:
SEC. 124. Alteration of instrument; effect of.—Where a negotiable
instrument is materially altered without the assent of all parties liable
thereon, it is avoided, except as against a party who has himself made,
authorized, or assented to the alteration and subsequent indorsers.
But when an instrument has been materially altered and is in the hands
of a holder in due course, not a party to the alteration, he may enforce
payment thereof according to its original tenor.
SEC. 125. What constitutes a material alteration.—Any alteration which
changes:
1. (a)The date;
2. (b)The sum payable, either for principal or interest;
3. (c)The time or place of payment;
4. (d)The number or the relations of the parties;
5. (e)The medium or currency in which payment is to be made; or
which adds a place of payment where no place of payment is
specified, or any other change or addition which alters the effect
of the instrument in any respect, is a material alteration.
The question on whether an alteration of the serial number of a check is a
material alteration under the Negotiable In-
_______________
15
Nuñez v. GSIS Family Bank, G.R. No. 163988, 17 November
2005, 475 SCRA 305.
16 Id.
30
30 SUPREME COURT REPORTS ANNOTATED
International Corporate Bank, Inc. vs. Court of Appeals
struments Law is already a settled matter. In Philippine National Bank v.
Court of Appeals, this Court ruled that the alteration on the serial number
of a check is not a material alteration. Thus:
“An alteration is said to be material if it alters the effect of the instrument.
It means an unauthorized change in an instrument that purports to modify
in any respect the obligation of a party or an unauthorized addition of words
or numbers or other change to an incomplete instrument relating to the
obligation of a party. In other words, a material alteration is one which
changes the items which are required to be stated under Section 1 of the
Negotiable Instrument[s] Law.”
Section 1 of the Negotiable Instruments Law provides:
“Section 1. Form of negotiable instruments.—An instrument to be
negotiable must conform to the following requirements:
1. (a)It must be in writing and signed by the maker or drawer;
2. (b)Must contain an unconditional promise or order to pay a sum
certain in money;
3. (c)Must be payable on demand, or at a fixed or determinable future
time;
4. (d)Must be payable to order or to bearer; and
5. (e)Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.
In his book entitled “Pandect of Commercial Law and Jurisprudence,”
Justice Jose C. Vitug opines that “an innocent alteration (generally,
changes on items other than those required to be stated under Sec. 1,
N.I.L.) and spoliation (alterations done by a stranger) will not avoid the
instrument, but the holder may enforce it only according to its original tenor.
xxxx
The case at the bench is unique in the sense that what was altered is
the serial number of the check in question, an item which, it can readily be
observed, is not an essential requisite for negotiability under Section 1 of
the Negotiable Instruments Law. The aforementioned alteration did not
change the relations between the parties. The name of the drawer and the
drawee were not altered. The in-
31
VOL. 501, SEPTEMBER 5, 2006 31
International Corporate Bank, Inc. vs. Court of Appeals
tended payee was the same. The sum of money due to the payee
remained the same. x x x
xxxx
The check’s serial number is not the sole indication of its origin. As
succinctly found by the Court of Appeals, the name of the government
agency which issued the subject check was prominently printed therein.
The check’s issuer was therefore sufficiently identified, rendering the
referral to the serial number redundant and inconsequential. x x x
xxxx
Petitioner, thus cannot refuse to accept the check in question on the
ground that the serial number was altered, the same being an immaterial
or innocent one.”17
Likewise, in the present case the alterations of the serial numbers do not
constitute material alterations on the checks.
Incidentally, we agree with the petitioner’s observation that the check
in the PNB case appears to belong to the same batch of checks as in the
present case. The check in the PNB case was also issued by the Ministry
of Education and Culture. It was also drawn against PNB, respondent in
this case. The serial number of the check in the PNB case is 7-3666-223-
3 and it was issued on 7 August 1981.
Timeliness of Filing of Respondent’s Motion for Reconsideration 21
Philippine National Bank v. Court of Appeals, supra note 17.
Respondent filed its motion for reconsideration of the 10 October 1991 22 Article 2209, Civil Code.
Decision on 6 November 1991. Respondent’s motion for reconsideration 33
states that it received a copy of the 10 October 1991 Decision on 22 VOL. 501, SEPTEMBER 5, 2006 33
October 1991.18 Thus, it appears that the motion for reconsideration was International Corporate Bank, Inc. vs. Court of Appeals
filed on time. However, the Registry Return Receipt shows that counsel for WHEREFORE, we SET ASIDE the 9 August 1994 Amended Decision and
respondent or his agent received a copy of the 10 October the 16 July 1997 Resolution of the Court of Appeals. We rule that
respondent Philippine National Bank is liable to petitioner International
_______________ Corporate Bank, Inc. for the value of the checks amounting to P1,447,920,
with legal interest from 16 March 1982 until full payment. Costs against
17
326 Phil. 504; 256 SCRA 491 (1996), 511-516; pp. 497-501. respondent.
18
CA Rollo, p. 86. SO ORDERED.
32 Quisumbing (Chairperson), Carpio-Morales, Tingaand Velasco,
32 SUPREME COURT REPORTS ANNOTATED Jr., JJ., concur.
International Corporate Bank, Inc. vs. Court of Appeals Amended decision and resolution set aside.
1991 Decision on 16 October 1991,19 not on 22 October 1991 as Notes.—The petitioners are mandated to state categorically in their
respondent claimed. Hence, the Court of Appeals is correct when it noted petition the rule under which the same is filed, and not merely leave the
that the motion for reconsideration was filed late. Despite its late filing, the matter for the Court’s determination. (Morato vs. Court of Appeals, 436
Court of Appeals resolved to admit the motion for reconsideration “in the SCRA 438 [2004])
interest of substantial justice.”20 In determining whether the proper remedy is a special civil action for
There are instances when rules of procedure are relaxed in the interest certiorari or a petition for review, the nature of the questions intended to be
of justice. However, in this case, respondent did not proffer any explanation raised on appeal is of no consequence. (Heirs of Lourdes Potenciano
for the late filing of the motion for reconsideration. Instead, there was a Padilla vs. Court of Appeals, 425 SCRA 236 [2004])
deliberate attempt to deceive the Court of Appeals by claiming that the
copy of the 10 October 1991 Decision was received on 22 October 1991
instead of on 16 October 1991. We find no justification for the posture taken
by the Court of Appeals in admitting the motion for reconsideration. Thus,
the late filing of the motion for reconsideration rendered the 10 October
1991 Decision final and executory.
The 24-Hour Clearing Time
The Court will not rule on the proper application of Central Bank Circular
No. 580 in this case. Since there were no material alterations on the
checks, respondent as drawee bank has no right to dishonor them and
return them to petitioner, the collecting bank.21 Thus, respondent is liable
to petitioner for the value of the checks, with legal interest from the time of
filing of the complaint on 16 March 1982 until full payment.22 Further,
considering that respondent’s motion for reconsideration was filed late, the
10 October 1991 Decision, which held respondent liable for the value of
the checks amounting to P1,447,920, had become final and executory.

_______________
19 Id., at p. 73.
20
Id., at p. 90.
620 SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
G.R. No. 107382. January 31, 1996.*
ASSOCIATED BANK, petitioner, vs. HON. COURT OF APPEALS,
PROVINCE OF TARLAC and PHILIPPINE NATIONAL BANK,
respondents.
G.R. No. 107612. January 31, 1996.*
PHILIPPINE NATIONAL BANK, petitioner, vs.HONORABLE COURT OF
APPEALS, PROVINCE OF TARLAC, and ASSOCIATED BANK,
respondents.
Commercial Law; Negotiable Instruments Law; Forgery; A person
whose signature to an instrument was forged was never a party and never
consented to the contract which allegedly gave rise to such instrument.—
A forged signature, whether it be that of the drawer or the payee, is wholly
inoperative and no one can gain title to the instrument through it. A person
whose signature to an instrument was forged was never a party and never
consented to the contract which allegedly gave rise to such instrument.
Section 23 does not avoid the instrument but only the forged signature.
Thus, a forged indorsement does not operate as the payee’s indorsement.
Same; Same; Same; Parties who warrant or admit the genuineness
of the signature in question and those who, by their acts, silence or
negligence are estopped from setting up the defense of forgery, are
precluded from using this defense.—The exception to the general rule in
Section 23 is where “a party against whom it is sought to enforce a right is
precluded from setting up the forgery or want of authority.” Parties who
warrant or admit the genuineness of the signature in question and those
who, by their acts, silence or negligence are estopped from setting up the
defense of forgery, are precluded from using this defense. Indorsers,
persons negotiating by delivery and acceptors are warrantors of the
genuineness of the signatures on the instrument.
Same; Same; Same; When the indorsement is a forgery, only the
person whose signature is forged can raise the defense of forgery against
a holder in due course.—In bearer instruments, the signa-
____________________________
*
SECOND DIVISION.
621
VOL. 252, JANUARY 31, 1996 621
Associated Bank vs. Court of Appeals
ture of the payee or holder is unnecessary to pass title to the
instrument. Hence, when the indorsement is a forgery, only the person
whose signature is forged can raise the defense of forgery against a holder
in due course.
Same; Same; Same; When the holder’s indorsement is forged, all
parties prior to the forgery may raise the real defense of forgery against all
parties subsequent thereto.—Where the instrument is payable to order at
the time of the forgery, such as the checks in this case, the signature of its
rightful holder (here, the payee hospital) is essential to transfer title to the
same instrument. When the holder’s indorsement is forged, all parties prior
to the forgery may raise the real defense of forgery against all parties
subsequent thereto.
Same; Same; Same; Indorser cannot interpose the defense that
signatures prior to him are forged.—An indorser of an order instrument
warrants “that the instrument is genuine and in all respects what it purports
to be; that he has a good title to it; that all prior parties had capacity to
contract; and that the instrument is at the time of his indorsement valid and
subsisting.” He cannot interpose the defense that signatures prior to him
are forged.
Same; Same; Same; A collecting bank where a check is deposited
and which indorses the check upon presentment with the drawee bank is
such an indorser.—A collecting bank where a check is deposited and which
indorses the check upon presentment with the drawee bank, is such an
indorser. So even if the indorsement on the check deposited by the bank’s
client is forged, the collecting bank is bound by his warranties as an
indorser and cannot set up the defense of forgery as against the drawee
bank.
Same; Same; Same; Payment under a forged indorsement is not to
the drawer’s order.—The bank on which a check is drawn, known as the
drawee bank, is under strict liability to pay the check to the order of the
payee. The drawer’s instructions are reflected on the face and by the terms
of the check. Payment under a forged indorsement is not to the drawer’s
order. When the drawee bank pays a person other than the payee, it does
not comply with the terms of the check and violates its duty to charge its
customer’s (the drawer) account only for properly payable items. Since the
drawee bank did not pay a holder or other person entitled to receive
payment, it has no right to reimbursement from the drawer. The general
rule then is that the drawee bank may not debit the drawer’s account and
is not
622
622 SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
entitled to indemnification from the drawer. The risk of loss must
perforce fall on the drawee bank.
Same; Same; Same; Drawer is precluded from asserting forgery
where the drawee bank can prove a failure by the customer/drawer to
exercise ordinary care that substantially contributed to the making of the
forged signature.—However, if the drawee bank can prove a failure by the
customer/drawer to exercise ordinary care that substantially contributed to
the making of the forged signature, the drawer is precluded from asserting
the forgery.
Same; Same; Same; Drawee bank can seek reimbursement or a
return of the amount it paid from the presentor bank or person.—In cases
involving checks with forged indorsements, such as the present petition,
the chain of liability does not end with the drawee bank. The drawee bank
may not debit the account of the drawer but may generally pass liability
back through the collection chain to the party who took from the forger and,
of course, to the forger himself, if available. In other words, the drawee
bank can seek reimbursement or a return of the amount it paid from the
presentor bank or person. Theoretically, the latter can demand
reimbursement from the person who indorsed the check to it and so on.
The loss falls on the party who took the check from the forger, or on the
forger himself.
Same; Same; Same; A collecting bank which indorses a check
bearing a forged indorsement and presents it to the drawee bank
guarantees all prior indorsements including the forged indorsement.—
More importantly, by reason of the statutory warranty of a general indorser
in Section 66 of the Negotiable Instruments Law, a collecting bank which
indorses a check bearing a forged indorsement and presents it to the
drawee bank guarantees all prior indorsements, including the forged
indorsement. It warrants that the instrument is genuine, and that it is valid
and subsisting at the time of his indorsement. Because the indorsement is
a forgery, the collecting bank commits a breach of this warranty and will be
accountable to the drawee bank.
Same; Same; Same; Drawee banks not similarly situated as the
collecting bank.—The drawee bank is not similarly situated as the
collecting bank because the former makes no warranty as to the
genuineness of any indorsement. The drawee bank’s duty is but to
623
VOL. 252, JANUARY 31, 1996 623
Associated Bank vs. Court of Appeals
verify the genuineness of the drawer’s signature and not of the
indorsement because the drawer is its client.
Same; Same; Same; Drawee bank has the duty to promptly inform
the presentor of the forgery upon discovery.—Hence, the drawee bank can
recover the amount paid on the check bearing a forged indorsement from
the collecting bank. However, a drawee bank has the duty to promptly
inform the presentor of the forgery upon discovery. If the drawee bank
delays in informing the presentor of the forgery, thereby depriving said
presentor of the right to recover from the forger, the former is deemed
negligent and can no longer recover from the presentor.
Same; Same; Same; Rule mandates that the checks be returned
within twenty-four hours after discovery of the forgery but in no event
beyond the period fixed by law for filing a legal action.—The rule mandates
that the checks be returned within twenty-four hours after discovery of the
forgery but in no event beyond the period fixed by law for filing a legal
action. The rationale of the rule is to give the collecting bank (which
indorsed the check) adequate opportunity to proceed against the forger. If
prompt notice is not given, the collecting bank may be prejudiced and lose
the opportunity to go after its depositor.
PETITIONS for review of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Jose A. Soluta, Jr. and Associates for Associated Bank.
Santiago, Jr., Vidad, Corpus & Associates for Philippine National
Bank.
ROMERO, J.:
Where thirty checks bearing forged endorsements are paid, who bears the
loss, the drawer, the drawee bank or the collecting bank?
This is the main issue in these consolidated petitions for review
assailing the decision of the Court of Appeals in “Province of Tarlac v.
Philippine National Bank v. Associated Bank v. Fausto Pangilinan, et al.”
(CA-G.R. No. CV No.
624
624 SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
17962).1
The facts of the case are as follows:
The Province of Tarlac maintains a current account with the Philippine
National Bank (PNB) Tarlac Branch where the provincial funds are
deposited. Checks issued by the Province are signed by the Provincial
Treasurer and countersigned by the Provincial Auditor or the Secretary of
the Sangguniang Bayan.
A portion of the funds of the province is allocated to the Concepcion
Emergency Hospital.2 The allotment checks for said government hospital
are drawn to the order of “Concepcion Emergency Hospital, Concepcion,
Tarlac” or “The Chief, Concepcion Emergency Hospital, Concepcion,
Tarlac.” The checks are released by the Office of the Provincial Treasurer
and received for the hospital by its administrative officer and cashier.
In January 1981, the books of account of the Provincial Treasurer were
post-audited by the Provincial Auditor. It was
____________________________
1
Penned by Justice Asaali S. Isnani, with Associate Justices Arturo S.
Buena and Ricardo P. Galvez, concurring, dated September 30, 1992.
Rollo, p. 22.
2 Provincial aid was given irregularly. Hospital staff would often call the
provincial treasurer’s office to inquire whether there was an allotment
check for the hospital. The hospital’s administrative officer and cashier
would then go to the provincial treasurer’s office to pick up the check.
Checks received by the hospital are deposited in the account of the
National Treasury with the PNB. All income of the hospital in excess of the
amount which the National Government has directed it to raise, is excess
income. The latter is given back to the hospital after a supplemental budget
is prepared. When the latter is approved, an advice of allotment is made.
Then the hospital requests a cash disbursement ceiling. When approved,
this is brought to the Ministry of Health. The regional office of said Ministry
then prepares a check for the hospital. The check will be deposited in the
hospital’s current account at the PNB. (Culled from the testimony of Dr.
Adena Canlas, TSN, October 17, 1983, pp. 8-11; December 6, 1983, pp.
43-44.)
625
VOL. 252, JANUARY 31, 1996 625
Associated Bank vs. Court of Appeals
then discovered that the hospital did not receive several allotment checks
drawn by the Province.
On February 19, 1981, the Provincial Treasurer requested the manager
of the PNB to return all of its cleared checks which were issued from 1977
to 1980 in order to verify the regularity of their encashment. After the
checks were examined, the Provincial Treasurer learned that 30 checks
amounting to P203,300.00 were encashed by one Fausto Pangilinan, with
the Associated Bank acting as collecting bank.
It turned out that Fausto Pangilinan, who was the administrative officer
and cashier of payee hospital until his retirement on February 28, 1978,
collected the questioned checks from the office of the Provincial Treasurer.
He claimed to be assisting or helping the hospital follow up the release of
the checks and had official receipts.3 Pangilinan sought to encash the first
check4 with Associated Bank. However, the manager of Associated Bank
refused and suggested that Pangilinan deposit the check in his personal
savings account with the same bank. Pangilinan was able to withdraw the
money when the check was cleared and paid by the drawee bank, PNB.
After forging the signature of Dr. Adena Canlas who was chief of the
payee hospital, Pangilinan followed the same procedure for the second
check, in the amount of P5,000.00 and dated April 20, 1978,5 as well as
for twenty-eight other checks of various amounts and on various dates.
The last check negotiated by Pangilinan was for P8,000.00 and dated
February 10, 1981.6 All the checks bore the stamp of Associated Bank
which reads “All prior endorsements guaranteed ASSOCIATED BANK.”
Jesus David, the manager of Associated Bank testified that Pangilinan
made it appear that the checks were paid to him for certain projects with
the hospital.7 He did not find as
____________________________
3
TSN, March 13, 1984, pp. 51-60.
4
Check No. 530863 K, dated January 17, 1978 for P10,000.00.
5
Check No. 526788 K.
6
Check No. 391351 L.
7 TSN, July 10, 1985, pp. 14-15.
626
626 SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
irregular the fact that the checks were not payable to Pangilinan but to the
Concepcion Emergency Hospital. While he admitted that his wife and
Pangilinan’s wife are first cousins, the manager denied having given
Pangilinan preferential treatment on this account.8
On February 26, 1981, the Provincial Treasurer wrote the manager of
the PNB seeking the restoration of the various amounts debited from the
current account of the Province.9 In turn, the PNB manager demanded
reimbursement from the Associated Bank on May 15, 1981.10
As both banks resisted payment, the Province of Tarlac brought suit
against PNB which, in turn, impleaded Associated Bank as third-party
defendant. The latter then filed a fourth-party complaint against Adena
Canlas and Fausto Pangilinan.11
After trial on the merits, the lower court rendered its decision on March
21, 1988, disposing as follows:
“WHEREFORE, in view of the foregoing, judgment is hereby rendered:
1. 1.On the basic complaint, in favor of plaintiff Province of Tarlac and
against defendant Philippine National Bank (PNB), ordering the
latter to pay to the former, the sum of Two Hundred
____________________________
8
TSN, July 10, 1985, pp. 20-21, 34-35; September 24, 1985.
9
Exhibit FF for Province of Tarlac. On March 20, 1981, the Province of
Tarlac reiterated its request in another letter to PNB. Associated Bank was
allegedly furnished with a copy of this letter. (Records, pp. 246-247) PNB
requested the Province to return the checks in a letter dated March 31,
1981. The checks were returned to PNB on April 22, 1981. (Exhibit GG)
On April 24, 1981, PNB gave the checks to Associated Bank. (Exhibit 5)
Associated Bank returned the checks to PNB on April 28, 1981, along with
a letter stating its refusal to return the money paid by PNB. (Exhibit 6)
10
Exhibit “MM” for Province of Tarlac.
11
Civil Case No. 6227, “Province of Tarlac v. Philippine National Bank;
Philippine National Bank v. Associated Bank; Associated Bank v. Fausto
Pangilinan and Adena G. Canlas,” Regional Trial Court Branch 64, Tarlac,
Tarlac.
627
VOL. 252, JANUARY 31, 1996 627
Associated Bank vs. Court of Appeals
1. Three Thousand Three Hundred (P203,300.00) Pesos with legal
interest thereon from March 20, 1981 until fully paid;
2. 2.On the third-party complaint, in favor of defendant/third-party
plaintiff Philippine National Bank (PNB) and against third-party
defendant/fourth-party plaintiff Associated Bank ordering the
latter to reimburse to the former the amount of Two Hundred
Three Thousand Three Hundred (P203,300.00) Pesos with legal
interests thereon from March 20, 1981 until fully paid;
3. 3.On the fourth-party complaint, the same is hereby ordered
dismissed for lack of cause of action as against fourth-party
defendant Adena Canlas and lack of jurisdiction over the person
of fourth-party defendant Fausto Pangilinan as against the latter.
4. 4.On the counterclaims on the complaint, third-party complaint and
fourth-party complaint, the same are hereby ordered dismissed
for lack of merit.
SO ORDERED.”12
PNB and Associated Bank appealed to the Court of
Appeals.13 Respondent court affirmed the trial court’s decision in toto on
September 30, 1992.
Hence these consolidated petitions which seek a reversal of
respondent appellate court’s decision.
PNB assigned two errors. First, the bank contends that respondent
court erred in exempting the Province of Tarlac from liability when, in fact,
the latter was negligent because it delivered and released the questioned
checks to Fausto Pangilinan who was then already retired as the hospital’s
cashier and administrative officer. PNB also maintains its innocence and
alleges that as between two innocent persons, the one whose act was the
cause of the loss, in this case the Province of Tarlac, bears the loss.
Next, PNB asserts that it was error for the court to order it to pay the
province and then seek reimbursement from Associated Bank. According
to petitioner bank, respondent appellate court should have directed
Associated Bank to pay the adjudged liability directly to the Province of
Tarlac to
____________________________
12 Penned by Judge Arturo U. Barias, Jr., Rollo, pp. 391-392.
13
CA-G.R. CV No. 17962.
628
628 SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
avoid circuity.14
Associated Bank, on the other hand, argues that the order of liability
should be totally reversed, with the drawee bank (PNB) solely and
ultimately bearing the loss.
Respondent court allegedly erred in applying Section 23 of the
Philippine Clearing House Rules instead of Central Bank Circular No. 580,
which, being an administrative regulation issued pursuant to law, has the
force and effect of law.15 The PCHC Rules are merely contractual
stipulations among and between member-banks. As such, they cannot
prevail over the aforesaid CB Circular.
It likewise contends that PNB, the drawee bank, is estopped from
asserting the defense of guarantee of prior indorsements against
Associated Bank, the collecting bank. In stamping the guarantee (for all
prior indorsements), it merely followed a mandatory requirement for
clearing and had no choice but to place the stamp of guarantee; otherwise,
there would be no clearing. The bank will be in a “no-win” situation and will
always bear the loss as against the drawee bank.16
Associated Bank also claims that since PNB already cleared and paid
the value of the forged checks in question, it is now estopped from
asserting the defense that Associated Bank guaranteed prior
indorsements. The drawee bank allegedly has the primary duty to verify
the genuineness of payee’s indorsement before paying the check.17
While both banks are innocent of the forgery, Associated Bank claims
that PNB was at fault and should solely bear the loss because it cleared
and paid the forged checks.
***
The case at bench concerns checks payable to the order of Concepcion
Emergency Hospital or its Chief. They were prop-
____________________________
14
Petition, pp. 6-7; Rollo, pp. 13-14, G.R. No. 107612.
 15
Citing Antique Sawmills, Inc. v. Zayco, 17 SCRA 316, et al., Petition,
p. 9, Rollo, p. 10.
16
Associated Bank’s Petition, p. 13.
17
Id., at 12.
629
VOL. 252, JANUARY 31, 1996 629
Associated Bank vs. Court of Appeals
erly issued and bear the genuine signatures of the drawer, the Province of
Tarlac. The infirmity in the questioned checks lies in the payee’s
(Concepcion Emergency Hospital) indorsements which are forgeries. At
the time of their indorsement, the checks were order instruments.
Checks having forged indorsements should be differentiated from
forged checks or checks bearing the forged signature of the drawer.
Section 23 of the Negotiable Instruments Law (NIL) provides:
Sec. 23. FORGED SIGNATURE, EFFECT OF.—When a signature is
forged or made without 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.
A forged signature, whether it be that of the drawer or the payee, is wholly
inoperative and no one can gain title to the instrument through it. A person
whose signature to an instrument was forged was never a party and never
consented to the contract which allegedly gave rise to such
instrument.18 Section 23 does not avoid the instrument but only the forged
signature.19 Thus, a forged indorsement does not operate as the payee’s
indorsement.
The exception to the general rule in Section 23 is where “a party against
whom it is sought to enforce a right is precluded from setting up the forgery
or want of authority.” Parties who warrant or admit the genuineness of the
signature in question and those who, by their acts, silence or negligence
are es-
____________________________
18
J. CAMPOS & M. LOPEZ-CAMPOS, NEGOTIABLE INSTRUMENTS
LAW, 227-230 (4th ed., 1990).
19 I A. AGBAYANI, COMMENTARIES AND JURISPRUDENCE ON
THE COMMERCIAL LAWS OF THE PHILIPPINES 198 (1989 ed.).
630
630 SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
topped from setting up the defense of forgery, are precluded from using
this defense. Indorsers, persons negotiating by delivery and acceptors are
warrantors of the genuineness of the signatures on the instrument.20
In bearer instruments, the signature of the payee or holder is
unnecessary to pass title to the instrument. Hence, when the indorsement
is a forgery, only the person whose signature is forged can raise the
defense of forgery against a holder in due course.21
The checks involved in this case are order instruments, hence, the
following discussion is made with reference to the effects of a forged
indorsement on an instrument payable to order.
Where the instrument is payable to order at the time of the forgery, such
as the checks in this case, the signature of its rightful holder (here, the
payee hospital) is essential to transfer title to the same instrument. When
the holder’s indorsement is forged, all parties prior to the forgery may raise
the real defense of forgery against all parties subsequent thereto.22
An indorser of an order instrument warrants “that the instrument is
genuine and in all respects what it purports to be; that he has a good title
to it; that all prior parties had capacity to contract; and that the instrument
is at the time of his indorsement valid and subsisting.”23 He cannot
interpose the defense that signatures prior to him are forged.
A collecting bank where a check is deposited and which indorses the
check upon presentment with the drawee bank, is such an indorser. So
even if the indorsement on the check deposited by the bank’s client is
forged, the collecting bank is
____________________________
20
Id., at 199.
21
J. VITUG, PANDECT OF COMMERCIAL LAW AND
JURISPRUDENCE 51-53 (Rev. ed., 1990).
22 Id.
23 Section 66, Negotiable Instruments Law.
631
VOL. 252, JANUARY 31, 1996 631
Associated Bank vs. Court of Appeals
bound by his warranties as an indorser and cannot set up the defense of
forgery as against the drawee bank.
The bank on which a check is drawn, known as the drawee bank, is
under strict liability to pay the check to the order of the payee. The drawer’s
instructions are reflected on the face and by the terms of the check.
Payment under a forged indorsement is not to the drawer’s order. When
the drawee bank pays a person other than the payee, it does not comply
with the terms of the check and violates its duty to charge its customer’s
(the drawer) account only for properly payable items. Since the drawee
bank did not pay a holder or other person entitled to receive payment, it
has no right to reimbursement from the drawer.24 The general rule then is
that the drawee bank may not debit the drawer’s account and is not entitled
to indemnification from the drawer.25 The risk of loss must perforce fall on
the drawee bank.
However, if the drawee bank can prove a failure by the
customer/drawer to exercise ordinary care that substantially contributed to
the making of the forged signature, the drawer is precluded from asserting
the forgery.
If at the same time the drawee bank was also negligent to the point of
substantially contributing to the loss, then such loss from the forgery can
be apportioned between the negligent drawer and the negligent bank.26
In cases involving a forged check, where the drawer’s signature is
forged, the drawer can recover from the drawee
____________________________
24
S. NICKLES, NEGOTIABLE INSTRUMENTS AND OTHER
RELATED COMMERCIAL PAPER 416 (2nd ed., 1993).
25 Great Eastern Life Insurance Co. v. Hongkong and Shanghai
Banking Corp., 43 Phil. 678; Banco de Oro Savings and Mortgage Bank v.
Equitable Banking Corporation, G.R. No. L-74917, January 20, 1988, 157
SCRA 188; CAMPOS & LOPEZ-CAMPOS, op. cit. note 18 at 283, citing
La Fayette v. Merchants Bank, 73 Ark 561; Wills v. Barney, 22 Cal
240; Wellington National Bank v. Robbins, 71 Kan 748.
26 R. JORDAN & W. WARREN, NEGOTIABLE INSTRUMENTS AND
LETTERS OF CREDIT 216 (1992).
632
632 SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
bank. No drawee bank has a right to pay a forged check. If it does, it shall
have to recredit the amount of the check to the account of the drawer. The
liability chain ends with the drawee bank whose responsibility it is to know
the drawer’s signature since the latter is its customer.27
In cases involving checks with forged indorsements, such as the
present petition, the chain of liability does not end with the drawee bank.
The drawee bank may not debit the account of the drawer but may
generally pass liability back through the collection chain to the party who
took from the forger and, of course, to the forger himself, if available.28 In
other words, the drawee bank can seek reimbursement or a return of the
amount it paid from the presentor bank or person.29 Theoretically, the latter
can demand reimbursement from the person who indorsed the check to it
and so on. The loss falls on the party who took the check from the forger,
or on the forger himself.
In this case, the checks were indorsed by the collecting bank
(Associated Bank) to the drawee bank (PNB). The former will necessarily
be liable to the latter for the checks bearing forged indorsements. If the
forgery is that of the payee’s or holder’s indorsement, the collecting bank
is held liable, without prejudice to the latter proceeding against the forger.
Since a forged indorsement is inoperative, the collecting bank had no
right to be paid by the drawee bank. The former must necessarily return
the money paid by the latter because it was paid wrongfully.30
____________________________
27
Id.
28
Id., at 216-235; VITUG, op. cit. note 21 at 53.
29 Banco de Oro v. Equitable Banking Corp., supra; Great Eastern Life
Insurance Co. v. HSBC, supra.
30
Article 2154 of the Civil Code provides: “If something is received
when there is no right to demand it, and it was unduly delivered through
mistake, the obligation to return it arises.” Banco de Oro v. Equitable
Banking Corp., supra.
633
VOL. 252, JANUARY 31, 1996 633
Associated Bank vs. Court of Appeals
More importantly, by reason of the statutory warranty of a general indorser
in Section 66 of the Negotiable Instruments Law, a collecting bank which
indorses a check bearing a forged indorsement and presents it to the
drawee bank guarantees all prior indorsements, including the forged
indorsement. It warrants that the instrument is genuine, and that it is valid
and subsisting at the time of his indorsement. Because the indorsement is
a forgery, the collecting bank commits a breach of this warranty and will be
accountable to the drawee bank. This liability scheme operates without
regard to fault on the part of the collecting/presenting bank. Even if the
latter bank was not negligent, it would still be liable to the drawee bank
because of its indorsement.
The Court has consistently ruled that “the collecting bank or last
endorser generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of
presenting the check for payment to the drawee is an assertion that the
party making the presentment had done its duty to ascertain the
genuineness of the endorsements.”31
The drawee bank is not similarly situated as the collecting bank
because the former makes no warranty as to the genuineness of any
indorsement.32 The drawee bank’s duty is but to verify the genuineness of
the drawer’s signature and not of the indorsement because the drawer is
its client.
 Moreover, the collecting bank is made liable because it is privy to the
depositor who negotiated the check. The bank knows him, his address and
history because he is a client. It has taken a risk on his deposit. The bank
is also in a better position to detect forgery, fraud or irregularity in the
indorsement.
____________________________
31
Bank of the Phil. Islands v. CA, G.R. No. 102383, November 26,
1992, 216 SCRA 51, 63 citing Banco de Oro v. Equitable Banking
Corp., supra; Great Eastern Life Insurance Co. v. HSBC, supra.
32
CAMPOS & LOPEZ-CAMPOS, op. cit. note 18 at 283 citing Inter-
state Trust Co. v. U.S. National Bank, 185 Pac. 260; Hongkong and
Shanghai Banking Corp. v. People’s Bank and Trust Co., supra.
634
634 SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
Hence, the drawee bank can recover the amount paid on the check bearing
a forged indorsement from the collecting bank. However, a drawee bank
has the duty to promptly inform the presentor of the forgery upon discovery.
If the drawee bank delays in informing the presentor of the forgery, thereby
depriving said presentor of the right to recover from the forger, the former
is deemed negligent and can no longer recover from the presentor.33
Applying these rules to the case at bench, PNB, the drawee bank,
cannot debit the current account of the Province of Tarlac because it paid
checks which bore forged indorsements. However, if the Province of Tarlac
as drawer was negligent to the point of substantially contributing to the
loss, then the drawee bank PNB can charge its account. If both drawee
bank-PNB and drawer-Province of Tarlac were negligent, the loss should
be properly apportioned between them.
The loss incurred by drawee bank-PNB can be passed on to the
collecting bank-Associated Bank which presented and indorsed the checks
to it. Associated Bank can, in turn, hold the forger, Fausto Pangilinan,
liable.
If PNB negligently delayed in informing Associated Bank of the forgery,
thus depriving the latter of the opportunity to recover from the forger, it
forfeits its right to reimbursement and will be made to bear the loss.
After careful examination of the records, the Court finds that the
Province of Tarlac was equally negligent and should, therefore, share the
burden of loss from the checks bearing a forged indorsement.
The Province of Tarlac permitted Fausto Pangilinan to collect the
checks when the latter, having already retired from government service,
was no longer connected with the hospital. With the exception of the first
check (dated January 17, 1978), all the checks were issued and released
after Pangilinan’s retirement on February 28, 1978. After nearly three
____________________________
33 JORDAN & WARREN, op. cit. note 26 at 217; CAMPOS & LOPEZ-
CAMPOS, op. cit. note 18 at 283.
635
VOL. 252, JANUARY 31, 1996 635
Associated Bank vs. Court of Appeals
years, the Treasurer’s office was still releasing the checks to the retired
cashier. In addition, some of the aid allotment checks were released to
Pangilinan and the others to Elizabeth Juco, the new cashier. The fact that
there were now two persons collecting the checks for the hospital is an
unmistakable sign of an irregularity which should have alerted employees
in the Treasurer’s office of the fraud being committed. There is also
evidence indicating that the provincial employees were aware of
Pangilinan’s retirement and consequent dissociation from the hospital.
Jose Meru, the Provincial Treasurer, testified:
“ATTY. MORGA:
Q Now, is it true that for a given month there were two releases of
: checks, one went to Mr. Pangilinan and one went to Miss Juco?
JOSE MERU:
A: Yes, sir.
Q Will you please tell us how at the time (sic) when the authorized
: representative of Concepcion Emergency Hospital is and was
supposed to be Miss Juco?
A: Well, as far as my investigation show (sic) the assistant cashier
told me that Pangilinan represented himself as also authorized to
help in the release of these checks and we were apparently misled
because they accepted the representation of Pangilinan that he
was helping them in the release of the checks and besides
according to them they were, Pangilinan, like the rest, was able to
present an official receipt to acknowledge these receipts and
according to them since this is a government check and believed
that it will eventually go to the hospital following the standard
procedure of negotiating government checks, they released the
checks to Pangilinan aside from Miss Juco.”34
The failure of the Province of Tarlac to exercise due care contributed to a
significant degree to the loss tantamount to
____________________________
34
TSN, June 19, 1984, pp. 10-11.
 636
636 SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
negligence. Hence, the Province of Tarlac should be liable for part of the
total amount paid on the questioned checks.
The drawee bank PNB also breached its duty to pay only according to
the terms of the check. Hence, it cannot escape liability and should also
bear part of the loss.
As earlier stated, PNB can recover from the collecting bank.
In the case of Associated Bank v. CA,35 six crossed checks with forged
indorsements were deposited in the forger’s account with the collecting
bank and were later paid by four different drawee banks. The Court found
the collecting bank (Associated) to be negligent and held:
“The Bank should have first verified his right to endorse the crossed
checks, of which he was not the payee, and to deposit the proceeds of the
checks to his own account. The Bank was by reason of the nature of the
checks put upon notice that they were issued for deposit only to the private
respondent’s account. x x x”
The situation in the case at bench is analogous to the above case, for it
was not the payee who deposited the checks with the collecting bank.
Here, the checks were all payable to Concepcion Emergency Hospital but
it was Fausto Pangilinan who deposited the checks in his personal savings
account.
Although Associated Bank claims that the guarantee stamped on the
checks (All prior and/or lack of endorsements guaranteed) is merely a
requirement forced upon it by clearing house rules, it cannot but remain
liable. The stamp guaranteeing prior indorsements is not an empty rubric
which a bank must fulfill for the sake of convenience. A bank is not required
to accept all the checks negotiated to it. It is within the bank’s discretion to
receive a check for no banking institution would consciously or deliberately
accept a check bearing a forged indorsement. When a check is deposited
with the collecting bank, it takes a risk on its depositor. It is only logi-
____________________________
35
G.R. No. 89802, May 7, 1992, 208 SCRA 465.
637
VOL. 252, JANUARY 31, 1996 637
Associated Bank vs. Court of Appeals
cal that this bank be held accountable for checks deposited by its
customers.
A delay in informing the collecting bank (Associated Bank) of the
forgery, which deprives it of the opportunity to go after the forger, signifies
negligence on the part of the drawee bank (PNB) and will preclude it from
claiming reimbursement.
It is here that Associated Bank’s assignment of error concerning C.B.
Circular No. 580 and Section 23 of the Philippine Clearing House
Corporation Rules comes to fore. Under Section 4 (c) of CB Circular No.
580, items bearing a forged endorsement shall be returned within twenty-
four (24) hours after discovery of the forgery but in no event beyond the
period fixed or provided by law for filing of a legal action by the returning
bank. Section 23 of the PCHC Rules deleted the requirement that items
bearing a forged endorsement should be returned within twenty-four hours.
Associated Bank now argues that the aforementioned Central Bank
Circular is applicable. Since PNB did not return the questioned checks
within twenty-four hours, but several days later, Associated Bank alleges
that PNB should be considered negligent and not entitled to
reimbursement of the amount it paid on the checks.
The Court deems it unnecessary to discuss Associated Bank’s
assertions that CB Circular No. 580 is an administrative regulation issued
pursuant to law and as such, must prevail over the PCHC rule. The Central
Bank circular was in force for all banks until June 1980 when the Philippine
Clearing House Corporation (PCHC) was set up and commenced
operations. Banks in Metro Manila were covered by the PCHC while banks
located elsewhere still had to go through Central Bank Clearing. In any
event, the twenty-four-hour return rule was adopted by the PCHC until it
was changed in 1982. The contending banks herein, which are both
branches in Tarlac province, are therefore not covered by PCHC Rules but
by CB Circular No. 580. Clearly then, the CB circular was applicable when
the forgery of the checks was discovered in 1981.
638
638 SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
The rule mandates that the checks be returned within twenty-four hours
after discovery of the forgery but in no event beyond the period fixed by
law for filing a legal action. The rationale of the rule is to give the collecting
bank (which indorsed the check) adequate opportunity to proceed against
the forger. If prompt notice is not given, the collecting bank may be
prejudiced and lose the opportunity to go after its depositor.
The Court finds that even if PNB did not return the questioned checks
to Associated Bank within twenty-four hours, as mandated by the rule, PNB
did not commit negligent delay. Under the circumstances, PNB gave
prompt notice to Associated Bank and the latter bank was not prejudiced
in going after Fausto Pangilinan. After the Province of Tarlac informed PNB
of the forgeries, PNB necessarily had to inspect the checks and conduct
its own investigation. Thereafter, it requested the Provincial Treasurer’s
office on March 31, 1981 to return the checks for verification. The Province
of Tarlac returned the checks only on April 22, 1981. Two days later,
Associated Bank received the checks from PNB.36
Associated Bank was also furnished a copy of the Province’s letter of
demand to PNB dated March 20, 1981, thus giving it notice of the forgeries.
At this time, however, Pangilinan’s account with Associated had only
P24.63 in it.37 Had Associated Bank decided to debit Pangilinan’s account,
it could not have recovered the amounts paid on the questioned checks. In
addition, while Associated Bank filed a fourth-party complaint against
Fausto Pangilinan, it did not present evidence against Pangilinan and even
presented him as its rebuttal witness.38 Hence, Associated Bank was not
prejudiced by PNB’s failure to comply with the twenty-four-hour return rule.
Next, Associated Bank contends that PNB is estopped from requiring
reimbursement because the latter paid and cleared
____________________________
36
See footnote 9.
37
Exhibit “3-G” for Associated Bank.
38 TSN, January 8, 1987.
639
VOL. 252, JANUARY 31, 1996 639
Associated Bank vs. Court of Appeals
the checks. The Court finds this contention unmeritorious. Even if PNB
cleared and paid the checks, it can still recover from Associated Bank. This
is true even if the payee’s Chief Officer who was supposed to have
indorsed the checks is also a customer of the drawee bank.39 PNB’s duty
was to verify the genuineness of the drawer’s signature and not the
genuineness of payee’s indorsement. Associated Bank, as the collecting
bank, is the entity with the duty to verify the genuineness of the payee’s
indorsement.
PNB also avers that respondent court erred in adjudging circuitous
liability by directing PNB to return to the Province of Tarlac the amount of
the checks and then directing Associated Bank to reimburse PNB. The
Court finds nothing wrong with the mode of the award. The drawer,
Province of Tarlac, is a client or customer of the PNB, not of Associated
Bank. There is no privity of contract between the drawer and the collecting
bank.
The trial court made PNB and Associated Bank liable with legal interest
from March 20, 1981, the date of extrajudicial demand made by the
Province of Tarlac on PNB. The payments to be made in this case stem
from the deposits of the Province of Tarlac in its current account with the
PNB. Bank deposits are considered under the law as loans.40 Central Bank
Circular No. 416 prescribes a twelve percent (12%) interest per annum for
loans, forebearance of money, goods or credits in the absence of express
stipulation. Normally, current accounts are likewise interest-bearing, by
express contract, thus excluding them from the coverage of CB Circular
No. 416. In this case, however, the actual interest rate, if any, for the
current account opened by the Province of Tarlac with PNB was not given
in evidence. Hence, the Court deems it wise to affirm the trial court’s use
of the legal interest rate, or six percent (6%) per annum. The interest rate
shall be com-
____________________________
39
San Carlos Milling Co. Ltd. v. BPI, 59 Phil. 59.
40
Article 1980 of the Civil Code reads: Fixed, savings, and current
deposits of money in banks and similar institutions shall be governed by
the provisions concerning simple loan.
640
640 SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
puted from the date of default, or the date of judicial or extrajudicial
demand.41 The trial court did not err in granting legal interest from March
20, 1981, the date of extrajudicial demand.
The Court finds as reasonable, the proportionate sharing of fifty
percent—fifty percent (50%-50%). Due to the negligence of the Province
of Tarlac in releasing the checks to an unauthorized person (Fausto
Pangilinan), in allowing the retired hospital cashier to receive the checks
for the payee hospital for a period close to three years and in not properly
ascertaining why the retired hospital cashier was collecting checks for the
payee hospital in addition to the hospital’s real cashier, respondent
Province contributed to the loss amounting to P203,300.00 and shall be
liable to the PNB for fifty (50%) percent thereof. In effect, the Province of
Tarlac can only recover fifty percent (50%) of P203,300.00 from PNB.
The collecting bank, Associated Bank, shall be liable to PNB for fifty
(50%) percent of P203,300.00. It is liable on its warranties as indorser of
the checks which were deposited by Fausto Pangilinan, having guaranteed
the genuineness of all prior indorsements, including that of the chief of the
payee hospital, Dr. Adena Canlas. Associated Bank was also remiss in its
duty to ascertain the genuineness of the payee’s indorsement.
IN VIEW OF THE FOREGOING, the petition for review filed by the
Philippine National Bank (G.R. No. 107612) is hereby PARTIALLY
GRANTED. The petition for review filed by the Associated Bank (G.R. No.
107382) is hereby DENIED. The decision of the trial court is MODIFIED.
The Philippine National Bank shall pay fifty percent (50%) of P203,300.00
to the Province of Tarlac, with legal interest from March 20, 1981 until the
payment thereof. Associated Bank shall pay fifty percent (50%) of
P203,300.00 to the Philippine National
____________________________
41
Eastern Shipping Lines, Inc. v. CA, G.R. No. 97412, July 12,
1994, 234 SCRA 78.
641
VOL. 252, JANUARY 31, 1996 641
Paredes, Jr. vs. Sandiganbayan, Second Division
Bank, likewise, with legal interest from March 20, 1981 until payment is
made.
SO ORDERED.
Regalado (Chairman), Puno and Mendoza, JJ.,concur.
Petition of PNB partially granted while that of Associated Bank denied.
Judgment of trial court modified.
Note.—Forgery cannot be presumed it must be proved by clear,
positive and convincing evidence. (Tenio-Obsequio vs. Court of
Appeals, 230 SCRA 550 [1994])
620 SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
G.R. No. 107382. January 31, 1996.*
ASSOCIATED BANK, petitioner, vs. HON. COURT OF APPEALS,
PROVINCE OF TARLAC and PHILIPPINE NATIONAL BANK,
respondents.
G.R. No. 107612. January 31, 1996.*
PHILIPPINE NATIONAL BANK, petitioner, vs.HONORABLE COURT OF
APPEALS, PROVINCE OF TARLAC, and ASSOCIATED BANK,
respondents.
Commercial Law; Negotiable Instruments Law; Forgery; A person
whose signature to an instrument was forged was never a party and never
consented to the contract which allegedly gave rise to such instrument.—
A forged signature, whether it be that of the drawer or the payee, is wholly
inoperative and no one can gain title to the instrument through it. A person
whose signature to an instrument was forged was never a party and never
consented to the contract which allegedly gave rise to such instrument.
Section 23 does not avoid the instrument but only the forged signature.
Thus, a forged indorsement does not operate as the payee’s indorsement.
Same; Same; Same; Parties who warrant or admit the genuineness
of the signature in question and those who, by their acts, silence or
negligence are estopped from setting up the defense of forgery, are
precluded from using this defense.—The exception to the general rule in
Section 23 is where “a party against whom it is sought to enforce a right is
precluded from setting up the forgery or want of authority.” Parties who
warrant or admit the genuineness of the signature in question and those
who, by their acts, silence or negligence are estopped from setting up the
defense of forgery, are precluded from using this defense. Indorsers,
persons negotiating by delivery and acceptors are warrantors of the
genuineness of the signatures on the instrument.
Same; Same; Same; When the indorsement is a forgery, only the
person whose signature is forged can raise the defense of forgery against
a holder in due course.—In bearer instruments, the signa-
____________________________
*
SECOND DIVISION.
621
VOL. 252, JANUARY 31, 1996 621
Associated Bank vs. Court of Appeals
ture of the payee or holder is unnecessary to pass title to the
instrument. Hence, when the indorsement is a forgery, only the person
whose signature is forged can raise the defense of forgery against a holder
in due course.
Same; Same; Same; When the holder’s indorsement is forged, all
parties prior to the forgery may raise the real defense of forgery against all
parties subsequent thereto.—Where the instrument is payable to order at
the time of the forgery, such as the checks in this case, the signature of its
rightful holder (here, the payee hospital) is essential to transfer title to the
same instrument. When the holder’s indorsement is forged, all parties prior
to the forgery may raise the real defense of forgery against all parties
subsequent thereto.
Same; Same; Same; Indorser cannot interpose the defense that
signatures prior to him are forged.—An indorser of an order instrument
warrants “that the instrument is genuine and in all respects what it purports
to be; that he has a good title to it; that all prior parties had capacity to
contract; and that the instrument is at the time of his indorsement valid and
subsisting.” He cannot interpose the defense that signatures prior to him
are forged.
Same; Same; Same; A collecting bank where a check is deposited
and which indorses the check upon presentment with the drawee bank is
such an indorser.—A collecting bank where a check is deposited and which
indorses the check upon presentment with the drawee bank, is such an
indorser. So even if the indorsement on the check deposited by the bank’s
client is forged, the collecting bank is bound by his warranties as an
indorser and cannot set up the defense of forgery as against the drawee
bank.
Same; Same; Same; Payment under a forged indorsement is not to
the drawer’s order.—The bank on which a check is drawn, known as the
drawee bank, is under strict liability to pay the check to the order of the
payee. The drawer’s instructions are reflected on the face and by the terms
of the check. Payment under a forged indorsement is not to the drawer’s
order. When the drawee bank pays a person other than the payee, it does
not comply with the terms of the check and violates its duty to charge its
customer’s (the drawer) account only for properly payable items. Since the
drawee bank did not pay a holder or other person entitled to receive
payment, it has no right to reimbursement from the drawer. The general
rule then is that the drawee bank may not debit the drawer’s account and
is not
622
622 SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
entitled to indemnification from the drawer. The risk of loss must
perforce fall on the drawee bank.
Same; Same; Same; Drawer is precluded from asserting forgery
where the drawee bank can prove a failure by the customer/drawer to
exercise ordinary care that substantially contributed to the making of the
forged signature.—However, if the drawee bank can prove a failure by the
customer/drawer to exercise ordinary care that substantially contributed to
the making of the forged signature, the drawer is precluded from asserting
the forgery.
Same; Same; Same; Drawee bank can seek reimbursement or a
return of the amount it paid from the presentor bank or person.—In cases
involving checks with forged indorsements, such as the present petition,
the chain of liability does not end with the drawee bank. The drawee bank
may not debit the account of the drawer but may generally pass liability
back through the collection chain to the party who took from the forger and,
of course, to the forger himself, if available. In other words, the drawee
bank can seek reimbursement or a return of the amount it paid from the
presentor bank or person. Theoretically, the latter can demand
reimbursement from the person who indorsed the check to it and so on.
The loss falls on the party who took the check from the forger, or on the
forger himself.
Same; Same; Same; A collecting bank which indorses a check
bearing a forged indorsement and presents it to the drawee bank
guarantees all prior indorsements including the forged indorsement.—
More importantly, by reason of the statutory warranty of a general indorser
in Section 66 of the Negotiable Instruments Law, a collecting bank which
indorses a check bearing a forged indorsement and presents it to the
drawee bank guarantees all prior indorsements, including the forged
indorsement. It warrants that the instrument is genuine, and that it is valid
and subsisting at the time of his indorsement. Because the indorsement is
a forgery, the collecting bank commits a breach of this warranty and will be
accountable to the drawee bank.
Same; Same; Same; Drawee banks not similarly situated as the
collecting bank.—The drawee bank is not similarly situated as the
collecting bank because the former makes no warranty as to the
genuineness of any indorsement. The drawee bank’s duty is but to
623
VOL. 252, JANUARY 31, 1996 623
Associated Bank vs. Court of Appeals
verify the genuineness of the drawer’s signature and not of the
indorsement because the drawer is its client.
Same; Same; Same; Drawee bank has the duty to promptly inform
the presentor of the forgery upon discovery.—Hence, the drawee bank can
recover the amount paid on the check bearing a forged indorsement from
the collecting bank. However, a drawee bank has the duty to promptly
inform the presentor of the forgery upon discovery. If the drawee bank
delays in informing the presentor of the forgery, thereby depriving said
presentor of the right to recover from the forger, the former is deemed
negligent and can no longer recover from the presentor.
Same; Same; Same; Rule mandates that the checks be returned
within twenty-four hours after discovery of the forgery but in no event
beyond the period fixed by law for filing a legal action.—The rule mandates
that the checks be returned within twenty-four hours after discovery of the
forgery but in no event beyond the period fixed by law for filing a legal
action. The rationale of the rule is to give the collecting bank (which
indorsed the check) adequate opportunity to proceed against the forger. If
prompt notice is not given, the collecting bank may be prejudiced and lose
the opportunity to go after its depositor.
PETITIONS for review of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Jose A. Soluta, Jr. and Associates for Associated Bank.
Santiago, Jr., Vidad, Corpus & Associates for Philippine National
Bank.
ROMERO, J.:
Where thirty checks bearing forged endorsements are paid, who bears the
loss, the drawer, the drawee bank or the collecting bank?
This is the main issue in these consolidated petitions for review
assailing the decision of the Court of Appeals in “Province of Tarlac v.
Philippine National Bank v. Associated Bank v. Fausto Pangilinan, et al.”
(CA-G.R. No. CV No.
624
624 SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
17962).1
The facts of the case are as follows:
The Province of Tarlac maintains a current account with the Philippine
National Bank (PNB) Tarlac Branch where the provincial funds are
deposited. Checks issued by the Province are signed by the Provincial
Treasurer and countersigned by the Provincial Auditor or the Secretary of
the Sangguniang Bayan.
A portion of the funds of the province is allocated to the Concepcion
Emergency Hospital.2 The allotment checks for said government hospital
are drawn to the order of “Concepcion Emergency Hospital, Concepcion,
Tarlac” or “The Chief, Concepcion Emergency Hospital, Concepcion,
Tarlac.” The checks are released by the Office of the Provincial Treasurer
and received for the hospital by its administrative officer and cashier.
In January 1981, the books of account of the Provincial Treasurer were
post-audited by the Provincial Auditor. It was
____________________________
1
Penned by Justice Asaali S. Isnani, with Associate Justices Arturo S.
Buena and Ricardo P. Galvez, concurring, dated September 30, 1992.
Rollo, p. 22.
2 Provincial aid was given irregularly. Hospital staff would often call the
provincial treasurer’s office to inquire whether there was an allotment
check for the hospital. The hospital’s administrative officer and cashier
would then go to the provincial treasurer’s office to pick up the check.
Checks received by the hospital are deposited in the account of the
National Treasury with the PNB. All income of the hospital in excess of the
amount which the National Government has directed it to raise, is excess
income. The latter is given back to the hospital after a supplemental budget
is prepared. When the latter is approved, an advice of allotment is made.
Then the hospital requests a cash disbursement ceiling. When approved,
this is brought to the Ministry of Health. The regional office of said Ministry
then prepares a check for the hospital. The check will be deposited in the
hospital’s current account at the PNB. (Culled from the testimony of Dr.
Adena Canlas, TSN, October 17, 1983, pp. 8-11; December 6, 1983, pp.
43-44.)
625
VOL. 252, JANUARY 31, 1996 625
Associated Bank vs. Court of Appeals
then discovered that the hospital did not receive several allotment checks
drawn by the Province.
On February 19, 1981, the Provincial Treasurer requested the manager
of the PNB to return all of its cleared checks which were issued from 1977
to 1980 in order to verify the regularity of their encashment. After the
checks were examined, the Provincial Treasurer learned that 30 checks
amounting to P203,300.00 were encashed by one Fausto Pangilinan, with
the Associated Bank acting as collecting bank.
It turned out that Fausto Pangilinan, who was the administrative officer
and cashier of payee hospital until his retirement on February 28, 1978,
collected the questioned checks from the office of the Provincial Treasurer.
He claimed to be assisting or helping the hospital follow up the release of
the checks and had official receipts.3 Pangilinan sought to encash the first
check4 with Associated Bank. However, the manager of Associated Bank
refused and suggested that Pangilinan deposit the check in his personal
savings account with the same bank. Pangilinan was able to withdraw the
money when the check was cleared and paid by the drawee bank, PNB.
After forging the signature of Dr. Adena Canlas who was chief of the
payee hospital, Pangilinan followed the same procedure for the second
check, in the amount of P5,000.00 and dated April 20, 1978,5 as well as
for twenty-eight other checks of various amounts and on various dates.
The last check negotiated by Pangilinan was for P8,000.00 and dated
February 10, 1981.6 All the checks bore the stamp of Associated Bank
which reads “All prior endorsements guaranteed ASSOCIATED BANK.”
Jesus David, the manager of Associated Bank testified that Pangilinan
made it appear that the checks were paid to him for certain projects with
the hospital.7 He did not find as
____________________________
3
TSN, March 13, 1984, pp. 51-60.
4
Check No. 530863 K, dated January 17, 1978 for P10,000.00.
5
Check No. 526788 K.
6
Check No. 391351 L.
7 TSN, July 10, 1985, pp. 14-15.
626
626 SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
irregular the fact that the checks were not payable to Pangilinan but to the
Concepcion Emergency Hospital. While he admitted that his wife and
Pangilinan’s wife are first cousins, the manager denied having given
Pangilinan preferential treatment on this account.8
On February 26, 1981, the Provincial Treasurer wrote the manager of
the PNB seeking the restoration of the various amounts debited from the
current account of the Province.9 In turn, the PNB manager demanded
reimbursement from the Associated Bank on May 15, 1981.10
As both banks resisted payment, the Province of Tarlac brought suit
against PNB which, in turn, impleaded Associated Bank as third-party
defendant. The latter then filed a fourth-party complaint against Adena
Canlas and Fausto Pangilinan.11
After trial on the merits, the lower court rendered its decision on March
21, 1988, disposing as follows:
“WHEREFORE, in view of the foregoing, judgment is hereby rendered:
1. 1.On the basic complaint, in favor of plaintiff Province of Tarlac and
against defendant Philippine National Bank (PNB), ordering the
latter to pay to the former, the sum of Two Hundred
____________________________
8
TSN, July 10, 1985, pp. 20-21, 34-35; September 24, 1985.
9
Exhibit FF for Province of Tarlac. On March 20, 1981, the Province of
Tarlac reiterated its request in another letter to PNB. Associated Bank was
allegedly furnished with a copy of this letter. (Records, pp. 246-247) PNB
requested the Province to return the checks in a letter dated March 31,
1981. The checks were returned to PNB on April 22, 1981. (Exhibit GG)
On April 24, 1981, PNB gave the checks to Associated Bank. (Exhibit 5)
Associated Bank returned the checks to PNB on April 28, 1981, along with
a letter stating its refusal to return the money paid by PNB. (Exhibit 6)
10
Exhibit “MM” for Province of Tarlac.
11
Civil Case No. 6227, “Province of Tarlac v. Philippine National Bank;
Philippine National Bank v. Associated Bank; Associated Bank v. Fausto
Pangilinan and Adena G. Canlas,” Regional Trial Court Branch 64, Tarlac,
Tarlac.
627
VOL. 252, JANUARY 31, 1996 627
Associated Bank vs. Court of Appeals
1. Three Thousand Three Hundred (P203,300.00) Pesos with legal
interest thereon from March 20, 1981 until fully paid;
2. 2.On the third-party complaint, in favor of defendant/third-party
plaintiff Philippine National Bank (PNB) and against third-party
defendant/fourth-party plaintiff Associated Bank ordering the
latter to reimburse to the former the amount of Two Hundred
Three Thousand Three Hundred (P203,300.00) Pesos with legal
interests thereon from March 20, 1981 until fully paid;
3. 3.On the fourth-party complaint, the same is hereby ordered
dismissed for lack of cause of action as against fourth-party
defendant Adena Canlas and lack of jurisdiction over the person
of fourth-party defendant Fausto Pangilinan as against the latter.
4. 4.On the counterclaims on the complaint, third-party complaint and
fourth-party complaint, the same are hereby ordered dismissed
for lack of merit.
SO ORDERED.”12
PNB and Associated Bank appealed to the Court of
Appeals.13 Respondent court affirmed the trial court’s decision in toto on
September 30, 1992.
Hence these consolidated petitions which seek a reversal of
respondent appellate court’s decision.
PNB assigned two errors. First, the bank contends that respondent
court erred in exempting the Province of Tarlac from liability when, in fact,
the latter was negligent because it delivered and released the questioned
checks to Fausto Pangilinan who was then already retired as the hospital’s
cashier and administrative officer. PNB also maintains its innocence and
alleges that as between two innocent persons, the one whose act was the
cause of the loss, in this case the Province of Tarlac, bears the loss.
Next, PNB asserts that it was error for the court to order it to pay the
province and then seek reimbursement from Associated Bank. According
to petitioner bank, respondent appellate court should have directed
Associated Bank to pay the adjudged liability directly to the Province of
Tarlac to
____________________________
12 Penned by Judge Arturo U. Barias, Jr., Rollo, pp. 391-392.
13
CA-G.R. CV No. 17962.
628
628 SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
avoid circuity.14
Associated Bank, on the other hand, argues that the order of liability
should be totally reversed, with the drawee bank (PNB) solely and
ultimately bearing the loss.
Respondent court allegedly erred in applying Section 23 of the
Philippine Clearing House Rules instead of Central Bank Circular No. 580,
which, being an administrative regulation issued pursuant to law, has the
force and effect of law.15 The PCHC Rules are merely contractual
stipulations among and between member-banks. As such, they cannot
prevail over the aforesaid CB Circular.
It likewise contends that PNB, the drawee bank, is estopped from
asserting the defense of guarantee of prior indorsements against
Associated Bank, the collecting bank. In stamping the guarantee (for all
prior indorsements), it merely followed a mandatory requirement for
clearing and had no choice but to place the stamp of guarantee; otherwise,
there would be no clearing. The bank will be in a “no-win” situation and will
always bear the loss as against the drawee bank.16
Associated Bank also claims that since PNB already cleared and paid
the value of the forged checks in question, it is now estopped from
asserting the defense that Associated Bank guaranteed prior
indorsements. The drawee bank allegedly has the primary duty to verify
the genuineness of payee’s indorsement before paying the check.17
While both banks are innocent of the forgery, Associated Bank claims
that PNB was at fault and should solely bear the loss because it cleared
and paid the forged checks.
***
The case at bench concerns checks payable to the order of Concepcion
Emergency Hospital or its Chief. They were prop-
____________________________
14
Petition, pp. 6-7; Rollo, pp. 13-14, G.R. No. 107612.
 15
Citing Antique Sawmills, Inc. v. Zayco, 17 SCRA 316, et al., Petition,
p. 9, Rollo, p. 10.
16
Associated Bank’s Petition, p. 13.
17
Id., at 12.
629
VOL. 252, JANUARY 31, 1996 629
Associated Bank vs. Court of Appeals
erly issued and bear the genuine signatures of the drawer, the Province of
Tarlac. The infirmity in the questioned checks lies in the payee’s
(Concepcion Emergency Hospital) indorsements which are forgeries. At
the time of their indorsement, the checks were order instruments.
Checks having forged indorsements should be differentiated from
forged checks or checks bearing the forged signature of the drawer.
Section 23 of the Negotiable Instruments Law (NIL) provides:
Sec. 23. FORGED SIGNATURE, EFFECT OF.—When a signature is
forged or made without 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.
A forged signature, whether it be that of the drawer or the payee, is wholly
inoperative and no one can gain title to the instrument through it. A person
whose signature to an instrument was forged was never a party and never
consented to the contract which allegedly gave rise to such
instrument.18 Section 23 does not avoid the instrument but only the forged
signature.19 Thus, a forged indorsement does not operate as the payee’s
indorsement.
The exception to the general rule in Section 23 is where “a party against
whom it is sought to enforce a right is precluded from setting up the forgery
or want of authority.” Parties who warrant or admit the genuineness of the
signature in question and those who, by their acts, silence or negligence
are es-
____________________________
18
J. CAMPOS & M. LOPEZ-CAMPOS, NEGOTIABLE INSTRUMENTS
LAW, 227-230 (4th ed., 1990).
19 I A. AGBAYANI, COMMENTARIES AND JURISPRUDENCE ON
THE COMMERCIAL LAWS OF THE PHILIPPINES 198 (1989 ed.).
630
630 SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
topped from setting up the defense of forgery, are precluded from using
this defense. Indorsers, persons negotiating by delivery and acceptors are
warrantors of the genuineness of the signatures on the instrument.20
In bearer instruments, the signature of the payee or holder is
unnecessary to pass title to the instrument. Hence, when the indorsement
is a forgery, only the person whose signature is forged can raise the
defense of forgery against a holder in due course.21
The checks involved in this case are order instruments, hence, the
following discussion is made with reference to the effects of a forged
indorsement on an instrument payable to order.
Where the instrument is payable to order at the time of the forgery, such
as the checks in this case, the signature of its rightful holder (here, the
payee hospital) is essential to transfer title to the same instrument. When
the holder’s indorsement is forged, all parties prior to the forgery may raise
the real defense of forgery against all parties subsequent thereto.22
An indorser of an order instrument warrants “that the instrument is
genuine and in all respects what it purports to be; that he has a good title
to it; that all prior parties had capacity to contract; and that the instrument
is at the time of his indorsement valid and subsisting.”23 He cannot
interpose the defense that signatures prior to him are forged.
A collecting bank where a check is deposited and which indorses the
check upon presentment with the drawee bank, is such an indorser. So
even if the indorsement on the check deposited by the bank’s client is
forged, the collecting bank is
____________________________
20
Id., at 199.
21
J. VITUG, PANDECT OF COMMERCIAL LAW AND
JURISPRUDENCE 51-53 (Rev. ed., 1990).
22 Id.
23 Section 66, Negotiable Instruments Law.
631
VOL. 252, JANUARY 31, 1996 631
Associated Bank vs. Court of Appeals
bound by his warranties as an indorser and cannot set up the defense of
forgery as against the drawee bank.
The bank on which a check is drawn, known as the drawee bank, is
under strict liability to pay the check to the order of the payee. The drawer’s
instructions are reflected on the face and by the terms of the check.
Payment under a forged indorsement is not to the drawer’s order. When
the drawee bank pays a person other than the payee, it does not comply
with the terms of the check and violates its duty to charge its customer’s
(the drawer) account only for properly payable items. Since the drawee
bank did not pay a holder or other person entitled to receive payment, it
has no right to reimbursement from the drawer.24 The general rule then is
that the drawee bank may not debit the drawer’s account and is not entitled
to indemnification from the drawer.25 The risk of loss must perforce fall on
the drawee bank.
However, if the drawee bank can prove a failure by the
customer/drawer to exercise ordinary care that substantially contributed to
the making of the forged signature, the drawer is precluded from asserting
the forgery.
If at the same time the drawee bank was also negligent to the point of
substantially contributing to the loss, then such loss from the forgery can
be apportioned between the negligent drawer and the negligent bank.26
In cases involving a forged check, where the drawer’s signature is
forged, the drawer can recover from the drawee
____________________________
24
S. NICKLES, NEGOTIABLE INSTRUMENTS AND OTHER
RELATED COMMERCIAL PAPER 416 (2nd ed., 1993).
25 Great Eastern Life Insurance Co. v. Hongkong and Shanghai
Banking Corp., 43 Phil. 678; Banco de Oro Savings and Mortgage Bank v.
Equitable Banking Corporation, G.R. No. L-74917, January 20, 1988, 157
SCRA 188; CAMPOS & LOPEZ-CAMPOS, op. cit. note 18 at 283, citing
La Fayette v. Merchants Bank, 73 Ark 561; Wills v. Barney, 22 Cal
240; Wellington National Bank v. Robbins, 71 Kan 748.
26 R. JORDAN & W. WARREN, NEGOTIABLE INSTRUMENTS AND
LETTERS OF CREDIT 216 (1992).
632
632 SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
bank. No drawee bank has a right to pay a forged check. If it does, it shall
have to recredit the amount of the check to the account of the drawer. The
liability chain ends with the drawee bank whose responsibility it is to know
the drawer’s signature since the latter is its customer.27
In cases involving checks with forged indorsements, such as the
present petition, the chain of liability does not end with the drawee bank.
The drawee bank may not debit the account of the drawer but may
generally pass liability back through the collection chain to the party who
took from the forger and, of course, to the forger himself, if available.28 In
other words, the drawee bank can seek reimbursement or a return of the
amount it paid from the presentor bank or person.29 Theoretically, the latter
can demand reimbursement from the person who indorsed the check to it
and so on. The loss falls on the party who took the check from the forger,
or on the forger himself.
In this case, the checks were indorsed by the collecting bank
(Associated Bank) to the drawee bank (PNB). The former will necessarily
be liable to the latter for the checks bearing forged indorsements. If the
forgery is that of the payee’s or holder’s indorsement, the collecting bank
is held liable, without prejudice to the latter proceeding against the forger.
Since a forged indorsement is inoperative, the collecting bank had no
right to be paid by the drawee bank. The former must necessarily return
the money paid by the latter because it was paid wrongfully.30
____________________________
27
Id.
28
Id., at 216-235; VITUG, op. cit. note 21 at 53.
29 Banco de Oro v. Equitable Banking Corp., supra; Great Eastern Life
Insurance Co. v. HSBC, supra.
30
Article 2154 of the Civil Code provides: “If something is received
when there is no right to demand it, and it was unduly delivered through
mistake, the obligation to return it arises.” Banco de Oro v. Equitable
Banking Corp., supra.
633
VOL. 252, JANUARY 31, 1996 633
Associated Bank vs. Court of Appeals
More importantly, by reason of the statutory warranty of a general indorser
in Section 66 of the Negotiable Instruments Law, a collecting bank which
indorses a check bearing a forged indorsement and presents it to the
drawee bank guarantees all prior indorsements, including the forged
indorsement. It warrants that the instrument is genuine, and that it is valid
and subsisting at the time of his indorsement. Because the indorsement is
a forgery, the collecting bank commits a breach of this warranty and will be
accountable to the drawee bank. This liability scheme operates without
regard to fault on the part of the collecting/presenting bank. Even if the
latter bank was not negligent, it would still be liable to the drawee bank
because of its indorsement.
The Court has consistently ruled that “the collecting bank or last
endorser generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of
presenting the check for payment to the drawee is an assertion that the
party making the presentment had done its duty to ascertain the
genuineness of the endorsements.”31
The drawee bank is not similarly situated as the collecting bank
because the former makes no warranty as to the genuineness of any
indorsement.32 The drawee bank’s duty is but to verify the genuineness of
the drawer’s signature and not of the indorsement because the drawer is
its client.
 Moreover, the collecting bank is made liable because it is privy to the
depositor who negotiated the check. The bank knows him, his address and
history because he is a client. It has taken a risk on his deposit. The bank
is also in a better position to detect forgery, fraud or irregularity in the
indorsement.
____________________________
31
Bank of the Phil. Islands v. CA, G.R. No. 102383, November 26,
1992, 216 SCRA 51, 63 citing Banco de Oro v. Equitable Banking
Corp., supra; Great Eastern Life Insurance Co. v. HSBC, supra.
32
CAMPOS & LOPEZ-CAMPOS, op. cit. note 18 at 283 citing Inter-
state Trust Co. v. U.S. National Bank, 185 Pac. 260; Hongkong and
Shanghai Banking Corp. v. People’s Bank and Trust Co., supra.
634
634 SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
Hence, the drawee bank can recover the amount paid on the check bearing
a forged indorsement from the collecting bank. However, a drawee bank
has the duty to promptly inform the presentor of the forgery upon discovery.
If the drawee bank delays in informing the presentor of the forgery, thereby
depriving said presentor of the right to recover from the forger, the former
is deemed negligent and can no longer recover from the presentor.33
Applying these rules to the case at bench, PNB, the drawee bank,
cannot debit the current account of the Province of Tarlac because it paid
checks which bore forged indorsements. However, if the Province of Tarlac
as drawer was negligent to the point of substantially contributing to the
loss, then the drawee bank PNB can charge its account. If both drawee
bank-PNB and drawer-Province of Tarlac were negligent, the loss should
be properly apportioned between them.
The loss incurred by drawee bank-PNB can be passed on to the
collecting bank-Associated Bank which presented and indorsed the checks
to it. Associated Bank can, in turn, hold the forger, Fausto Pangilinan,
liable.
If PNB negligently delayed in informing Associated Bank of the forgery,
thus depriving the latter of the opportunity to recover from the forger, it
forfeits its right to reimbursement and will be made to bear the loss.
After careful examination of the records, the Court finds that the
Province of Tarlac was equally negligent and should, therefore, share the
burden of loss from the checks bearing a forged indorsement.
The Province of Tarlac permitted Fausto Pangilinan to collect the
checks when the latter, having already retired from government service,
was no longer connected with the hospital. With the exception of the first
check (dated January 17, 1978), all the checks were issued and released
after Pangilinan’s retirement on February 28, 1978. After nearly three
____________________________
33 JORDAN & WARREN, op. cit. note 26 at 217; CAMPOS & LOPEZ-
CAMPOS, op. cit. note 18 at 283.
635
VOL. 252, JANUARY 31, 1996 635
Associated Bank vs. Court of Appeals
years, the Treasurer’s office was still releasing the checks to the retired
cashier. In addition, some of the aid allotment checks were released to
Pangilinan and the others to Elizabeth Juco, the new cashier. The fact that
there were now two persons collecting the checks for the hospital is an
unmistakable sign of an irregularity which should have alerted employees
in the Treasurer’s office of the fraud being committed. There is also
evidence indicating that the provincial employees were aware of
Pangilinan’s retirement and consequent dissociation from the hospital.
Jose Meru, the Provincial Treasurer, testified:
“ATTY. MORGA:
Q Now, is it true that for a given month there were two releases of
: checks, one went to Mr. Pangilinan and one went to Miss Juco?
JOSE MERU:
A: Yes, sir.
Q Will you please tell us how at the time (sic) when the authorized
: representative of Concepcion Emergency Hospital is and was
supposed to be Miss Juco?
A: Well, as far as my investigation show (sic) the assistant cashier
told me that Pangilinan represented himself as also authorized to
help in the release of these checks and we were apparently misled
because they accepted the representation of Pangilinan that he
was helping them in the release of the checks and besides
according to them they were, Pangilinan, like the rest, was able to
present an official receipt to acknowledge these receipts and
according to them since this is a government check and believed
that it will eventually go to the hospital following the standard
procedure of negotiating government checks, they released the
checks to Pangilinan aside from Miss Juco.”34
The failure of the Province of Tarlac to exercise due care contributed to a
significant degree to the loss tantamount to
____________________________
34
TSN, June 19, 1984, pp. 10-11.
 636
636 SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
negligence. Hence, the Province of Tarlac should be liable for part of the
total amount paid on the questioned checks.
The drawee bank PNB also breached its duty to pay only according to
the terms of the check. Hence, it cannot escape liability and should also
bear part of the loss.
As earlier stated, PNB can recover from the collecting bank.
In the case of Associated Bank v. CA,35 six crossed checks with forged
indorsements were deposited in the forger’s account with the collecting
bank and were later paid by four different drawee banks. The Court found
the collecting bank (Associated) to be negligent and held:
“The Bank should have first verified his right to endorse the crossed
checks, of which he was not the payee, and to deposit the proceeds of the
checks to his own account. The Bank was by reason of the nature of the
checks put upon notice that they were issued for deposit only to the private
respondent’s account. x x x”
The situation in the case at bench is analogous to the above case, for it
was not the payee who deposited the checks with the collecting bank.
Here, the checks were all payable to Concepcion Emergency Hospital but
it was Fausto Pangilinan who deposited the checks in his personal savings
account.
Although Associated Bank claims that the guarantee stamped on the
checks (All prior and/or lack of endorsements guaranteed) is merely a
requirement forced upon it by clearing house rules, it cannot but remain
liable. The stamp guaranteeing prior indorsements is not an empty rubric
which a bank must fulfill for the sake of convenience. A bank is not required
to accept all the checks negotiated to it. It is within the bank’s discretion to
receive a check for no banking institution would consciously or deliberately
accept a check bearing a forged indorsement. When a check is deposited
with the collecting bank, it takes a risk on its depositor. It is only logi-
____________________________
35
G.R. No. 89802, May 7, 1992, 208 SCRA 465.
637
VOL. 252, JANUARY 31, 1996 637
Associated Bank vs. Court of Appeals
cal that this bank be held accountable for checks deposited by its
customers.
A delay in informing the collecting bank (Associated Bank) of the
forgery, which deprives it of the opportunity to go after the forger, signifies
negligence on the part of the drawee bank (PNB) and will preclude it from
claiming reimbursement.
It is here that Associated Bank’s assignment of error concerning C.B.
Circular No. 580 and Section 23 of the Philippine Clearing House
Corporation Rules comes to fore. Under Section 4 (c) of CB Circular No.
580, items bearing a forged endorsement shall be returned within twenty-
four (24) hours after discovery of the forgery but in no event beyond the
period fixed or provided by law for filing of a legal action by the returning
bank. Section 23 of the PCHC Rules deleted the requirement that items
bearing a forged endorsement should be returned within twenty-four hours.
Associated Bank now argues that the aforementioned Central Bank
Circular is applicable. Since PNB did not return the questioned checks
within twenty-four hours, but several days later, Associated Bank alleges
that PNB should be considered negligent and not entitled to
reimbursement of the amount it paid on the checks.
The Court deems it unnecessary to discuss Associated Bank’s
assertions that CB Circular No. 580 is an administrative regulation issued
pursuant to law and as such, must prevail over the PCHC rule. The Central
Bank circular was in force for all banks until June 1980 when the Philippine
Clearing House Corporation (PCHC) was set up and commenced
operations. Banks in Metro Manila were covered by the PCHC while banks
located elsewhere still had to go through Central Bank Clearing. In any
event, the twenty-four-hour return rule was adopted by the PCHC until it
was changed in 1982. The contending banks herein, which are both
branches in Tarlac province, are therefore not covered by PCHC Rules but
by CB Circular No. 580. Clearly then, the CB circular was applicable when
the forgery of the checks was discovered in 1981.
638
638 SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
The rule mandates that the checks be returned within twenty-four hours
after discovery of the forgery but in no event beyond the period fixed by
law for filing a legal action. The rationale of the rule is to give the collecting
bank (which indorsed the check) adequate opportunity to proceed against
the forger. If prompt notice is not given, the collecting bank may be
prejudiced and lose the opportunity to go after its depositor.
The Court finds that even if PNB did not return the questioned checks
to Associated Bank within twenty-four hours, as mandated by the rule, PNB
did not commit negligent delay. Under the circumstances, PNB gave
prompt notice to Associated Bank and the latter bank was not prejudiced
in going after Fausto Pangilinan. After the Province of Tarlac informed PNB
of the forgeries, PNB necessarily had to inspect the checks and conduct
its own investigation. Thereafter, it requested the Provincial Treasurer’s
office on March 31, 1981 to return the checks for verification. The Province
of Tarlac returned the checks only on April 22, 1981. Two days later,
Associated Bank received the checks from PNB.36
Associated Bank was also furnished a copy of the Province’s letter of
demand to PNB dated March 20, 1981, thus giving it notice of the forgeries.
At this time, however, Pangilinan’s account with Associated had only
P24.63 in it.37 Had Associated Bank decided to debit Pangilinan’s account,
it could not have recovered the amounts paid on the questioned checks. In
addition, while Associated Bank filed a fourth-party complaint against
Fausto Pangilinan, it did not present evidence against Pangilinan and even
presented him as its rebuttal witness.38 Hence, Associated Bank was not
prejudiced by PNB’s failure to comply with the twenty-four-hour return rule.
Next, Associated Bank contends that PNB is estopped from requiring
reimbursement because the latter paid and cleared
____________________________
36
See footnote 9.
37
Exhibit “3-G” for Associated Bank.
38 TSN, January 8, 1987.
639
VOL. 252, JANUARY 31, 1996 639
Associated Bank vs. Court of Appeals
the checks. The Court finds this contention unmeritorious. Even if PNB
cleared and paid the checks, it can still recover from Associated Bank. This
is true even if the payee’s Chief Officer who was supposed to have
indorsed the checks is also a customer of the drawee bank.39 PNB’s duty
was to verify the genuineness of the drawer’s signature and not the
genuineness of payee’s indorsement. Associated Bank, as the collecting
bank, is the entity with the duty to verify the genuineness of the payee’s
indorsement.
PNB also avers that respondent court erred in adjudging circuitous
liability by directing PNB to return to the Province of Tarlac the amount of
the checks and then directing Associated Bank to reimburse PNB. The
Court finds nothing wrong with the mode of the award. The drawer,
Province of Tarlac, is a client or customer of the PNB, not of Associated
Bank. There is no privity of contract between the drawer and the collecting
bank.
The trial court made PNB and Associated Bank liable with legal interest
from March 20, 1981, the date of extrajudicial demand made by the
Province of Tarlac on PNB. The payments to be made in this case stem
from the deposits of the Province of Tarlac in its current account with the
PNB. Bank deposits are considered under the law as loans.40 Central Bank
Circular No. 416 prescribes a twelve percent (12%) interest per annum for
loans, forebearance of money, goods or credits in the absence of express
stipulation. Normally, current accounts are likewise interest-bearing, by
express contract, thus excluding them from the coverage of CB Circular
No. 416. In this case, however, the actual interest rate, if any, for the
current account opened by the Province of Tarlac with PNB was not given
in evidence. Hence, the Court deems it wise to affirm the trial court’s use
of the legal interest rate, or six percent (6%) per annum. The interest rate
shall be com-
____________________________
39
San Carlos Milling Co. Ltd. v. BPI, 59 Phil. 59.
40
Article 1980 of the Civil Code reads: Fixed, savings, and current
deposits of money in banks and similar institutions shall be governed by
the provisions concerning simple loan.
640
640 SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
puted from the date of default, or the date of judicial or extrajudicial
demand.41 The trial court did not err in granting legal interest from March
20, 1981, the date of extrajudicial demand.
The Court finds as reasonable, the proportionate sharing of fifty
percent—fifty percent (50%-50%). Due to the negligence of the Province
of Tarlac in releasing the checks to an unauthorized person (Fausto
Pangilinan), in allowing the retired hospital cashier to receive the checks
for the payee hospital for a period close to three years and in not properly
ascertaining why the retired hospital cashier was collecting checks for the
payee hospital in addition to the hospital’s real cashier, respondent
Province contributed to the loss amounting to P203,300.00 and shall be
liable to the PNB for fifty (50%) percent thereof. In effect, the Province of
Tarlac can only recover fifty percent (50%) of P203,300.00 from PNB.
The collecting bank, Associated Bank, shall be liable to PNB for fifty
(50%) percent of P203,300.00. It is liable on its warranties as indorser of
the checks which were deposited by Fausto Pangilinan, having guaranteed
the genuineness of all prior indorsements, including that of the chief of the
payee hospital, Dr. Adena Canlas. Associated Bank was also remiss in its
duty to ascertain the genuineness of the payee’s indorsement.
IN VIEW OF THE FOREGOING, the petition for review filed by the
Philippine National Bank (G.R. No. 107612) is hereby PARTIALLY
GRANTED. The petition for review filed by the Associated Bank (G.R. No.
107382) is hereby DENIED. The decision of the trial court is MODIFIED.
The Philippine National Bank shall pay fifty percent (50%) of P203,300.00
to the Province of Tarlac, with legal interest from March 20, 1981 until the
payment thereof. Associated Bank shall pay fifty percent (50%) of
P203,300.00 to the Philippine National
____________________________
41
Eastern Shipping Lines, Inc. v. CA, G.R. No. 97412, July 12,
1994, 234 SCRA 78.
641
VOL. 252, JANUARY 31, 1996 641
Paredes, Jr. vs. Sandiganbayan, Second Division
Bank, likewise, with legal interest from March 20, 1981 until payment is
made.
SO ORDERED.
Regalado (Chairman), Puno and Mendoza, JJ.,concur.
Petition of PNB partially granted while that of Associated Bank denied.
Judgment of trial court modified.
Note.—Forgery cannot be presumed it must be proved by clear,
positive and convincing evidence. (Tenio-Obsequio vs. Court of
Appeals, 230 SCRA 550 [1994])
 VOL. 66, AUGUST 6, 1975 29
Jai-Alai Corp. of the Phil. vs. Bank of the Phil. Is.
No. L-29432. August 6, 1975.*
JAI-ALAI CORPORATION OF THE PHILIPPINES, petitioner, vs. BANK
OF THE PHILIPPINE ISLANDS, respondent.
Negotiable Instruments Law; Checks; Banks; Agency; Where check
is deposited with a collecting bank relationship created is that of agency,
not creditor-debtor. Same rule follows where after drawee-bank paid the
collecting bank, it was found that signature of payee of checks was forged
by one who previously encashed them.—When the petitioner deposited
the checks with the respondent, the nature of the relationship created at
that stage was one of agency, that is, the bank was to collect from the
drawee of the checks the corresponding proceeds. It is true that the
respondent had already collected the proceeds of the checks when it
debited the petitioner’s account, so that following the rule in Gullas vs.
Philippine National Bank it might be argued that the relationship between
the parties had become that of creditor and debtor as to preclude the
respondent from using the petitioner’s funds to make payments not
authorized by the latter. It is our view nonetheless that no creditor-debtor
relationship was created between the parties. x x x Since under the
foregoing provision of Section 23 of the Negotiable Instruments Law, a
forged signature in a negotiable instrument is wholly inoperative and no
right to discharge it or enforce its payment can be acquired through or
under the forged signature except against a party who cannot invoke the
forgery, it stands to reason, upon the facts of record, that the respondent,
as a collecting bank which indorsed the checks to the drawee-banks for
clearing, should be liable to the latter for reimbursement, for, as found by
the court a quo and by the appellate court, the indorsements on the checks
had been forged prior to their delivery to the petitioner. In legal
contemplation, therefore, the payments made by the drawee-banks to the
respondent on account of the said checks were ineffective; and, such being
the case, the relationship of creditor and debtor between petitioner and the
respondent had not been validly effected, the checks not having been
properly and legitimately converted into cash. In Great Eastern Life Ins.
Co. vs. Hongkong & Shanghai Bank, the Court rule that it is the obligation
of the collecting bank to reimburse the drawee-bank the value of the
checks subsequently found to contain the forged indorsement of the
payee. The reason is that the bank with which the check was deposited
has, no right to pay the sum stated therein to the forger “or anyone else
upon a forged signature.” x x x The petitioner must in turn shoulder the
_______________
*
FIRST DIVISION
30
30 SUPREME COURT REPORTS ANNOTATED
Jai-Alai Corp. of the Phil. vs. Bank of the Phil. Is.
loss of the amounts which the respondent, as its collecting agent, had
to reimburse to the drawee-banks.
Same; Same; Same; Same; Lapse of 3 months after collecting bank
obtained proceeds of checks from drawee-bank before it informed
depositor of fact checks were forged not material where collecting bank
acted promptly upon being informed of forgery. Moreover, depositor of a
check as indorser warrants that it is genuine and in all respects what it
purports to be.—We do not consider material for the purposes of the case
at bar that more than three months had elapsed since the proceeds of the
checks in question were collected by respondent. The records shows that
the respondent had acted promptly after being informed that the
indorsements on the checks were forged. Moreover having received the
checks merely for collection and deposit, the respondent cannot be
expected to know or ascertain the genuineness of all prior indorsements
on the said checks. Indeed, having itself indorsed them to the respondent
in accordance with the rules and practices of commercial banks, of which
the Court takes due cognizance, the petitioner is deemed to have given the
warranty prescribed in Section 66 of the Negotiable Instruments Law that
every single one of those checks “is genuine and in all respects what it
purports to be.”
Same; Same; Same; Same; One who accepts and encashes a check
from an individual knowing that the payee is a corporation does so at his
peril.—The petitioner was, moreover, grossly recreant in accepting the
checks in questions from Ramirez. It could not have escaped the attention
of the petitioner that the payee of all the checks was a corporation—the
Inter-Island Gas Service, Inc. Yet, the petitioner cashed these checks, to a
mere individual who was admittedly a habitue at its jai-alai games without
making any inquiry as to his authority to exchange checks belonging to the
payee-corporation. x x x 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. It must be noted further that three of the checks in question are
crossed checks, namely, exhs. 21, 25 and 27, which may only be
deposited, but not encashed; yet, petitioner negligently accepted them for
cash. That two of the crossed checks, namely, exhs. 21 and 25, are bearer
instruments would not, in our view, exculpate the petitioner from liability
with respect to them. The fact that they are bearer checks and at the same
time crossed checks should have aroused the petitioner’s suspicion as to
the title of Ramirez over them and his authority to cash them (apparently
to purchase jai-alai tickets from the petitioner), it appearing on their face
that a corporate entity—the Inter-Island Gas Service, Inc.—was the payee From April 2, 1959 to May 18, 1959, ten checks with a total face value
thereof. of P8,030.58 were deposited by the petitioner in its current account with
31 the respondent bank. The particulars of these checks are as follows:
VOL. 66, AUGUST 6, 1975 31 32
Jai-Alai Corp. of the Phil. vs. Bank of the Phil. Is. 32 SUPREME COURT REPORTS ANNOTATED
Same; One who indorses a bearer instrument incurs liability of Jai-Alai Corp. of the Phil. vs. Bank of the Phil. Is.
general indorser that instrument is genuine.—At all events, under Section
67 of the Negotiable Instruments Law, “Where a person places his 1. 1.Drawn by the Delta Engineering Service upon the Pacific
indorsement on an instrument negotiable by delivery he incurs all the Banking Corporation and payable to the Inter-Island Gas Service,
liability of an indorser,” and under Section 66 of the same statute a general Inc. or order:
indorser warrants that the instrument” is genuine and in all respects what
it purports to be.” Date Check Exhibit Amount
Same; Contracts; Banks; Checks; Provision in deposit slip that bank Deposited Number Number
reserves to itself right to charge back item to account of its depositor at any 4/2/59 B-352680 P 500.00 18
time before current funds actually received by Bank does not negate right 4/20/59 A-156907 372.32 19
of Bank to debit depositor’s account for value of forged checks after 4/24/59 A-156924 397.82 20
drawee-bank had paid the collecting bank because the transfer of funds 5/4/59 B-364764 250.00 23
from drawee-bank to collecting bank in such cases is ineffectual.—The 5/6/59 B-364775 250.00 24
provision in the deposit slip issued by the respondent which stipulates that 2. Drawn by the Enrique Cortiz & Co. upon the Pacific Banking Corporation
it “reserves to itself, the right to charge back the item to the account of its and payable to the Inter-Island Gas Service, Inc. or bearer:
depositor”, at any time before “current funds or solvent credits shall have 4/13/59 B-335063 P2108.70 21
been actually received by the Bank,” would not materially affect the 4/27/59 B-335072 P2210.94 22
conclusion we have reached. That stipulation prescribes that there must 3. Drawn by the Luzon Tinsmith & Company upon the China Banking
be an actual receipt by the bank of current funds or solvent credits; but as Corporation and payable to the Inter-Island Gas Service, Inc. or bearer:
we have earlier indicated the transfer by the drawee-banks of funds to the 5/18/59 VN430188 P 940.80 25
respondent on account of the checks in question was ineffectual because 4. Drawn by the Roxas Manufacturing, Inc. upon the Philippine National
made under the mistaken and valid assumption that the indorsements of Bank and payable to the Inter-Island Gas Service, Inc. or oder:
the payee thereon were genuine. x x x There was, therefore, in 5/14/59 1860160 P 500.00 26
contemplation of law, no valid payment of money made by the drawee- 5/18/59 1860660 P 500.00 27
banks to the respondent on account of the questioned checks. All the foreoing checks, which were acquired by the petitioner from one
Antonio J. Ramirez, a sales agent of the Inter-Island Gas and a regular
PETITION for review of the decision of the Court of Appeals. bettor at jai-alai games, were, upon deposit, temporarily credited to the
petitioner’s account in accordance with the clause printed on the deposit
The facts are stated in the opinion of the Court. slips issued by the respondent and which reads:
Bausa, Ampil & Suarez for petitioner. “Any credit allowed the depositor on the books of the Bank for checks or
Aviado & Aranda for respondent. drafts hereby received for deposit, is provisional only, until such time as
the proceeds thereof, in current funds or solvent credits, shall have been
CASTRO, J.: actually received by the Bank and the latter reserves to itself the right to
charge back the item to the account of its depositor, at any time before that
This is a petition by the Jai-Alai Corporation of the Philippines (hereinafter event, regardless of whether or not the item itself can be returned.”
referred to as the petitioner) for review of the decision of the Court of 33
Appeals in C.A.-G.R. 34042-R dated June 25, 1968 in favor of the Bank of VOL. 66, AUGUST 6, 1975 33
the Philippine Islands (hereinafter referred to as the respondent). Jai-Alai Corp. of the Phil. vs. Bank of the Phil. Is.
About the latter part of July 1959, after Ramirez had resigned from the
Inter-Island Gas and after the checks had been submitted to inter-bank
clearing, the Inter-Island Gas discovered that all the indorsements made
on the checks purportedly by its cashiers, Santiago Amplayo and Vicenta
Mucor (who were merely authorized to deposit checks issued payable to
the said company) as well as the rubber stamp impression thereon reading
“Inter-Island Gas Service, Inc.,” were forgeries. In due time, the Inter-Island
Gas advised the petitioner, the respondent, the drawers and the drawee-
banks of the said checks about the forgeries, and filed a criminal complaint
against Ramirez with the Office of the City Fiscal of Manila.1
The respondent’s cashier, Ramon Sarthou, upon receipt of the latter of
Inter-Island Gas dated August 31, 1959, called up the petitioner’s cashier,
Manuel Garcia, and advised the latter that in view of the circumstances he
would debit the value of the checks against the petitioner’s account as soon
as they were returned by the respective drawee-banks.
Meanwhile, the drawers of the checks, having been notified of the
forgeries, demanded reimbursement to their respective accounts from the
drawee-banks, which in turn demanded from the respondent, as collecting
bank, the return of the amounts they had paid on account thereof. When
the drawee-banks returned the checks to the respondent, the latter paid
their value which the former in turn paid to the Inter-Island Gas. The
respondent, for its part, debited the petitioner’s current account and
forwarded to the latter the checks containing the forged indorsements,
which the petitioner, however, refused to accept.
On October 8, 1959 the petitioner drew against its current account with
the respondent a check for P135,000 payable to the order of the Mariano
Olondriz y Cia. in payment of certain shares of stock. The check was,
however, dishonored by the respondent as its records showed that as of
October 8, 1959 the current account of the petitioner, after netting out the
value of the checks P8,030.58) with the forged indorsements, had a
balance of only P128,257.65.
_______________
1
The City Fiscal dropped the charges on the ground that the Inter-
Island Gas which was later reimbursed by the drawee-banks, was no
longer qualified to be regarded as an offended party which could properly
file a complaint against Ramirez because it had not suffered any damage
at all.
34
34 SUPREME COURT REPORTS ANNOTATED
Jai-Alai Corp. of the Phil. vs. Bank of the Phil. Is.
The petitioner then filed a complaint against the respondent with the Court
of First Instance of Manila, which was however dismissed by the trial court
after due trial, and as well by the Court of Appeals, on appeal.
Hence, the present recourse.
The issues posed by the petitioner in the instant petition may be briefly
stated as follows:
1. (a)Whether the respondent had the right to debit the petitioner’s
current account in the amount corresponding to the total value of
the checks in question after more than three months had elapsed
from the date their value was credited to the petitioner’s account:
2. (b)Whether the respondent is estopped from claiming that the
amount of P8,030.58, representing the total value of the checks
with the forged indorsements, had not been properly credited to
the petitioner’s account, since the same had already been paid by
the drawee-banks and received in due course by the respondent;
and
3. (c)On the assumption that the respondent had improperly debited
the petitioner’s current account, whether the latter is entitled to
damages.
These three issues interlock and will be resolved jointly.
In our opinion, the respondent acted within legal bounds when it debited
the petitioner’s account. When the petitioner deposited the checks with the
respondent, the nature of the relationship created at that stage was one of
agency, that is, the bank was to collect from the drawees of the checks the
corresponding proceeds. It is true that the respondent had already
collected the proceeds of the checks when it debited the petitioner’s
account, so that following the rule in Gullas vs. Philippine National Bank2 it
might be argued that the relationship between the parties had become that
of creditor and debtor as to preclude the respondent from using the
petitioner’s funds to make payments not authorized by the latter. It is our
view nonetheless that no creditor-debtor relationship was created between
the parties.
Section 23 of the Negotiable Instruments Law (Act 2031) states that3—
_______________
2
62 Phil. 519 (1935).
3
A bank check is a negotiable instrument and is governed by the
Negotiable Instruments Law (Ang Tiong vs. Ting, 22 SCRA 713).
35
VOL. 66, AUGUST 6, 1975 35
Jai-Alai Corp. of the Phil. vs. Bank of the Phil. Is.
“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.”
Since under the foregoing provision, a forged signature in a negotiable
instrument is wholly inoperative and no right to discharge it or enforce its
payment can be acquired through or under the forged signature except
against a party who cannot invoke the forgery, it stands to reason, upon
the facts of record, that the respondent, as a collecting bank which
indorsed the checks to the drawee-banks for clearing, should be liable to
the latter for reimbursement, for, as found by the court a quo and by the
appellate court, the indorsements on the checks had been forged prior to
their delivery to the petitioner. In legal contemplation, therefore, the
payments made by the draweebanks to the respondent on account of the
said checks were ineffective; and, such being the case, the relationship of
creditor and debtor between the petitioner and the respondent had not
been validly effected, the checks not having been properly and legitimately
converted into cash.4
In Great Eastern Life Ins. Co. vs. Hongkong & Shanghai Bank,5 the
Court ruled that it is the obligation of the collecting bank to reimburse the
drawee-bank the value of the checks subsequently found to contain the
forged indorsement of the payee. The reason is that the bank with which
the check was deposited has no right to pay the sum stated therein to the
forger “or anyone else upon a forged signature.” “It was its duty to know,”
said the Court, “that [the payee’s] endorsement was genuine before
cashing the check.” The petitioner must in turn shoulder the loss of the
amounts which the respondent, as its collecting agent, had to reimburse to
the drawee-banks.
We do not consider material for the purposes of the case at bar that
more than three months had elapsed since the proceeds of the checks in
question were collected by the respondent. The
_______________
4
The collecting bank may certainly set up as defense the socalled “24-
hour clearing house rule” of the Central Bank. This rule is not, however,
invoked here. See Hongkong & Shanghai Banking Corp. vs. People’s Bank
& Trust Co., 35 SCRA 141.
5 43 Phil. 678 (1922).
36
36 SUPREME COURT REPORTS ANNOTATED
Jai-Alai Corp. of the Phil. vs. Bank of the Phil. Is.
record shows that the respondent had acted promptly after being informed
that the indorsements on the checks were forged. Moreover, having
received the checks merely for collection and deposit, the respondent
cannot be expected to know or ascertain the genuineness of all prior
indorsements on the said checks. Indeed, having itself indorsed them to
the respondent in accordance with the rules and practices of commercial
banks, of which the Court takes due cognizance, the petitioner is deemed
to have given the warranty prescribed in Section 66 of the Negotiable
Instruments Law that every single one of those checks “is genuine and in
all respects what it purports to be.”
The petitioner was, moreover, grossly recreant in accepting the checks
in question from Ramirez. It could not have escaped the attention of the
petitioner that the payee of all the checks was a corporation—the Inter-
Island Gas Service, Inc. Yet, the petitioner cashed these checks to a mere
individual who was admittedly a habitue at its jai-alai games without making
any inquiry as to his authority to exchange checks belonging to the payee-
corporation. In Insular Drug Co. vs. National6 the Court made the
pronouncement that
“. . . The right of an agent to indorse commercial paper is a very responsible
power and will not be lightly inferred. A salesman with authority to collect
money belonging to his principal does not have the implied authority to
indorse checks received in payment. 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.” (underscoring supplied)
It must be noted further that three of the checks in question are crossed
checks, namely, exhs. 21, 25 and 27, which may only be deposited, but
not encashed; yet, the petitioner negligently accepted them for cash. That
two of the crossed checks, namely, exhs. 21 and 25, are bearer
instruments would not, in our view, exculpate the petitioner from liability
with respect to them. The fact that they are bearer checks and at the same
time crossed checks should have aroused the petitioner’s suspicion as to
the title of Ramirez over them and his authority to cash them (apparently
to purchase jai-alai tickets from the petitioner), it appearing on their face
that a corporate entity—the Inter-
_______________
6
58 Phil. 685 (1933).
37
VOL. 66, AUGUST 6, 1975 37
Jai-Alai Corp. of the Phil. vs. Bank of the Phil. Is.
Island Gas Service, Inc.—was the payee thereof and Ramirez delivered note has the right to hold any one or any two of the signers responsible for
the said checks to the petitioner ostensibly on the strength of the payee’s the payment of the amount of the said note. (Philippine National Bank vs.
cashiers’ indorsements. Concepcion Mining Co., Inc.,5 SCRA 745).
At all events, under Section 67 of the Negotiable Instruments Law, Section 63 of the Negotiable Instruments Law makes a person “placing
“Where a person places his indorsement on an instrument negotiable by his signature upon an instrument otherwise than that as maker, drawer or
delivery he incurs all the liability of an indorser,” and under Section 66 of acceptor” a general indorser “unless he clearly indicates by appropriate
the same statute a general indorser warrants that the instrument “is words his intention to be bound in some other capacity.” (Ang Tiong vs.
genuine and in all respects what it purports to be.” Considering that the Ting, 22 SCRA 713).
petitioner indorsed the said checks when it deposited them with the It is not a valid defense that the accommodation party did not receive
respondent, the petitioner as an indorser guaranteed the genuineness of any valuable consideration when he executed the instrument. It is not
all prior indorsements thereon. The respondent which relied upon the correct to say either that the holder for value is not a holder in due course
petitioner’s warranty should not be held liable for the resulting loss. This merely because at the time he acquired the instrument, he knew that the
conclusion applied similarly to exh. 22 which is an uncrossed bearer indorser was only an accommodation party. (Ibid.)
instrument, for under Section 65 of the Negotiable Instrument Law. “Every A promissory note payable “on demand” is immediately demandable
person negotiating an instrument by delivery. . . warrants (a) That the and action thereon prescribes within ten years. (Pay vs. vda. de
instrument is genuine and in all respects what it purports to be.” Under that Palanca, 57 SCRA 618).
same section this warranty “extends in favor of no holder other than the Postal money orders are not negotiable instruments. (Philippine
immediate transferee,” which, in the case at bar, would be the respondent. Education Co., Inc. vs. Soriano, 39 SCRA 587).
The provision in the deposit slip issued by the respondent which
stipulates that it “reserves to itself the right to charge back the item to the
account of its depositor,” at any time before “current funds or solvent
credits shall have been actually received by the Bank,” would not materially
affect the conclusion we have reached. That stipulation prescribes that
there must be an actual receipt by the bank of current funds or solvent
credits; but as we have earlier indicated the transfer by the drawee-banks
of funds to the respondent on account of the checks in question was
ineffectual because made under the mistaken and valid assumption that
the indorsements of the payee thereon were genuine. Under article 2154
of the New Civil Code “If something is received when there is no right to
demand it and it was unduly delivered through mistake, the obligation to
return it arises.” There was, therefore, in contemplation of law, no valid
payment of money made by the drawee-banks to the respondent on
account of the questioned checks.
ACCORDINGLY, the judgment of the Court of Appeals is affirmed, at
petitioner’s cost.
Makasiar, Esguerra, Muñoz Palma and Martin, JJ., concur.
38
38 SUPREME COURT REPORTS ANNOTATED
Almeda vs. Villaluz
Teehankee, J., is on leave.
Judgment affirmed.
Notes.—Under Section 17(g) of the Negotiable Instruments Law and
Article 1216 of the new Civil Code, where a promissory note was executed
jointly and severally by two or more persons, the payee of the promissory
680 SUPREME COURT REPORTS ANNOTATED
Republic Bank vs. Ebrada
No. L-40796. July 31, 1975.*
REPUBLIC BANK, plaintiff-appellee, vs. MAURICIA T. EBRADA,
defendant-appellant.
Negotiable Instruments Law; Checks; It is only the negotiation
predicated on the forged indorsement that should be declared
inoperative.—It can be safely concluded that it is only the negotiation
predicated on the forged indorsement that should be declared inoperative.
This means that the negotiation of the check in question from Martin
Lorenzo, the original payee, to Ramon R. Lorenzo the second indorser,
should be declared of no effect, but the negotiation of the aforementioned
check from Ramon R. Lorenzo to Adeliada Dominguez, the third indorser,
and from Adelaida Dominguez to the defendant-appellant who did not
know of the forgery, should be considered valid and enforceable, barring
any claim of forgery.
Same; Same; If the drawee-bank discovers that the signature of the
payee was forged after it has paid the amount of the check to the
* FIRST DIVISION.
681
VOL. 65, JULY 31, 1975 681
Republic Bank vs. Ebrada
holder thereof, it can recover the amount paid from the said holder.—
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 and the drawee who has paid the forged check,
without actual negligence on his part, may recover the money paid from
such negligent purchasers. In such cases the recovery is permitted
because although the drawee was in a way negligent in failing to detect
the forgery, yet if the encasher of the check had performed his duty, the
forgery would in all probability, have been detected and the fraud defeated.
x x x Similarly, in the case before us, the defendant-appellant, upon
receiving the check in question from Adelaida Dominguez, was duty-bound
to ascertain whether the check in question was genuine before presenting
it to plaintiff Bank for payment. Her failure to do so makes her liable for the
loss and the plaintiff Bank may recover from her the money she received
for the check.
Same; Same; Fact that the person who encashed the check wherein
the signature of the payee was forged turned over the proceeds to the one
who indorsed said check to the said holder would not exempt the encasher
from liability as by doing so he acted as an accomodation party.—The fact
that immediately after receiving the cash proceeds of the check in question
x x x defendant-appellant immediately turned over said amount to Adelaida
Dominguez (Third-Party defendant and the Fourth-Party Plaintiff) who in
turn hand the amount to Justina Tinio on the same date would not exempt
her from liability because by doing so, she acted as an accommodation
party to the check for which she is also liable under Section 29 of the
Negotiable Instruments Law
APPEAL from a decision of the Court of First Instance of Manila.
Jarencio, J
The facts are stated in the opinion of the Court.
Sabino de Leon, Jr. for plaintiff-appellee.
Julio Baldonado for defendant-appellant.
MARTIN, J.:
Appeal on a question of law of the decision of the Court of First Instance
of Manila, Branch XXIII in Civil Case No. 69288, entitled “Republic Bank
vs. Mauricia T. Ebrada.”
On or about February 27, 1963 defendant Mauricia T. Ebrada,
encashed Back Pay Check No. 508060 dated January 15, 1963 for
P1,246.08 at the main office of the plaintiff Republic Bank at
682
682 SUPREME COURT REPORTS ANNOTATED
Republic Bank vs. Ebrada
Escolta, Manila. The check was issued by the Bureau of Treasury.1 Plaintiff
Bank was later advised by the said bureau that the alleged indorsement on
the reverse side of the aforesaid check by the payee, “Martin Lorenzo” was
a forgery2 since the latter had allegedly died as of July 14, 1952.3 Plaintiff
Bank was then requested by the Bureau of Treasury to refund the amount
of P1,246.08.4 To recover what it had refunded to the Bureau of Treasury,
plaintiff Bank made verbal and formal demands upon defendant Ebrada to
account for the sum of P1,246.08, but said defendant refused to do so. So
plaintiff Bank sued defendant Ebrada before the City Court of Manila.
On July 11, 1966, defendant Ebrada filed her answer denying the
material allegations of the complaint and as affirmative defenses alleged
that she was a holder in due course of the check in question, or at the very
least, has acquired her rights from a holder in due course and therefore
entitled to the proceeds thereof. She also alleged that the plaintiff Bank has
no cause of action against her; that it is in estoppel, or so negligent as not
to be entitled to recover anything from her.5
About the same day, July 11, 1966 defendant Ebrada filed a Third-Party
complaint against Adelaida Dominguez who, in turn, filed on September
14, 1966 a Fourth-Party complaint against Justina Tinio.
 On March 21, 1967, the City Court of Manila rendered judgment for the
plaintiff Bank against defendant Ebrada; for Third-Party plaintiff against
Third-Party defendant, Adelaida Dominguez, and for Fourth-Party plaintiff
against Fourth-Party defendant, Justina Tinio.
From the judgment of the City Court, defendant Ebrada took an appeal
to the Court of First Instance of Manila where the parties submitted a partial
stipulation of facts as follows:
“COME NOW the undersigned counsel for the plaintiff, defendant, Third-
Party defendant and Fourth-Party plaintiff and unto this Honorable Court
most respectfully submit the following:
PARTIAL STIPULATION OF FACTS
1. 1.That they admit their respective capacities to sue and be sued;
2. 5.That the signature of defendant MAURICIA T. EBRADA was
affixed on said check on February 27, 1963 when she encashed
it with the plaintiff Bank;
3. 6.That immediately after defendant MAURICIA T. EBRADA
received the cash proceeds of said check in the sum of P1,246.08
from the plaintiff Bank, she immediately turned over the said
amount to the third-party defendant and fourth-party plaintiff
ADELAIDA DOMINGUEZ, who in turn handed the said amount to
the fourth-party defendant JUSTINA TINIO on the same date, as
evidenced by the receipt signed by her which will be marked as
Exhibit “1-Dominguez”; and
4. 7.That the parties hereto reserve the right to present evidence on
any other fact not covered by the foregoing stipulations. Manila,
Philippines, June 6, 1969.”

_______________ Based on the foregoing stipulation of facts and the documentary evidence
presented, the trial court rendered a decision, the dispositive portion of
1
ROA, p. 2. which reads as follows:
2 ROA, p. 2. “WHEREFORE, the Court renders judgment ordering the defendant
3 ROA, p. 2. Mauricia T. Ebrada to pay the plaintiff the amount of ONE THOUSAND
4 Exhibit “F-1”. TWO FORTY-SIX 08/100 (P1,246.08), with interest at the legal rate from
5 ROA, p. 5. the filing of the complaint on June 16, 1966, until fully paid, plus the costs
683 in both instances against Mauricia T. Ebrada.
VOL. 65, JULY 31, 1975 683 The right of Mauricia T. Ebrada to file whatever claim she may have
Republic Bank vs. Ebrada against Adelaida Dominguez in connection with this case is hereby
reserved. The right of the estate of Dominguez to file the fourth-party
complaint against Justina Tinio is also reserved.
1. 2.That on January 15, 1963 the Treasury of the Philippines issued
its Check No. BP-508060, payable to the order of one MARTIN SO ORDERED.”
LORENZO, in the sum of P1,246.08, and drawn on the Republic In her appeal, defendant-appellant presses that the lower court erred:
Bank, plaintiff herein, which check will be marked as Exhibit “A” 684
for the plaintiff; 684 SUPREME COURT REPORTS ANNOTATED
2. 3.That the back side of aforementioned check bears the following Republic Bank vs. Ebrada
signatures, in this order: “IN ORDERING THE APPELLANT TO PAY THE APPELLEE THE FACE
VALUE OF THE SUBJECT CHECK AFTER FINDING THAT THE
DRAWER ISSUED THE SUBJECT CHECK TO A PERSON ALREADY
1. 1)MARTIN LORENZO;
DECEASED FOR 11-1/2 YEARS AND THAT THE APPELLANT DID NOT
2. 2)RAMON R. LORENZO;
BENEFIT FROM ENCASHING SAID CHECK.”
3. 3)DELIA DOMINGUEZ; and
From the stipulation of facts it is admitted that the check in question
4. 4)MAURICIA T. EBRADA;
was delivered to defendant-appellant by Adelaida Dominguez for the
purpose of encashment and that her signature was affixed on said check
1. 4.That the aforementioned check was delivered to the defendant when she cashed it with the plaintiff Bank. Likewise it is admitted that
MAURICIA T. EBRADA by the Third-Party defendant and Fourth- defendant-appellant was the last indorser of the said check. As such
Party plaintiff ADELAIDA DOMINGUEZ, for the purpose of indorser, she was supposed to have warranted that she has good title to
encashment; said check; for under Section 65 of the Negotiable Instruments Law:6
“Every person negotiating an instrument by delivery or by qualified
indorsement, warrants:
1. (a)That the instrument is genuine and in all respects what it
purports to be.
2. (b)That she has good title to it.”
3. x x x x x x
and under Section 65 of the same Act:
“Every indorser who indorses without qualification warrants to all
subsequent holders in due course:
1. (a)The matters and things mentioned in subdivisions (a), (b) and
(c) of the next preceding sections;
2. (b)That the instrument is at the time of his indorsement valid and
subsisting.”
It turned out, however, that the signature of the original payee of the check,
Martin Lorenzo was a forgery because he was already dead7 almost 11
years before the check in question was issued by the Bureau of Treasury.
Under Section 23 of the Negotiable Instruments Law (Act 2031):
“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 instruments, or to give a discharge thereof against any party
thereto, can be acquired through or under such
_______________
6
Act No. 2031.
7
He died July 14, 1952 as shown by the Certificate of Death issued by
the Local Civil Registrar of the Municipality of Lubao Pampanga (Exhibit
B).
685
VOL. 65, JULY 31, 1975 685
Republic Bank vs. Ebrada
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 is clear from the provision that where the signature on a negotiable
instrument if forged, the negotiation of the check is without force or effect.
But does this mean that the existence of one forged signature therein will
render void all the other negotiations of the check with respect to the other
parties whose signatures are genuine?
In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where a
check has several indorsements on it, it was held that it is only the
negotiation based on the forged or unauthorized signature which is
inoperative. Applying this principle to the case before Us, it can be safely
concluded that it is only the negotiation predicated on the forged
indorsement that should be declared inoperative. This means that the
negotiation of the check in question from Martin Lorenzo, the original
payee, to Ramon R. Lorenzo, the second indorser, should be declared of
no effect, but the negotiation of the aforesaid check from Ramon R.
Lorenzo to Adelaida Dominguez, the third indorser, and from Adelaida
Dominguez to the defendant-appellant who did not know of the forgery,
should be considered valid and enforceable, barring any claim of forgery.
What happens then, if, after the drawee bank has paid the amount of
the check to the holder thereof, it was discovered that the signature of the
payee was forged? Can the drawee bank recover from the one who
encashed the check?
In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it was
held that the drawee of a check can recover from the holder the money
paid to him on a forged instrument. It is not supposed to be its duty to
ascertain whether the signatures of the payee or indorsers are genuine or
not. This is because the indorser is supposed to warrant to the drawee that
the signatures of the payee and previous indorsers are genuine, warranty
not extending only to holders in due course. 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 and the
drawee who has paid the forged check, without actual negligence on his
part, may recover the money paid from such negligent purchasers. In such
cases the recovery is permitted because although the drawee was in a way
negligent in failing to
686
686 SUPREME COURT REPORTS ANNOTATED
Republic Bank vs. Ebrada
detect the forgery, yet if the encasher of the check had performed his duty,
the forgery would in all probability, have been detected and the fraud
defeated. The reason for allowing the drawee bank to recover from the
encasher is:
“Every one with even the least experience in business knows that no
business man would accept a check in exchange for money or goods
unless he is satisfied that the check is genuine. He accepts it only because
he has proof that it is genuine, or because he has sufficient confidence in
the honesty and financial responsibility of the person who vouches for it. If
he is deceived he has suffered a loss of his cash or goods through his own
mistake. His own credulity or recklessness, or misplaced confidence was
the sole cause of the loss. Why should he be permitted to shift the loss due
to his own fault in assuming the risk, upon the drawee, simply because of
the accidental circumstance that the drawee afterwards failed to detect the
forgery when the check was presented?”8
Similarly, in the case before Us, the defendant-appellant, upon receiving
the check in question from Adelaida Dominguez, was duty-bound to
ascertain whether the check in question was genuine before presenting it
to plaintiff Bank for payment. Her failure to do so makes her liable for the
loss and the plaintiff Bank may recover from her the money she received
for the check. As reasoned out above, had she performed the duty of
ascertaining the genuineness of the check, in all probability the forgery
would have been detected and the fraud defeated.
In our jurisdiction We have a case of similar import.9The Great Eastern
Life Insurance Company drew its check for P2000.00 on the Hongkong
and Shanghai Banking Corporation payable to the order of Lazaro Melicor.
A certain E. M. Maasin
_______________
8 Gloucester Bank v. Salem Bank, 17 Mass. 33; Bank of U. S. Bank of
Georgia, 10 Wheat 333, 6 L. Ed. 334; Sional Bank of America v. Bangs,
196 Mass. 441, 8 Am. Rep. 349; First National Bank of Danvers v. First
National Bank of Salem, 151 Mass. 280, 24 N.E. 44, 21 Am. St. Rep.
450; First National Bank v. Ricker, 71 Ill. 439, 22 Am. Rep. 104; Rouvant
v. Bank, 63 Tex. 610; Bank, 30 Il. 96 Am. Dec. 554; People’s Bank v.
Franklyn Bank, 88 Tenn. 299, 12 S.W. 716, 6 L.R.A. 724, 17 Am St. Rep.
884; Ellis & Morton v. Trust Co., 4 Ohio St. 682, 64 Am. Dec. 610; Bank v.
Bank, 58 Ohio St. 207, 50 N. E. 723; Bank v. Bingham, 30 wash. 484, 71
Pac. 43, 60 L.R.A. 955.
9 Great Eastern Life insurance Company vs. Hongkong and Shanghai
Banking Corporation, 43 Phil. 678.
687
VOL. 65, JULY 31, 1975 687
Republic Bank vs. Ebrada
fraudulently obtained the check and forged the signature of Melicor, as an
indorser, and then personally indorsed and presented the check to the
Philippine National Bank where the amount of the check was placed to his
(Maasin’s) credit. On the next day, the Philippine National Bank indorsed
the check to the Hongkong and Shanghai Banking Corporation which paid
it and charged the amount of the check to the insurance company. The
Court held that the Hongkong and Shanghai Banking Corporation was
liable to the insurance company for the amount of the check and that the
Philippine National Bank was in turn liable to the Hongkong and Shanghai
Banking Corporation. Said the Court:
“Where a check is drawn payable to the order of one person and is
presented to a bank by another and purports upon its face to have been
duly indorsed by the payee of the check, it is the duty of the bank to know
that the check was duly indorsed by the original payee, and where the Bank
pays the amount of the check to a third person, who has forged the
signature of the payee, the loss falls upon the bank who cashed the check,
and its only remedy is against the person to whom it paid the money.”
With the foregoing doctrine We are to concede that the plaintiff Bank
should suffer the loss when it paid the amount of the check in question to
defendant-appellant, but it has the remedy to recover from the latter the
amount it paid to her. Although the defendant-appellant to whom the
plaintiff Bank paid the check was not proven to be the author of the
supposed forgery, yet as last indorser of the check, she has warranted that
she has good title to it10 even if in fact she did not have it because the
payee of the check was already dead 11 years before the check was
issued. The fact that immediately after receiving the cash proceeds of the
check in question in the amount of P1,246.08 from the plaintiff Bank,
defendant-appellant immediately turned over said amount to Adelaida
Dominguez (Third-Party defendant and the Fourth-Party plaintiff) who in
turn handed the amount to Justina Tinio on the same date would not
exempt her from liability because by doing so, she acted as an
accommodation party in the check for which she is
_______________
10Sec. 65, par. (b). Negotiable Instruments Law (Act 2031). Every
person negotiating an instrument by delivery or by a qualified instrument
warrants:
1. (a)x x x x x x
2. (b)That he has a good title to it.”
688
688 SUPREME COURT REPORTS ANNOTATED
Republic Bank vs. Ebrada
also liable under Section 29 of the Negotiable Instruments Law (Act 2031),
thus:
“An accommodation party is one who has signed the instrument as maker,
drawer, acceptor, or indorser, without receiving value therefor, and for the
purpose of lending his name to some other person. Such a person is liable
on the instrument to a holder for value, notwithstanding such holder at the
time of taking the instrument knew him to be only an accommodation
party.”
IN VIEW OF THE FOREGOING, the judgment appealed from is hereby
affirmed in toto with costs against defendant-appellant.
SO ORDERED.
Makalintal, C.J., Castro, Makasiar and Esguerra, JJ., concur.
Decision affirmed.
Notes.—It is the obligation of a collecting bank to reimburse to the
drawee-bank the value of checks found to contain the forged indorsements
of the payee for the reason that the bank with which the check was
deposited has no right to pay the sum stated therein to the forger or anyone
else upon a forged signature. It was the collecting bank’s duty to know that
the endorsement was genuine before cashing the check. (Great Eastern
Life Ins. Co. vs. Hongkong & Shanghai Bank, 53 Phil. 678).
Any person taking checks made payable to a corporation which can act
only though its agents does so at its or his peril, and must abide by the
consequences if the agent who indorses the same is without authority.
(Insular Drug Co. vs. National, 58 Phil. 685).
The 24-hour regulation of the Central Bank relative to the clearing of
checks is valid (Republic vs. Equitable Banking Corp., L-15894, Jan. 30,
1964). Consequently, where a corporation draws a check on a bank and
thereafter said checks falls into the hands of a person who erases the
name of the payee, superimposes his own name and thereafter deposits
said check in his bank, the liability of the encashing bank on its
indorsement to the drawee-bank after the 24-hour period had elapsed
would cease. (Hongkong & Shanghai Banking Corp. vs. People’s Bank &
Trust Co., 35 SCRA 143).
582 SUPREME COURT REPORTS ANNOTATED
Phil. National Bank vs. Quimpo
No. L-53194. March 14, 1988.*
PHILIPPINE NATIONAL BANK, petitioner, vs. HON. ROMULO S.
QUIMPO, Presiding Judge, Court of First Instance of Rizal, Branch XIV,
and FRANCISCO S. GOZON II, respondents.
Commercial Law; Banks; Checks; Duty of a bank to ascertain the
genuineness of the signature of the drawer or depositor on the check being
encashed.—The prime duty of a bank is to ascertain the genuineness of
the signature of the drawer or the depositor on the check being encashed.
It is expected to use reasonable business prudence in accepting and
cashing a check presented to it.
Same; Same; Same; Bank was negligent in encashing a forged
check without carefully examining the signature on the check from the
genuine signature of respondent.—Obviously, petitioner was negligent in
encashing said forged check without carefully examining the signature
which shows marked variation from the genuine signature of private
respondent.
Same; Same; Same; Where the private respondent's check was
removed and stolen from his checkbook without his knowledge and
consent, he cannot be considered negligent in this case.—Private
respondent trusted Ernesto Santos as a classmate and a friend. He
brought him along in his car to the bank and he left his personal belongings
in the car. Santos however removed and stole a check from his check book
without the knowledge and consent of private respondent. No doubt
_____________
*
FIRST DIVISION.
583
VOL. 158, MARCH 14, 1988 583
Philippine National Bank vs. Quimpo
private respondent cannot be considered negligent under the
circumstances of the case.
PETITION for certiorari to review the decision of the Court of First Instance
of Rizal, Br. XIV. Quimpo, J.
The facts are stated in the opinion of the Court.
GANCAYCO, J.:
On July 3, 1973, Francisco S. Gozon II, who was a depositor of the
Caloocan City Branch of the Philippine National Bank, went to the bank in
his car accompanied by his friend Ernesto Santos whom he left in the car
while he transacted business in the bank. When Santos saw that Gozon
left his check book he took a check therefrom, filled it up for the amount of
P5,000.00, forged the signature of Gozon, and thereafter he encashed the
check in the bank on the same day. The account of Gozon was debited the
said amount. Upon receipt of the statement of account from the bank,
Gozon asked that the said amount of P5,000.00 should be returned to his
account as his signature on the check was forged but the bank refused.
Upon complaint of private respondent on February 1, 1974 Ernesto
Santos was apprehended by the police authorities and upon investigation
he admitted that he stole the check of Gozon, forged his signature and
encashed the same with the Bank.
Hence Gozon filed the complaint for recovery of the amount of
P5,000.00, plus interest, damages, attorney's fees and costs against the
bank in the Court of First Instance of Rizal. After the issues were joined
and the trial on the merits ensued, a decision was rendered on February
4,1980, the dispositive part of which reads as follows:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff. The
defendant is hereby condemned to return to plaintiff the amount of
P5,000.00 which it had unlawfully withheld from the latter, with interest at
the legal rate from September 22, 1972 until the amount is fully delivered.
The defendant is further condemned to pay plaintiff the sum of P2,000.00
as attorney's fees and to pay the costs of this suit."
Not satisfied therewith, the bank now filed this petition for
584
584 SUPREME COURT REPORTS ANNOTATED
Phil. National Bank vs. Quimpo
review on certiorari in this Court raising the sole legal issue that—
"THE ACT OF RESPONDENT FRANCISCO GOZON, II IN PUTTING HIS
CHECKBOOK CONTAINING THE CHECK IN QUESTION INTO THE
HANDS OF ERNESTO SANTOS WAS INDEED THE PROXIMATE
CAUSE OF THE LOSS, THEREBY PRECLUDING HIM FROM SETTING
UP THE DEFENSE OF FORGERY OR WANT OF AUTHORITY UNDER
SECTION 23 OF THE NEGOTIABLE INSTRUMENTS LAW, ACT NO.
3201"
The petition is devoid of merit
This Court reproduces with approval the disquisition of the court a
quo as follows:
"A bank is bound to know the signatures of its customers; and if it pays a
forged check, it must be considered as making the payment out of its own
funds, and cannot ordinarily change the amount so paid to the account of
the depositor whose name was forged' (San Carlos Milling Co, vs. Bank of
the P.I., 59 Phil. 59).
This rule is absolutely necessary to the circulation of drafts and checks,
and is based upon the presumed negligence of the drawee in failing to
meet its obligation to know the signature of its correspondent. x x x There
is nothing inequitable in such a rule. If the paper comes to the drawee in
the regular course of business, and he, having the opportunity ascertaining
its character, pronounces it to be valid and pays it, it is not only a question
of payment under mistake, but payment in neglect of duty which the
commercial law places upon him, and the result of his negligence must rest
upon him' (12 ALR, 1901, citing many cases found in I Agbayani, supra).
Defendant, however, interposed the defense that it exercised diligence
in accordance with the accepted norms of banking practice when it
accepted and paid Exhibit 'A'. It presented evidence that the check had to
pass scrutiny by a signature verifier as well as an officer of the bank.
A comparison of the signature (Exhibit 'A-1') on the forged check
(Exhibit 'A') with plaintiffs exemplar signatures (Exhibits '5-A' and '5-B)
found in the PNB Form 35-A would immediately show the negligence of
the employees of the defendant bank. Even a not too careful comparison
would immediately arrest one's attention and direct it to the graceful lines
of plaintiff s exemplar signatures found in Exhibits '5-A' and '5-B'. The
formation of the first letter 'F' in the exemplars, which could be regarded as
artistic, is completely different from the way the same letter is formed in
Exhibit 'A-1'. That alone should have alerted a more careful and prudent
signature verifier."
585
VOL. 158, MARCH 14, 1988 585
Phil. National Bank vs. Quimpo
The prime duty of a bank is to ascertain the genuineness of the signature
of the drawer or the depositor on the check being encashed.1 It is expected
to use reasonable business prudence in accepting and cashing a check
presented to it.
In this case the findings of facts of the court a quo are conclusive. The
trial court found that a comparison of the signature on the forged check
and the sample signatures of private respondent show marked differences
as the graceful lines in the sample signature which is completely different
from those of the signature on the forged check. Indeed the NBI
handwriting expert Estelita Santiago Agnes whom the trial court
considered to be an "unbiased scientific expert" indicated the marked
differences between the signature of private respondent on the sample
signatures and the questioned signature. Notwithstanding the testimony of
Col. Fernandez, witness for petitioner, advancing the opinion that the
questioned signature appears to be genuine, the trial court by merely
examining the pictorial report presented by said witness, found a marked
difference in the second "c" in Francisco as written on the questioned
signature as compared to the sample signatures, and the separation
between the "s" and the "c" in the questioned signature while they are
connected in the sample signatures.2
Obviously, petitioner was negligent in encashing said forged check
without carefully examining the signature which shows marked variation
from the genuine signature of private respondent.
In reference to the allegation of the petitioner that it is the negligence of
private respondent that is the cause of the loss which he suffered, the trial
court held:
"The act of plaintiff in leaving his checkbook in the car while he went out
for a short while can not be considered negligence sufficient to excuse the
defendant bank from its own negligence. It should be borne in mind that
when defendant left his car, Ernesto Santos, a long time classmate and
friend remained in the same. Defendant could not have been expected to
know that the said Ernesto Santos would remove a check from his
checkbook. Defendant had trust in his classmate and
_____________
1
PNB vs. National City Bank, 63 Phil. 711, 742; Banco de Oro Savings
& Mortgage Bank vs. Equitable Bank Corp., G.R. No. 74917, Jan. 20,1988.
2 See Decision; p. 59, Rollo.
586
586 SUPREME COURT REPORTS ANNOTATED
People vs. Cayago
friend. He had no reason to suspect that the latter would breach that trust."
We agree.
Private respondent trustee Ernesto Santos as a classmate and a friend.
He brought him along in his car to the bank and he left his personal
belongings in the car. Santos however removed and stole a check from his
check book without the knowledge and consent of private respondent. No
doubt private respondent cannot be considered negligent under the
circumstances of the case.
WHEREFORE, the petition is DISMISSED for lack of merit with costs
against petitioner.
SO ORDERED.
Teehankee (C.J.), Narvasa, Cruz and Griño-Aquino, JJ., concur.
Petition dismissed.
Note.—The evidence in this case fails to show that the petitioner use
the proceeds of the check he encash for his own use. On the contrary, the
evidence shows he used it for the operational expenses of the company of
which he is President (Rañon vs. Court of Appeals, 135 SCRA 495.)
446 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial and International Bank vs. Court of Appeals
G.R. No. 121413. January 29, 2001.*
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR
BANK OF ASIA AND AMERICA), petitioner, vs. COURT OF APPEALS
and FORD PHILIPPINES, INC. and CITIBANK, N.A., respondents.
G.R. No. 121479. January 29, 2001.*
FORD PHILIPPINES, INC., petitioner, vs. COURT OF APPEALS and
CITIBANK, N.A. and PHILIPPINE COMMERCIAL INTERNATIONAL
BANK, respondents.
G.R. No. 128604. January 29, 2001.*
FORD PHILIPPINES, INC., petitioner, vs. CITIBANK, N.A., PHILIPPINE
COMMERCIAL INTERNATIONAL BANK and THE COURT OF APPEALS,
respondents.
Negligence; Torts; Quasi-Delicts; The general rule is that if the
master is injured by the negligence of a third person and by the concurring
contributory negligence of his own servant or agent, the latter’s negligence
is imputed to his superior and will defeat the superior’s action against the
third person, assuming, of course that the contributory negligence was the
proximate cause of the injury of which complaint is made.—On this point,
jurisprudence regarding the imputed negligence of employer in a master-
servant relationship is instructive. Since a master may be held for his
servant’s wrongful act, the law imputes to the master the act of the servant,
and if that act is negligent or wrongful and proximately results in injury to a
third person, the negligence or wrongful conduct is the negligence or
wrongful conduct of the master, for which he is liable. The general rule is
that if the master is injured by the negligence of a third person and by the
concurring contributory negligence of his own servant or agent, the latter’s
negligence is imputed to his superior and will defeat the superior’s action
against the third person, assuming, of course that the contributory
negligence was the proximate cause of the injury of which complaint is
made.
Same; Same; Same; Words and Phrases; Proximate cause is that
which, in the natural and continuous sequence, unbroken by any efficient,
intervening cause, produces the injury, and without which the result would
________________
*SECOND DIVISION.
447
VOL. 350, JANUARY 29, 2001 447
Philippine Commercial and International Bank vs. Court of
Appeals
not have occurred.—Accordingly, we need to determine whether or
not the action of Godofredo Rivera, Ford’s General Ledger Accountant,
and/or Alexis Marindo, his assistant, was the proximate cause of the loss
or damage. As defined, proximate cause is that which, in the natural and
continuous sequence, unbroken by any efficient, intervening cause
produces the injury, and without which the result would not have occurred.
Banks and Banking; Negotiable Instruments; Checks; The mere fact
that the forgery was committed by a drawer-payor’s confidential employee
or agent, who by virtue of his position had unusual facilities for perpetrating
the fraud and imposing the forged paper upon the bank, does not entitle
the bank to shift the loss to the drawer-payor, in the absence of some
circumstances raising estoppel against the drawer.—It appears that
although the employees of Ford initiated the transactions attributable to an
organized syndicate, in our view, their actions were not the proximate
cause of encashing the checks payable to the CIR. The degree of Ford’s
negligence, if any, could not be characterized as the proximate cause of
the injury to the parties. The Board of Directors of Ford, we note, did not
confirm the request of Godofredo Rivera to recall Citibank Check No. SN-
04867. Rivera’s instruction to replace the said check with PCIBank’s
Manager’s Check was not in the ordinary course of business which could
have prompted PCIBank to validate the same. As to the preparation of
Citibank Checks Nos. SN-10597 and 16508, it was established that these
checks were made payable to the CIR. Both were crossed checks. These
checks were apparently turned around by Ford’s employees, who were
acting on their own personal capacity. Given these circumstances, the
mere fact that the forgery was committed by a drawer-payor’s confidential
employee or agent, who by virtue of his position had unusual facilities for
perpetrating the fraud and imposing the forged paper upon the bank, does
not entitle the bank to shift the loss to the drawer-payor, in the absence of
some circumstance raising estoppel against the drawer. This rule likewise
applies to the checks fraudulently negotiated or diverted by the confidential
employees who hold them in their possession.
Same; Checks; Collecting Banks; Taxation; A bank authorized to
collect the payment of taxpayers in behalf of the Bureau of Internal
Revenue is duty bound to consult its principal regarding the unwarranted
instructions given by the pay or of its agent.—Citibank Check No. SN-
04867 was deposited at PCIBank through its Ermita Branch. It was coursed
through the ordinary banking transaction, sent to Central Clearing with the
indorsement at the back “all prior indorsements and/or lack of
indorsements guaranteed,” and was presented to Citibank for payment.
Thereafter PCIBank, instead of remitting the proceeds to the CIR, prepared
two of its
448
448 SUPREME COURT REPORTS ANNOTATED
 Philippine Commercial and International Bank vs. Court of
Appeals
Manager's checks and enabled the syndicate to encash the same. On
record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the
checks. The neglect of PCIBank employees to verify whether his letter
requesting for the replacement of the Citibank Check No. SN-04867 was
duly authorized, showed lack of care and prudence required in the
circumstances. Furthermore, it was admitted that PCIBank is authorized to
collect the payment of taxpayers in behalf of the BIR. As an agent of BIR,
PCIBank is duty bound to consult its principal regarding the unwarranted
instructions given by the payor or its agent.
Same; Same; Same; Negotiable Instruments; It is a well-settled rule
that the relationship between the payee or holder of commercial paper and
the bank to which it is sent for collection is, in the absence of an agreement
to the contrary, that of principal and agent.—It is a well-settled rule that the
relationship between the payee or holder of commercial paper and the
bank to which it is sent for collection is, in the absence of an agreement to
the contrary, that of principal and agent. A bank which receives such paper
for collection is the agent of the payee or holder.
Same; Same; Same; Even considering arguendo, that the diversion
of the amount of a check payable to the collecting bank in behalf of the
designated payee may be allowed, still such diversion must be properly
authorized by the payor.—Even considering arguendo, that the diversion
of the amount of a check payable to the collecting bank in behalf of the
designated payee may be allowed, still such diversion must be properly
authorized by the payor. Otherwise stated, the diversion can be justified
only by proof of authority from the drawer, or that the drawer has clothed
his agent with apparent authority to receive the proceeds of such check.
Same; Same; Same; Crossed Checks; Words and Phrases; The
crossing of the check with the phrase “Payee’s Account Only,” is a warning
that the check should be deposited only in the account of the payee; It is
the collecting bank which is bound to scrutinize the check and to know its
depositors before it could make the clearing indorsement “all prior
indorsements and lor lack ofindorsement guaranteed.”—Indeed, the
crossing of the check with the phrase “Payee’s Account Only,” is a warning
that the check should be deposited only in the account of the CIR. Thus, it
is the duty of the collecting bank PCIBank to ascertain that the check be
deposited in payee’s account only. Therefore, it is the collecting bank
(PCIBank) which is bound to scrutinize the check and to know its
depositors before it could make the clearing indorsement “all prior
indorsements and/or lack of indorsement guaranteed.”
449
VOL. 350, JANUARY 29, 2001 449
Philippine Commercial International Bank vs. Court of Appeals
Same; Same; Same; A bank which cashes a check drawn upon
another bank, without requiring proof as to the identity of persons
presenting it, or making inquiries with regard to them, cannot hold the
proceeds against the drawee when the proceeds of the checks were
afterwards diverted to the hands of a third party.—Banking business
requires that the one who first cashes and negotiates the check must take
some precautions to learn whether or not it is genuine. And if the one
cashing the check through indifference or other circumstance assists the
forger in committing the fraud, he should not be permitted to retain the
proceeds of the check from the drawee whose sole fault was that it did not
discover the forgery or the defect in the title of the person negotiating the
instrument before paying the check. For this reason, a bank which cashes
a check drawn upon another bank, without requiring proof as to the identity
of persons presenting it, or making inquiries with regard to them, cannot
hold the proceeds against the drawee when the proceeds of the checks
were afterwards diverted to the hands of a third party. In such cases the
drawee bank has a right to believe that the cashing bank (or the collecting
bank) had, by the usual proper investigation, satisfied itself of the
authenticity of the negotiation of the checks. Thus, one who encashed a
check which had been forged or diverted and in turn received payment
thereon from the drawee, is guilty of negligence which proximately
contributed to the success of the fraud practiced on the drawee bank. The
latter may recover from the holder the money paid on the check.
Same; Same; Torts; As a general rule, a banking corporation is liable
for the wrongful or tortuous acts and declarations of its officers or agents
within the course and scope of their employment—it may be liable for the
tortuous acts of its officers even as regards that species of tort of which
malice is an essential element.—In this case, there was no evidence
presented confirming the conscious participation of PCIBank in the
embezzlement. As a general rule, however, a banking corporation is liable
for the wrongful or tortuous acts and declarations of its officers or agents
within the course and scope of their employment. A bank will be held liable
for the negligence of its officers or agents when acting within the course
and scope of their employment. It may be liable for the tortuous acts of its
officers even as regards that species of tort of which malice is an essential
element. In this case, we find a situation where the PCIBank appears also
to be the victim of the scheme hatched by a syndicate in which its own
management employees had participated.
Same; Same; Same; The general rule is that a bank is liable for the
fraudulent acts or representations of an officer or agent acting within the
course and apparent scope of his employment or authority.—A bank hold-
450
450 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
 ing out its officers and agents as worthy of confidence will not be
permit- ted to profit by the frauds these officers or agents were enabled to
perpetrate in the apparent course of their employment; nor will it be
permitted to shirk its responsibility for such frauds, even though no benefit
may accrue to the bank therefrom. For the general rule is that a bank is
liable for the fraudulent acts or representations of an officer or agent acting
within the course and apparent scope of his employment or authority. And
if an officer or employee of a bank, in his official capacity, receives money
to satisfy an evidence of indebtedness lodged with his bank for collection,
the bank is liable for his misappropriation of such sum.
Same; Same; Same; Negligence; As a business affected with public
interest and because of the nature of its functions, a bank is under
obligation to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their relationship.—Citibank
should have scrutinized Citibank Check Numbers SN-10597 and 16508
before paying the amount of the proceeds thereof to the collecting bank of
the BIR. One thing is clear from the record: the clearing stamps at the back
of Citibank Check Nos. SN-10597 and 16508 do not bear any initials.
Citibank failed to notice and verify the absence of the clearing stamps. Had
this been duly examined, the switching of the worthless checks to Citibank
Check Nos. 10597 and 16508 would have been discovered in time. For
this reason, Citibank had indeed failed to perform what was incumbent
upon it, which is to ensure that the amount of the checks should be paid
only to its designated payee. The fact that the drawee bank did not discover
the irregularity seasonably, in our view, constitutes negligence in carrying
out the bank’s duty to its depositors. The point is that as a business
affected with public interest and because of the nature of its functions, the
bank is under obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their
relationship.
Same; Same; Same; Same; Doctrine of Comparative
Negligence; Where both the collecting and drawee banks failed in their
respective obligations and both were negligent in the selection and
supervision of their employees, both are equally liable for the loss of the
proceeds of checks fraudulently encashed.—Thus, invoking the doctrine
of comparative negligence, we are of the view that both PCIBank and
Citibank failed in their respective obligations and both were negligent in the
selection and supervision of their employees resulting in the encashment
of Citibank Check Nos. SN-10597 and 16508. Thus, we are constrained to
hold them equally liable for the loss of the proceeds of said checks issued
by Ford in favor of the CIR.
451
VOL. 350, JANUARY 29, 2001 451
Philippine Commercial International Bank vs. Court of Appeals
Same; Same; Same; Same; The 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 very high, if not the highest, degree of diligence.—Time and again,
we have stressed 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 very high, if not the highest, degree of diligence. A bank’s 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.
Same; Same; Same; Same; Banks are expected to exercise the
highest degree of diligence in the selection and supervision of their
employees.—Banks handle daily transactions involving millions of pesos.
By the very nature of their work the degree of responsibility, care and
trustworthiness expected of their employees and officials is far greater than
those of ordinary clerks and employees. Banks are expected to exercise
the highest degree of diligence in the selection and supervision of their
employees.
Same; Same; Same; Prescription; The statute of limitations begins to
run when the bank gives the depositor notice of the payment, and an action
upon a check is ordinarily governed by the statutory period applicable to
instruments in writing; An action upon a written contract must be brought
within ten years from the time the right of action accrues.—The statute of
limitations begins to run when the bank gives the depositor notice of the
payment, which is ordinarily when the check is returned to the alleged
drawer as a voucher with a statement of his account, and an action upon
a check is ordinarily governed by the statutory period applicable to
instruments in writing. Our laws on the matter provide that the action upon
a written contract must be brought within ten years from the time the right
of action accrues. Hence, the reckoning time for the prescriptive period
begins when the instrument was issued and the corresponding check was
returned by the bank to its depositor (normally a month thereafter).
Applying the same rule, the cause of action for the recovery of the
proceeds of Citibank Check No. SN-04867 would normally be a month after
December 19, 1977, when Citibank paid the face value of the check in the
amount of P4,746,114.41. Since the original complaint for the cause of
action was filed on January 20, 1983, barely six years had lapsed. Thus,
we conclude that Ford’s cause of action to recover the amount of Citibank
Check No. SN-04867 was seasonably filed within the period provided by
law.
452
452 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
 Same; Same; Same; Negligence; Failure on the part of the depositor
to examine its passbook, statements of account, and cancelled checks and
to give notice within a reasonable time (or as required by statute) of any
discrepancy which it may in the exercise of due care and diligence find
therein, serves to mitigate the banks’ liability by reducing the award of
interest from twelve percent (12%) to six percent (6%) per annum.—We
also find that Ford is not completely blameless in its failure to detect the
fraud. Failure on the part of the depositor to examine its passbook,
statements of account, and cancelled checks and to give notice within a
reasonable time (or as required by statute) of any discrepancy which it may
in the exercise of due care and diligence find therein, serves to mitigate
the banks’ liability by reducing the award of interest from twelve percent
(12%) to six percent (6%) per annum. As provided in Article 1172 of the
Civil Code of the Philippines, 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. In
quasi-delicts, the contributory negligence of the plaintiff shall reduce the
damages that he may recover.
PETITIONS for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Romulo, Mabanta, Buenaventura, Sayoc & Delos Angeles for Ford
Philippines, Inc.
Agabin, Verzola, Hermoso, Layaoen and De Castro for private
respondent PCIB.
Angara, Abello, Concepcion, Regala and Cruz for respondent
Citibank.
QUISUMBING, J.:
These consolidated petitions involve several fraudulently negotiated
checks.
The original actions a quo were instituted by Ford Philippines to recover
from the drawee bank, CITIBANK, N.A. (Citibank) and collecting bank,
Philippine Commercial International Bank (PCI-Bank) [formerly Insular
Bank of Asia and America], the value of several checks payable to the
Commissioner of Internal Revenue, which were embezzled allegedly by an
organized syndicate.
453
VOL. 350, JANUARY 29, 2001 453
Philippine Commercial International Bank vs. Court of Appeals
G.R. Nos. 121413 and 121479 are twin petitions for review of the March
27, 1995 Decision1 of the Court of Appeals in CA-G.R. CV No. 25017,
entitled “Ford Philippines, Inc. vs. Citibank, N.A. and Insular Bank of Asia
and America (now Philippine Commercial International Bank), and the
August 8, 1995 Resolution,2 ordering the collecting bank, Philippine
Commercial International Bank, to pay the amount of Citibank Check No.
SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails the October 15,
1996 Decision3 of the Court of Appeals and its March 5, 1997
Resolution4 in CA-G.R. No. 28430entitled “Ford Philippines, Inc. vs.
Citibank, N.A. and Philippine Commercial International Bank,” affirming in
toto the judgment of the trial court holding the defendant drawee bank,
Citibank, N.A., solely liable to pay the amount of P12,163,298.10 as
damages for the misapplied proceeds of the plaintiff’s Citibank Check
Numbers SN-10597 and 16508.
I. G.R. Nos. 121413 and 121479
The stipulated facts submitted by the parties as accepted by the Court of
Appeals are as follows:
“On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check
No. SN-04867 in the amount of P4,746,114.41, in favor of the
Commissioner of Internal Revenue as payment of plaintiff’s percentage or
manufacturer’s sales taxes for the third quarter of 1977.
The aforesaid check was deposited with the defendant IBAA (now
PCIBank) and was subsequently cleared at the Central Bank. Upon
presentment with the defendant Citibank, the proceeds of the check was
paid to IBAA as collecting or depository bank.
__________________
1
Penned by Justice B. A. Adefuin-dela Cruz and concurred in by
Justices Jesus M. Elbinias and Lourdes K. Tayao-Jaguros, rollo, G.R. No.
121413, pp. 27-42.
2 Rollo, G.R. No. 121413, pp. 44-45.
3 Penned by Justice Jose C. de la Rama and concurred in by Justices
Emeterio C. Cui and Eduardo G. Montenegro, rollo, G.R. No. 128604, pp.
45-60.
4 Rollo, G.R. No. 128604, pp. 42-43.
454
454 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
The proceeds of the same Citibank check of the plaintiff was never paid to
or received by the payee thereof, the Commissioner of Internal Revenue.
As a consequence, upon demand of the Bureau and/or Commissioner
of Internal Revenue, the plaintiff was compelled to make a second payment
to the Bureau of Internal Revenue of its percentage/manufacturers’ sales
taxes for the third quarter of 1977 and that said second payment of plaintiff
in the amount of P4,746,114.41 was duly received by the Bureau of Internal
Revenue.
It is further admitted by defendant Citibank that during the time of the
transactions in question, plaintiff had been maintaining a checking account
with defendant Citibank; that Citibank Check No. SN-04867 which was
drawn and issued by the plaintiff in favor of the Commissioner of Internal
Revenue was a crossed check in that, on its face were two parallel lines
and written in between said lines was the phrase “Payee’s Account Only”;
and that defendant Citibank paid the full face value of the check in the
amount of P4,746,114.41 to the defendant IBAA.
It has been duly established that for the payment of plaintiff’s
percentage tax for the last quarter of 1977, the Bureau of Internal Revenue
issued Revenue Tax Receipt No. 18747002, dated October 20, 1977,
designating therein in Muntinlupa, Metro Manila, as the authorized agent
bank of Metrobank, Alabang Branch to receive the tax payment of the
plaintiff.
On December 19, 1977, plaintiff’s Citibank Check No. SN-04867,
together with the Revenue Tax Receipt No. 18747002, was deposited with
defendant IBAA, through its Ermita Branch. The latter accepted the check
and sent it to the Central Clearing House for clearing on the same day, with
the indorsement at the back “all prior indorsements and/or lack of
indorsements guaranteed.” Thereafter, defendant IBAA presented the
check for payment to defendant Citibank on same date, December 19,
1977, and the latter paid the face value of the check in the amount of
P4,746,114.41. Consequently, the amount of P4,746,114.41 was debited
in plaintiff’s account with the defendant Citibank and the check was
returned to the plaintiff.
Upon verification, plaintiff discovered that its Citibank Check No. SN-
04867 in the amount of P4,746,114.41 was not paid to the Commissioner
of Internal Revenue. Hence, in separate letters dated October 26, 1979,
addressed to the defendants, the plaintiff notified the latter that in case it
will be re-assessed by the BIR for the payment of the taxes covered by the
said checks, then plaintiff shall hold the defendants liable for reim-
455
VOL. 350, JANUARY 29, 2001 455
Philippine Commercial International Bank vs. Court of Appeals
bursement of the face value of the same. Both defendants denied liability
and refused to pay.
In a letter dated February 28, 1980 by the Acting Commissioner of
Internal Revenue addressed to the plaintiff—supposed to be Exhibit “D,”
the latter was officially informed, among others, that its check in the amount
of P4,746,114.41 was not paid to the government or its authorized agent
and instead encashed by unauthorized persons, hence, plaintiff has to pay
the said amount within fifteen days from receipt of the letter. Upon advice
of the plaintiff’s lawyers, plaintiff on March 11, 1982, paid to the Bureau of
Internal Revenue, the amount of P4,746,114.41, representing payment of
plaintiff’s percentage tax for the third quarter of 1977.
As a consequence of defendant’s refusal to reimburse plaintiff of the
payment it had made for the second time to the BIR of its percentage taxes,
plaintiff filed on January 20, 1983 its original complaint before this Court.
On December 24, 1985, defendant IBAA was merged with the
Philippine Commercial International Bank (PCIBank) with the latter as the
surviving entity.
Defendant Citibank maintains that; the payment it made of plaintiffs
Citibank Check No. SN-04867 in the amount of P4,746,114.41 “was in due
course”; it merely relied on the clearing stamp of the depository/collecting
bank, the defendant IBAA that “all prior indorsements and/or lack of
indorsements guaranteed”; and the proximate cause of plaintiff’s injury is
the gross negligence of defendant IBAA in indorsing the plaintiff’s Citibank
check in question.
It is admitted that on December 19, 1977 when the proceeds of
plaintiff’s Citibank Check No. SN-04867 was paid to defendant IBAA as
collecting bank, plaintiff was maintaining a checking account with
defendant Citibank.”5
Although it was not among the stipulated facts, an investigation by the
National Bureau of Investigation (NBI) revealed that Citibank Check No.
SN-04867 was recalled by Godofredo Rivera, the General Ledger
Accountant of Ford. He purportedly needed to hold back the check
because there was an error in the computation of the tax due to the Bureau
of Internal Revenue (BIR). With Rivera’s instruction, PCIBank replaced the
check with two of its own Man-
__________________
5
Supra, see note 1, pp. 32-34 (All citations omitted).
456
456 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
ager’s Checks (MCs). Alleged members of a syndicate later deposited the
two MCs with the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint before the trial
court impleading Pacific Banking Corporation (PBC) and Godofredo
Rivera, as third party defendants. But the court dismissed the complaint
against PBC for lack of cause of action. The court likewise dismissed the
third-party complaint against Godofredo Rivera because he could not be
served with summons as the NBI declared him as a “fugitive from justice.”
On June 15, 1989, the trial court rendered its decision, as follows:
“Premises considered, judgment is hereby rendered as follows:
 1. 1.Ordering the defendants Citibank and IBAA (now PCI Bank),
jointly and severally, to pay the plaintiff the amount of
P4,746,114.41 representing the face value of plaintiff’s Citibank
Check No. SN-04867, with interest thereon at the legal rate
starting January 20, 1983, the date when the original complaint
was filed until the amount is fully paid, plus costs;
2. 2.On defendant Citibank’s cross-claim: ordering the cross-
defendant IBAA (now PCI BANK) to reimburse defendant
Citibank for whatever amount the latter has paid or may pay to
the plaintiff in accordance with the next preceding paragraph;
3. 3.The counterclaims asserted by the defendants against the
plaintiff, as well as that asserted by the cross-defendant against
the cross-claimant are dismissed, for lack of merits; and
4. 4.With costs against the defendants.
SO ORDERED.”6
Not satisfied with the said decision, both defendants, Citibank and
PCIBank, elevated their respective petitions for review on certiorari to the
Court of Appeals. On March 27, 1995, the appellate court issued its
judgment as follows:
“WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed
decision with modifications.
The court hereby renders judgment:
_________________
6
Rollo, G.R. No. 121413, pp. 131-132.
457
VOL. 350, JANUARY 29, 2001 457
Philippine Commercial International Bank vs. Court of Appeals
1. 1.Dismissing the complaint in Civil Case No. 49287 insofar as
defendant Citibank N.A. is concerned;
2. 2.Ordering the defendant IBAA now PCI Bank to pay the plaintiff
the amount of P4,746,114.41 representing the face value of
plaintiff’s Citibank Check No. SN-04867, with interest thereon at
the legal rate starting January 20, 1983, the date when the original
complaint was filed until the amount is fully paid;
3. 3.Dismissing the counterclaims asserted by the defendants against
the plaintiff as well as that asserted by the cross-defendant
against the cross-claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED.”7
PCIBank moved to reconsider the above-quoted decision of the Court of
Appeals, while Ford filed a “Motion for Partial Reconsideration.” Both
motions were denied for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for
review by certiorari under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision and
resolution of the Twelfth Division of the Court of Appeals contending that it
merely acted on the instruction of Ford and such cause of action had
already prescribed.
PCIBank sets forth the following issues for consideration:
1. I.Did the respondent court err when, after finding that the petitioner
acted on the check drawn by respondent Ford on the said
respondent’s instructions, it nevertheless found the petitioner
liable to the said respondent for the full amount of the said check.
2. II.Did the respondent court err when it did not find prescription in
favor of the petitioner.8
In a counter move, Ford filed its petition docketed as G.R. No. 121479,
questioning the same decision and resolution of the Court of Appeals, and
praying for the reinstatement in toto of the decision
_________________
7 1d. at 41-42.
8 Id. at 18.
458
458 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
of the trial court which found both PCIBank and Citibank jointly and
severally liable for the loss.
In G.R. No. 121479, appellant Ford presents the following propositions
for consideration:
1. I.Respondent Citibank is liable to petitioner Ford considering that:
1. 1.As drawee bank, respondent Citibank owes to petitioner Ford, as
the drawer of the subject check and a depositor of respondent
Citibank, an absolute and contractual duty to pay the proceeds of
the subject check only to the payee thereof, the Commissioner of
Internal Revenue.
 2. 2.Respondent Citibank failed to observe its duty as banker with
respect to the subject check, which was crossed and payable to
“Payee’s Account Only.”
3. 3.Respondent Citibank raises an issue for the first time on appeal;
thus the same should not be considered by the Honorable Court.
4. 4.As correctly held by the trial court, there is no evidence of gross
negligence on the part of petitioner Ford.9
1. II.PCIBank is liable to petitioner Ford considering that:
1. 1.There were no instructions from petitioner Ford to deliver the
proceeds of the subject check to a person other than the payee
named therein, the Commissioner of the Bureau of Internal
Revenue; thus, PCIBank’s only obligation is to deliver the
proceeds to the Commissioner of the Bureau of Internal
Revenue.10
2. 2.PCIBank which affixed its indorsement on the subject check (“All
prior indorsement and/or lack of indorsement guaranteed”), is
liable as collecting bank.11
3. 3.PCIBank is barred from raising issues of fact in the instant
proceedings.12
4. 4.Petitioner Ford’s cause of action had not prescribed.13
___________________
9
Rollo, G.R. No. 121479, pp. 162-163.
10
Id. at 181.
11 Id. at 186.
12 Id at 188.
13 Id. at 192.
459
VOL. 350, JANUARY 29, 2001 459
Philippine Commercial International Bank vs. Court of Appeals
II. G.R. No. 128604
The same syndicate apparently embezzled the proceeds of checks
intended, this time, to settle Ford’s percentage taxes appertaining to the
second quarter of 1978 and the first quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the
amount of P5,851,706.37 representing the percentage tax due for the
second quarter of 1978 payable to the Commissioner of Internal Revenue.
A BIR Revenue Tax Receipt No. 28645385 was issued for the said
purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in
the amount of P6,311,591.73, representing the payment of percentage tax
for the first quarter of 1979 arid payable to the Commissioner of Internal
Revenue. Again a BIR Revenue Tax Receipt No. A-1697160 was issued
for the said purpose.
Both checks were “crossed checks” and contain two diagonal lines on
its upper left corner between which were written the words “payable to the
payee’s account only.”
The checks never reached the payee, CIR. Thus, in a letter dated
February 28, 1980, the BIR, Region 4-B, demanded for the said tax
payments the corresponding periods above-mentioned.
As far as the BIR is concerned, the said two BIR Revenue Tax Receipts
were considered “fake and spurious.” This anomaly was confirmed by the
NBI upon the initiative of the BIR. The findings forced Ford to pay the BIR
anew, while an action was filed against Citibank and PCIBank for the
recovery of the amount of Citibank Check Numbers SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tried the case,
made its findings on the modus operandi of the syndicate, as follows:
“A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its
General Ledger Accountant. As such, he prepared the plaintiffs check
marked Exh. ‘A’ [Citibank Check No. SN-10597] for payment to the BIR.
Instead, however, of delivering the same to the payee, he passed
460
460 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
on the check to a co-conspirator named Remberto Castro who was a
promanager of the San Andres Branch of PCIB.** In connivance with one
Winston Dulay, Castro himself subsequently opened a Checking Account
in the name of a fictitious person denominated as ‘Reynaldo Reyes’ in the
Meralco Branch of PCIBank where Dulay works as Assistant Manager.
After an initial deposit of P100.00 to validate the account, Castro
deposited a worthless Bank of America Check in exactly the same amount
as the first FORD check (Exh. “A,” P5,851,706.37) while this worthless
check was coursed through PCIB’s main office enroute to the Central Bank
for clearing, replaced this worthless check with FORD’s Exhibit ‘A’ and
accordingly tampered the accompanying documents to cover the
replacement. As a result, Exhibit ‘A’ was cleared by defendant CITIBANK,
and the fictitious deposit account of ‘Reynaldo Reyes’ was credited at the
PCIB Meralco Branch with the total amount of the FORD check Exhibit ‘A.’
The same method was again utilized by the syndicate in profiting from Exh.
‘B’ [Citibank Check No. SN-16508] which was subsequently pilfered by
Alexis Marindo, Rivera’s Assistant at FORD.
From this ‘Reynaldo Reyes’ account, Castro drew various checks
distributing the shares of the other participating conspirators namely (1)
CRISANTO BERNABE, the mastermind who formulated the method for the
embezzlement; (2) RODOLFO R. DE LEON a customs broker who
negotiated the initial contact between Bernabe, FORD’s Godofredo Rivera
and PCIB’s Remberto Castro; (3) JUAN CASTILLO who assisted de Leon
in the initial arrangements; (4) GODOFREDO RIVERA, FORD’s
accountant who passed on the first check (Exhibit “A”) to Castro; (5)
REMBERTO CASTRO, PCIB’s pro-manager at San Andres who
performed the switching of checks in the clearing process and opened the
fictitious Reynaldo Reyes account at the PCIB Meralco Branch; (6)
WINSTON DULAY, PCIB’s Assistant Manager at its Meralco Branch, who
assisted Castro in switching the checks in the clearing process and
facilitated the opening of the fictitious Reynaldo Reyes’ bank account; (7)
ALEXIS MARINDO, Rivera’s Assistant at FORD, who gave the second
check (Exh. “B”) to Castro; (8) ELEUTERIO JIMENEZ, BIR Collection
Agent who provided the fake and spurious revenue tax receipts to make it
appear that the BIR had received FORD’s tax payments.
Several other persons and entities were utilized by the syndicate as
conduits in the disbursements of the proceeds of the two checks, but like
the aforementioned participants in the conspiracy, have not been im-
___________________
**
Initials stand for Philippine Commercial International Bank, or
PCIBank.
461
VOL. 350, JANUARY 29, 2001 461
Philippine Commercial International Bank vs. Court of Appeals
pleaded in the present case. The manner by which the said funds were
distributed among them are traceable from the record of checks drawn
against the original “Reynaldo Reyes” account and indubitably identify the
parties who illegally benefited therefrom and readily indicate in what
amounts they did so.”14
On December 9, 1988, Regional Trial Court of Makati, Branch 57, held
drawee-bank, Citibank, liable for the value of the two checks while
absolving PCIBank from any liability, disposing as follows:
“WHEREFORE, judgment is hereby rendered sentencing defendant
CITIBANK to reimburse plaintiff FORD the total amount of P12,163,298.10
prayed for in its complaint, with 6% interest thereon from date of first written
demand until full payment, plus P300,000.00 attorney’s fees and expenses
of litigation, and to pay the defendant, PCIB (on its counterclaim to
crossclaim) the sum of P300,000.00 as attorney’s fees and costs of
litigation, and pay the costs.
SO ORDERED.”15
Both Ford and Citibank appealed to the Court of Appeals which affirmed, in
toto, the decision of the trial court. Hence, this petition.
Petitioner Ford prays that judgment be rendered setting aside the
portion of the Court of Appeals decision and its resolution dated March 5,
1997, with respect to the dismissal of the complaint against PCIBank and
holding Citibank solely responsible for the proceeds of Citibank Check
Numbers SN-10597 and 16508 fot P5,851,706.73 and P6,311,591.73
respectively.
Ford avers that the Court of Appeals erred in dismissing the complaint
against defendant PCIBank considering that:
1. I.Defendant PCIBank was clearly negligent when it failed to
exercise the diligence required to be exercised by it as a banking
institution.
2. II.Defendant PCIBank clearly failed to observe the diligence re-
quired in the selection and supervision of its officers and
employees.
_________________
14
Supra, see note 3, pp. 47-49.
15
Id. at 46.
462
462 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
1. III.Defendant PCIBank was, due to its negligence, clearly liable for
the loss or damage resulting to the plaintiff Ford as a
consequence of the substitution of the check consistent with
Section 5 of Central Bank Circular No. 580 series of 1977.
2. IV.Assuming arguendo that defendant PCIBank did not accept,
endorse or negotiate in due course the subject checks, it is liable,
under Article 2154 of the Civil Code, to return the money which it
admits having received, and which was credited to it in its Central
Bank account.16
The main issue presented for our consideration by these petitions could be
simplified as follows: Has petitioner Ford the right to recover from the
collecting bank (PCIBank) and the drawee bank (Citibank) the value of the
checks intended as payment to the Commissioner of Internal Revenue? Or
has Ford’s cause of action already prescribed?
Note that in these cases, the checks were drawn against the drawee
bank, but the title of the person negotiating the same was allegedly
defective because the instrument was obtained by fraud and unlawful
means, and the proceeds of the checks were not remitted to the payee. It
was established that instead of paying the checks to the CIR, for the
settlement of the appropriate quarterly percentage taxes of Ford, the
checks were diverted and encashed for the eventual distribution among
the members of the syndicate. As to the unlawful negotiation of the check
the applicable law is Section 55 of the Negotiable Instruments Law (NIL),
which provides:
“When title defective—The title of a person who negotiates an instrument
is defective within the meaning of this Act when he obtained the instrument,
or any signature thereto, by fraud, duress, or force and fear, or other
unlawful means, or for an illegal consideration, or when he negotiates it in
breach of faith or under such circumstances as amount to a fraud.”
Pursuant to this provision, it is vital to show that the negotiation is made by
the perpetrator in breach of faith amounting to fraud. The person
negotiating the checks must have gone beyond
__________________
16 Id. at 24-25.
463
VOL. 350, JANUARY 29, 2001 463
Philippine Commercial International Bank vs. Court of Appeals
the authority given by his principal. If the principal could prove that there
was no negligence in the performance of his duties, he may set up the
personal defense to escape liability and recover from other parties who,
through their own negligence, allowed the commission of the crime.
In this case, we note that the direct perpetrators of the offense, namely
the embezzlers belonging to a syndicate, are now fugitives from justice.
They have, even if temporarily, escaped liability for the embezzlement of
millions of pesos. We are thus left only with the task of determining who of
the present parties before us must bear the burden of loss of these millions.
It all boils down to the question of liability based on the degree of
negligence among the parties concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty of
the “imputed contributory negligence” that would defeat its claim for
reimbursement, bearing in mind that its employees, Godofredo Rivera and
Alexis Marindo, were among the members of the syndicate.
Citibank points out that Ford allowed its very own employee, Godofredo
Rivera, to negotiate the checks to his co-conspirators, instead of delivering
them to the designated authorized collecting bank (Metrobank-Alabang) of
the payee, CIR. Citibank bewails the fact that Ford was remiss in the
supervision and control of its own employees, inasmuch as it only
discovered the syndicate’s activities through the information given by the
payee of the checks after an unreasonable period of time.
PCIBank also blames Ford of negligence when it allegedly authorized
Godofredo Rivera to divert the proceeds of Citibank Check No. SN-04867,
instead of using it to pay the BIR. As to the subsequent run-around of funds
of Citibank Check Nos. SN-10597 and 16508, PCIBank claims that the
proximate cause of the damage to Ford lies in its own officers and
employees who carried out the fraudulent schemes and the transactions.
These circumstances were not checked by other officers of the company,
including its comptroller or internal auditor. PCIBank contends that the
inaction of Ford despite the enormity of the amount involved was a sheer
negligence and stated that, as between two innocent persons, one of
whom must suffer the consequences of a breach of trust, the
464
464 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
one who made it possible, by his act of negligence, must bear the loss.
For its part, Ford denies any negligence in the performance of its duties.
It avers that there was no evidence presented before the trial court showing
lack of diligence on the part of Ford. And, citing the case of Gempesaw vs.
Court of Appeals,17 Ford argues that even if there was a finding therein that
the drawer was negligent, the drawee bank was still ordered to pay
damages.
Furthermore, Ford contends that Godofredo Rivera was not authorized
to make any representation in its behalf, specifically, to divert the proceeds
of the checks. It adds that Citibank raised the issue of imputed negligence
against Ford for the first time on appeal. Thus, it should not be considered
by this Court.
On this point, jurisprudence regarding the imputed negligence of
employer in a master-servant relationship is instructive. Since a master
may be held for his servant’s wrongful act, the law imputes to the master
the act of the servant, and if that act is negligent or wrongful and
proximately results in injury to a third person, the negligence or wrongful
conduct is the negligence or wrongful conduct of the master, for which he
is liable.18 The general rule is that if the master is injured by the negligence
of a third person and by the concurring contributory negligence of his own
servant or agent, the latter’s negligence is imputed to his superior and will
defeat the superior’s action against the third person, assuming, of course
that the contributory negligence was the proximate cause of the injury of
which complaint is made.19
Accordingly, we need to determine whether or not the action of
Godofredo Rivera, Ford’s General Ledger Accountant, and/or Alexis
Marindo, his assistant, was the proximate cause of the loss or damage. As
defined, proximate cause is that which, in the natural and continuous
sequence, unbroken by any efficient, intervening cause produces the
injury, and without which the result would not have occurred.20
___________________
17 218 SCRA 682 (1993).
18 Am Jur 2d, Volume 58, Negligence, Section 458.
19
Am Jur 2d, Volume 58, Negligence, Section 464.
20
Vda. de Bataclan, et al vs. Medina, 102 Phil. 181,186 (1957).
465
VOL. 350, JANUARY 29, 2001 465
Philippine Commercial International Bank vs. Court of Appeals
It appears that although the employees of Ford initiated the transactions
attributable to an organized syndicate, in our view, their actions were not
the proximate cause of encashing the checks payable to the CIR. The
degree of Ford’s negligence, if any, could not be characterized as the
proximate cause of the injury to the parties.
The Board of Directors of Ford, we note, did not confirm the request of
Godofredo Rivera to recall Citibank Check No. SN-04867. Rivera’s
instruction to replace the said check with PCIBank’s Manager’s Check was
not in the ordinary course of business which could have prompted PCIBank
to validate the same.
As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it
was established that these checks were made payable to the CIR. Both
were crossed checks. These checks were apparently turned around by
Ford’s employees, who were acting on their own personal capacity.
Given these circumstances, the mere fact that the forgery was
committed by a drawer-payor’s confidential employee or agent, who by
virtue of his position had unusual facilities for perpetrating the fraud and
imposing the forged paper Upon the bank, does not entitle the bank to shift
the loss to the drawer-payor, in the absence of some circumstance raising
estoppel against the drawer.21 This rule likewise applies to the checks
fraudulently negotiated or diverted by the confidential employees who hold
them in their possession.
With respect to the negligence of PCIBank in the payment of the three
checks involved, separately, the trial courts found variations between the
negotiation of Citibank Check No. SN-04867 and the misapplication of total
proceeds of Checks SN-10597 and 16508. Therefore, we have to
scrutinize, separately, PCIBank’s share of negligence when the syndicate
achieved its ultimate agenda of stealing the proceeds of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank through its
Ermita Branch. It was coursed through the ordinary
___________________
21
Am Jur 2d, Volume 10, Banks, Section 604 (1963 Edition).
466
466 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
banking transaction, sent to Central Clearing with the indorsement at the
back “all prior indorsements and/or lack of indorsements guaranteed,” and
was presented to Citibank for payment. Thereafter PCIBank, instead of
remitting the proceeds to the CIR, prepared two of its Manager’s checks
and enabled the syndicate to encash the same.
On record, PCIBank failed to verify the authority of Mr. Rivera to
negotiate the checks. The neglect of PCIBank employees to verify whether
his letter requesting for the replacement of the Citibank Check No. SN-
04867 was duly authorized, showed lack of care and prudence required in
the circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect the
payment of taxpayers in behalf of the BIR. As an agent of BIR, PCIBank is
duty bound to consult its principal regarding the unwarranted instructions
given by the payor or its agent. As aptly stated by the trial court, to wit:
“x x x. Since the questioned crossed check was deposited with IBAA [now
PCIBank], which claimed to be a depository/collecting bank of the BIR, it
has the responsibility to make sure that the check in question is deposited
in Payee’s account only.
xxx xxx xxx
As agent of the BIR (the payee of the check), defendant IBAA should
receive instructions only from its principal BIR and not from any other
person especially so when that person is not known to the defendant. It is
very imprudent on the part of the defendant IBAA to just rely on the alleged
telephone call of one Godofredo Rivera and in his signature to the
authenticity of such signature considering that the plaintiff is not a client of
the defendant IBAA.”
It is a well-settled rule that the relationship between the payee or holder of
commercial paper and the bank to which it is sent for collection is, in the
absence of an agreement to the contrary, that of principal and agent.22 A
bank which receives such paper for collection is the agent of the payee or
holder.23
__________________
22
Id. at Section 697.
23
Ibid.
467
VOL. 350, JANUARY 29, 2001 467
 Philippine Commercial International Bank vs. Court of Appeals
Even considering arguendo, that the diversion of the amount of a check
payable to the collecting bank in behalf of the designated payee may be
allowed, still such diversion must be properly authorized by the payor.
Otherwise stated, the diversion can be justified only by proof of authority
from the drawer, or that the drawer has clothed his agent with apparent
authority to receive the proceeds of such check.
Citibank further argues that PCI Bank’s clearing stamp appearing at the
back of the questioned checks stating that ALL PRIOR INDORSEMENTS
AND/OR LACK OF INDORSEMENTS GUARANTEED should render
PCIBank liable because it made it pass through the clearing house and
therefore Citibank had no other option but to pay it. Thus, Citibank asserts
that the proximate cause of Ford’s injury is the gross negligence of
PCIBank. Since the questioned crossed check was deposited with
PCIBank, which claimed to be a depository/collecting bank of the BIR, it
had the responsibility to make sure that the check in question is deposited
in Payee’s account only.
Indeed, the crossing of the check with the phrase “Payee’s Account
Only,” is a warning that the check should be deposited only in the account
of the CIR. Thus, it is the duty of the collecting bank PCIBank to ascertain
that the check be deposited in payee’s account only. Therefore, it is the
collecting bank (PCIBank) which is bound to scrutinize the check and to
know its depositors before it could make the clearing indorsement “all prior
indorsements and/or lack of indorsement guaranteed.”
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking
Corporation,24 we ruled:
“Anent petitioner’s liability on said instruments, this court is in full accord
with the ruling of the PCHC’s Board of Directors that:
‘In presenting the checks for clearing and for payment, the defendant
made an express guarantee on the validity of “all prior endorsements.”
Thus, stamped at the back of the checks are the defendant’s clear
warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK OF EN-
_________________
24157 SCRA 188 (1988).
468
468 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
DORSEMENTS GUARANTEED. Without such warranty, plaintiff would not
have paid on the checks.’
No amount of legal jargon can reverse the clear meaning of defendant’s
warranty. As the warranty has proven to be false and inaccurate, the
defendant is liable for any damage arising out of the falsity of its
representation.”25
Lastly, banking business requires that the one who first cashes and
negotiates the check must take some precautions to learn whether or not
it is genuine. And if the one cashing the check through indifference or other
circumstance assists the forger in committing the fraud, he should not be
permitted to retain the proceeds of the check from the drawee whose sole
fault was that it did not discover the forgery or the defect in the title of the
person negotiating the instrument before paying the check. For this reason,
a bank which cashes a check drawn upon another bank, without requiring
proof as to the identity of persons presenting it, or making inquiries with
regard to them, cannot hold the proceeds against the drawee when the
proceeds of the checks were afterwards diverted to the hands of a third
party. In such cases the drawee bank has a right to believe that the cashing
bank (or the collecting bank) had, by the usual proper investigation,
satisfied itself of the authenticity of the negotiation of the checks. Thus, one
who encashed a check which had been forged or diverted and in turn
received payment thereon from the drawee, is guilty of negligence which
proximately contributed to the success of the fraud practiced on the drawee
bank. The latter may recover from the holder the money paid on the
check.26
Having established that the collecting bank’s negligence is the
proximate cause of the loss, we conclude that PCIBank is liable in the
amount corresponding to the proceeds of Citibank Check No SN-04867.
__________________
25
Id. at 194.
26
Supra note 20 at Section 611.
469
VOL. 350, JANUARY 29, 2001 469
Philippine Commercial International Bank vs. Court of Appeals
G.R. No. 128604
The trial court and the Court of Appeals found that PCIBank had no official
act in the ordinary course of business that would attribute to it the case of
the embezzlement of Citibank Check Numbers SN-10597 and 16508,
because PCIBank did not actually receive nor hold the two Ford checks at
all. The trial court held, thus:
“Neither is there any proof that defendant PCIBank contributed any official
or conscious participation in the process of the embezzlement. This Court
is convinced that the switching operation (involving the checks while in
transit for “clearing”) were the clandestine or hidden actuations performed
by the members of the syndicate in their own personal, covert and private
capacity and done without the knowledge of the defendant PCIBank. . . .”27
In this case, there was no evidence presented confirming the conscious
participation of PCIBank in the embezzlement. As a general rule, however,
a banking corporation is liable for the wrongful or tortuous acts and
declarations of its officers or agents within the course and scope of their
employment.28 A bank will be held liable for the negligence of its officers or
agents when acting within the course and scope of their employment. It
may be liable for the tortuous acts of its officers even as regards that
species of tort of which malice is an essential element. In this case, we find
a situation where the PCIBank appears also to be the victim of the scheme
hatched by a syndicate in which its own management employees had
participated.
The pro-manager of San Andres Branch of PCIBank, Remberto Castro,
received Citibank Check Numbers SN-10597 and 16508. He passed the
checks to a co-conspirator, an Assistant Manager of PCIBank’s Meralco
Branch, who helped Castro open a Checking account of a fictitious person
named “Reynaldo Reyes.” Castro deposited a worthless Bank of America
Check in exactly the same amount of Ford checks. The syndicate
tampered with the checks
__________________
27
Rollo, G.R. No. 128604, pp. 56-57.
28
Supra note 20 at Section 110.
470
470 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
and succeeded in replacing the worthless checks and the eventual
encashment of Citibank Check Nos, SN-10597 and 16508. The PCIBank
Pro-manager, Castro, and his co-conspirator Assistant Manager
apparently performed their activities using facilities in their official capacity
or authority but for their personal and private gain or benefit.
A bank holding out its officers and agents as worthy of confidence will
not be permitted to profit by the frauds these officers or agents were
enabled to perpetrate in the apparent course of their employment; nor will
it be permitted to shirk its responsibility for such frauds, even though no
benefit may accrue to the bank therefrom. For the general rule is that a
bank is liable for the fraudulent acts or representations of an officer or
agent acting within the course and apparent scope of his employment or
authority.29 And if an officer or employee of a bank, in his official capacity,
receives money to satisfy an evidence of indebtedness lodged with his
bank for collection, the bank is liable for his misappropriation of such sum.30
Moreover, as correctly pointed out by Ford, Section 531 of Central Bank
Circular No. 580, Series of 1977 provides that any theft affecting items in
transit for clearing, shall be for the account of sending bank, which in this
case is PCIBank.
But in this case, responsibility for negligence does not lie on PCIBank’s
shoulders alone.
The evidence on record shows that Citibank as drawee bank was
likewise negligent in the performance of its duties. Citibank failed to
establish that its payment of Ford’s checks were made in due course and
legally in order. In its defense, Citibank claims the genuineness and due
execution of said checks, considering that Citibank (1) has no knowledge
of any infirmity in the issuance of the checks in question (2) coupled by the
fact that said checks were sufficiently funded and (3) the endorsement of
the Payee or lack
___________________
29
Id. at Sec. 111.
30
Id. Sec. 113.
31
Sec. 5. Loss of Clearing Items.—Any loss or damage arising from
theft, pilferage, or other causes affecting items in transit shall be for the
account of the sending bank/branch, institution or entity concerned.
471
VOL. 350, JANUARY 29, 2001 471
Philippine Commercial and International Bank vs. Court of Appeals
thereof was guaranteed by PCI Bank (formerly IBAA), thus, it has the
obligation to honor and pay the same.
For its part, Ford contends that Citibank as the drawee bank owes to
Ford an absolute and contractual duty to pay the proceeds of the subject
check only to the payee thereof, the CIR. Citing Section 6232 of the
Negotiable Instruments Law, Ford argues that by accepting the instrument,
the acceptor which is Citibank engages that it will pay according to the
tenor of its acceptance, and that it will pay only to the payee, (the CIR),
considering the fact that here the check was crossed with annotation
“Payees Account Only.”
As ruled by the Court of Appeals, Citibank must likewise answer for the
damages incurred by Ford on Citibank Checks Numbers SN-10597 and
16508, because of the contractual relationship existing between the two.
Citibank, as the drawee bank breached its contractual obligation with Ford
and such degree of culpability contributed to the damage caused to the
latter. On this score, we agree with the respondent court’s ruling.
Citibank should have scrutinized Citibank Check Numbers SN-10597
and 16508 before paying the amount of the proceeds thereof to the
collecting bank of the BIR. One thing is clear from the record: the clearing
stamps at the back of Citibank Check Nos. SN-10597 and 16508 do not
bear any initials. Citibank failed to notice and verify the absence of the
clearing stamps. Had this been duly examined, the switching of the
worthless checks to Citibank Check Nos. SN-10597 and 16508 would have
been discovered in time. For this reason, Citibank had indeed failed to
perform what was incumbent upon it, which is to ensure that the amount of
the checks should be paid only to its designated payee. The fact that the
drawee bank did not discover the irregularity seasonably, in our view,
constitutes negligence in carrying out the bank’s duty to its depositors. The
point is that as a business affected with public interest and because of the
nature of its functions, the bank is under obligation to treat the accounts of
its depositors with me-
___________________
32 Sec. 62, Negotiable Instruments Law.
472
472 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
ticulous care, always having in mind the fiduciary nature of their
relationship.33
Thus, invoking the doctrine of comparative negligence, we are of the
view that both PCIBank and Citibank failed in their respective obligations
and both were negligent in the selection and supervision of their employees
resulting in the encashment of Citibank Check Nos. SN-10597 and 16508.
Thus, we are constrained to hold them equally liable for the loss of the
proceeds of said checks issued by Ford in favor of the CIR.
Time and again, we have stressed 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 very high, if not the highest, degree of diligence.34A
bank’s 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.35
Banks handle daily transactions involving millions of pesos.36 By the
very nature of their work the degree of responsibility, care and
tnistworthiness expected of their employees and officials is far greater than
those of ordinary clerks and employees.37 Banks are expected to exercise
the highest degree of diligence in the selection and supervision of their
employees.38
On the issue of prescription, PCIBank claims that the action of Ford had
prescribed because of its inability to seek judicial relief seasonably,
considering that the alleged negligent act took place prior to December 19,
1977 but the relief was sought only in 1983, or seven years thereafter.
The statute of limitations begins to run when the bank gives the
depositor notice of the payment, which is ordinarily when the check
______________________
33
Simex International (Manila), Inc. vs. Court of Appeals, 183 SCRA
360, 367 (1990).
34
Supra, see note 17, at p. 697.
35 Ibid.
36
BPI vs. Court of Appeals, 216 SCRA 51, 71 (1992).
37
Ibid.
38
Ibid.
473
VOL. 350, JANUARY 29, 2001 473
Philippine Commercial International Bank vs. Court of Appeals
is returned to the alleged drawer as a voucher with a statement of his
account,39 and an action upon a check is ordinarily governed by the
statutory period applicable to instruments in writing.40
Our laws on the matter provide that the action upon a written contract
must be brought within ten years from the time the right of action
accrues.41 Hence, the reckoning time for the prescriptive period begins
when the instrument was issued and the corresponding check was
returned by the bank to its depositor (normally a month thereafter).
Applying the same rule, the cause of action for the recovery of the
proceeds of Citibank Check No. SN-04867 would normally be a month after
December 19, 1977, when Citibank paid the face value of the check in the
amount of P4,746,114.41. Since the original complaint for the cause of
action was filed on January 20, 1983, barely six years had lapsed. Thus,
we conclude that Ford’s cause of action to recover the amount of Citibank
Check No. SN-04867 was seasonably filed within the period provided by
law.
Finally, we also find that Ford is not completely blameless in its failure
to detect the fraud. Failure on the part of the depositor to examine its
passbook, statements of account, and cancelled checks and to give notice
within a reasonable time (or as required by statute) of any discrepancy
which it may in the exercise of due care and diligence find therein, serves
to mitigate the banks’ liability by reducing the award of interest from twelve
percent (12%) to six percent (6%) per annum. As provided in Article 1172
of the Civil Code of the Philippines, 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. In,
quasi-delicts, the. contributory negligence of the plaintiff shall reduce the
damages that he may recover.42
WHEREFORE, the assailed Decision and Resolution of the Court of
Appeals in CA-G.R. CV No. 25017, are AFFIRMED. PCIBank, known
formerly as Insular Bank of Asia and America, is declared solely
responsible for the loss of the proceeds of Citibank
___________________
39
Supra note 20 at Section 605.
40
Ibid.
41
CIVIL CODE, Art. 1144.
42 CIVIL CODE, Art. 2214.

474
474 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
Check No. SN-04867 in the amount of P4,746,114.41, which shall be paid
together with six percent (6%) interest thereon to Ford Philippines, Inc.
from the date when the original complaint was filed until said amount is
fully paid.
However, the Decision and Resolution of the Court of Appeals in CA-
G.R. No. 28430 are MODIFIED as follows: PCIBank and Citibank are
adjudged liable for and must share the loss, (concerning the proceeds of
Citibank Check Numbers SN-10597 and 16508 totalling P12,163,298.10)
on a fifty-fifty ratio, and each bank is ORDERED to pay Ford Philippines,
Inc. P6,081,649.05, with six percent (6%) interest thereon, from the date
the complaint was filed until full payment of said amount.
Costs against Philippine Commercial International Bank and Citibank,
N.A.
SO ORDERED.
Bellosillo (Chairman), Mendoza, Buena and De Leon, Jr., JJ.,
concur.
Judgment in CA-G.R. CV No. 25017 affirmed, while in CA-G.R. No.
28430 modified.
Notes.—Issuing a crossed check imposes no legal obligation on the
drawee not to honor such a check. (Gempesaw vs. Court of Appeals, 218
SCRA 682 [19931)
There is no contractual relation created between a drawee bank and
the payee as a result of the payment by the former of the amount of the
check. (Security Bank and Trust Company vs. Court of Appeals, 291 SCRA
33 [1998])
20 SUPREME COURT REPORTS ANNOTATED
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
No. L-62943. July 14, 1986.*
METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM,
petitioner, vs. COURT OF APPEALS (Now INTERMEDIATE APPELLATE
COURT) and THE PHILIPPINE NATIONAL BANK, respondents.
Negotiable Instruments Law; Evidence; There is no clear evidence in
this case that the signatures on the checks are forgeries. The NBI reports
indicate that the anomalous encashment of the checks were an “inside job”
or due to negligence of MWSS.—We have carefully reviewed the
documents cited by the petitioner. There is no express and categorical
finding in these documents that the twenty-three (23) questioned checks
were indeed signed by persons other than the authorized MWSS
signatories. On the contrary, the findings of the National Bureau of
Investigation in its Report dated November 2, 1970 show that the MWSS
fraud was an “inside job”
__________________
* Metropolitan Waterworks and Sewerage System vs. Court of
SECOND DIVISION.
21
VOL. 143, JULY 14, 1986 21
Metropolitan Waterworks and Sewerage System vs. Court of
Appeals
and that the petitioner’s delay in the reconciliation of bank statements
and the laxity and loose records control in the printing of its personalized
checks facilitated the fraud. Likewise, the questioned Documents Report
No, 159-1074 dated November 21, 1974 of the National Bureau of
Investigation does not declare or prove that the signatures appearing on
the questioned checks are forgeries. The report merely mentions the
alleged differences in the typeface, checkwriting, and printing
characteristics appearing in the standard or submitted models and the
questioned typewritings. The NBI Chemistry Report No. C-74-891 merely
describes the inks and pens used in writing the alleged forged signatures.
It is clear that these three (3) NBI Reports relied upon by the petitioner are
inadequate to sustain its allegations of forgery. These reports did not touch
on the inherent qualities of the signatures which are indispensable in the
determination of the existence of forgery. There must be conclusive
findings that there is a variance in the inherent characteristics of the
signatures and that they were written by two or more different persons.
Same; Same; MWSS officials admitted that the checks in question
can be easily passed on as genuine.—Considering the absence of
sufficient security in the printing of the checks coupled with the very close
similarities between the genuine signatures and the alleged forgeries, the
twenty-three (23) checks in question could have been presented to the
petitioner’s signatories without their knowing that they were bogus checks.
Indeed, the cashier of the petitioner whose signatures were allegedly
forged was unable to tell the difference between the allegedly forged
signature and his own genuine signature. On the other hand, the MWSS
officials admitted that these checks could easily be passed on as genuine.
The memorandum of Mr. A. T. Tolentino, Assistant Chief Accountant of the
drawee Philippine National Bank to Mr. E. Villatuya, Executive Vice-
President of the petitioner dated June 9, 1969 cites an instance where even
the concerned NWSA officials could not tell the differences between the
genuine checks and the alleged forged checks.
Same; Where a depositor is using its own personalized checks, its
failure to provide adequate security measures to prevent forgeries of its
checks constitutes gross negligence and bars it from setting up the defense
of forgery.—The records show that at the time the twenty-three (23) checks
were prepared, negotiated, and encashed, the petitioner was using its own
personalized checks, instead of the official
22
22 SUPREME COURT REPORTS ANNOTATED
Appeals
PNB Commercial blank checks. In the exercise of this special
privilege, however, the petitioner failed to provide the needed security
measures. That there was gross negligence in the printing of its
personalized checks is shown by the following uncontroverted facts, to wit:
(1) The petitioner failed to give its printer, Mesina Enterprises, specific
instructions relative to the safekeeping and disposition of excess forms,
check vouchers, and safety papers; (2) The petitioner failed to retrieve from
its printer all spoiled check forms; (3) The petitioner failed to provide any
control regarding the paper used in the printing of said checks; x xxx.
Same; Failure of depositor to make prompt reconciliation of the
monthly bank statements furnished by the bank constitutes negligence for
which the bank cannot be blamed in case depositor’s checks are forged.—
It is accepted banking procedure for the depository bank to furnish its
depositors bank statements and debt and credit memos through the mail.
The records show that the petitioner requested the respondent drawee
bank to discontinue the practice of mailing the bank statements, but instead
to deliver the same to a certain Mr. Emiliano Zaporteza. For reasons known
only to Mr. Zaporteza however, he was unreasonably delayed in taking
prompt deliveries of the said bank statements and credit and debit memos.
As a consequence, Mr. Zaporteza failed to reconcile the bank statements
with the petitioner’s records. If Mr. Zaporteza had not been remiss in his
duty of taking the bank statements and reconciling them with the
petitioner’s records, the fraudulent encashments of the first checks should
have been discovered, and further frauds prevented. This negligence was, signatures were submitted by the MWSS to and on file with the PNB. By
therefore, the proximate cause of the failure to discover the fraud. special arrangement with the PNB, the MWSS used personalized checks
Same; Depository bank cannot be blamed for not detecting fraudulent in drawing from this account. These checks were printed for MWSS by its
encashment of checks where depositor uses its own personalized printer, F. Mesina Enterprises, located at 1775 Rizal Extension, Caloocan
checks.—We cannot fault the respondent drawee Bank for not having City.
detected the fraudulent encashment of the checks because the printing of “During the months of March, April and May 1969, twenty-three (23)
the petitioner’s personalized checks was not done under the supervision checks were prepared, processed, issued and released by NWSA, all of
and control of the Bank. There is no evidence on record indicating that which were paid and cleared by PNB and debited by PNB against NWSA
because of this private printing, the petitioner furnished the respondent Account No. 6, to wit:
Bank with samples of checks, pens, and inks or took other precautionary 24
measures with the PNB to safeguard its interests. Under the 24 SUPREME COURT REPORTS ANNOTATED
circumstances, therefore, the petitioner was in a better position to detect Metropolitan Waterworks and Sewerage System vs. Court of Appeals
and prevent the fraudulent encashment of its checks. Check No. Date Payee Amount Date Paid
23 By PNB
VOL. 143, JULY 14, 1986 23 1. 59546 8-21- Deogracias P3,187.79 4-2-69
Metropolitan Waterworks and Sewerage System vs. Court of Appeals 69 Estrella
2. 59548 3-31- Natividad 2,848.86 4-23-69
PETITION for certiorari to review the decision of the Intermediate 69 Rosario
Appellate Court. 3. 59547 3-31- Pangilinan 195.00 Unreleased
69 Enterprises
The facts are stated in the opinion of the Court 4. 59549 3-31- Natividad 3,239.88 4-23-69
Juan J. Diaz and Cesar T. Basa for respondent PNB. 69 Rosario
San Juan, Africa, Gonzales & San Agustin Law Offices for 5. 59552 4-1-69 Villarama 987.59 5-6-69
respondent PC IB. &Sons
6. 59554 4-1-69 Gascom 6,057.60 4-16-69
GUTIERREZ, JR., J .: Engineering
7. 59558 4-2-69 The Evening 112.00 Unreleased
This petition for review asks us to set aside the October 29, 1982 decision News
of the respondent Court of Appeals, now Intermediate Appellate Court 8. 59544 3-27- Progressive 18,391.20 4-18-69
which reversed the decision of the Court of First Instance of Manila, Branch 69 Const.
XL, and dismissed the plaintiff’s complaint, the third party complaint, as 9. 59564 4-2-69 Ind. Insp. 594.06 4-18-69
well as the defendant’s counterclaim. Int. Inc.
The background facts which led to the filing of the instant petition are 10. 59568 4-7-69 Roberto 800.00 4-22-69
summarized in the decision of the respondent Court of Appeals: Marsan
“Metropolitan Waterworks and Sewerage System (hereinafter referred to 11. 59570 4-7-69 Paz Andres 200.00 4-22-69
as MWSS) is a government owned and controlled corporation created 12. 59574 4-8-69 Florentino 100,000.00 4-11-69
under Republic Act No. 6234 as the successor-in-interest of the defunct Santos
NWSA. The Philippine National Bank (PNB for short), on the other hand, 13. 59578 4-8-69 Mia. Daily 95.00 Unreleased
is the depository bank of MWSS and its predecessor-in-interest NWSA. Bulletin
Among the several accounts of NWSA with PNB is NWSA Account No. 6, 14. 59580 4-8-69 Phil. Herald 100.00 5-9-69
otherwise known as Account No. 381-777 and which is presently allocated 15. 59582 4-8-69 Galauran 7,729.09 5-6-69
No. 010-500281. The authorized signature for said Account No. 6 were &Pilar
those of MWSS treasurer Jose Sanchez, its auditor Pedro Aguilar, and its 16. 59581 4-8-69 Manila 110.00 5-12-69
acting General Manager Victor L. Recio. Their respective specimen Chronicle
17. 59588 4-8-69 Treago 21,583. 00 4-11-69 20. 59594 4-18-69 Arturo Sison 122,000.00 5-14-69
Tunnel 21. 59577 4 -14-69 Antonio Mendoza 260,000.00 5-16-69
18. 59587 4-8-69 Del fin 120,000.00 4-11-69 22. 59601 4-18-69 Arturo Sison 400,000.00 5-19-69
Santiago 23. 59595 4-28-69 Arturo Sison 190,800.00 5-21-69
19. 59589 4-10- Deogracias 1,257.49 4-16-69 P3,457,903.00
69 Estrella 26
20. 59594 4-14- Philam Ac 33.03 4-29-69 26 SUPREME COURT REPORTS ANNOTATED
69 cident Inc. Metropolitan Waterworks and Sewerage System vs. Court of Appeals
21. 59577 4-8-69 Esla 9,429.78 4-29-69 “The foregoing checks were deposited by the payees Raul Dizon,
Arturo Sison and Antonio Mendoza in their respective current accounts
25 with the Philippine Commercial and Industrial Bank (PCIB) and Philippine
VOL. 143, JULY 14, 1986 25 Bank of Commerce (PBC) in the months of March, April and May 1969.
Metropolitan Waterworks and Sewerage System vs. Court of Appeals Thru the Central Bank Clearing, these checks were presented for payment
22. 59601 4-16-69 by PBC and PCIB to the defendant PNB, and paid, also in the months of
Justine 20,000.00 4-18-69 March, April and May 1969. At the time of their presentation to PNB these
23. 59595 4-14-69 Torres checks bear the standard indorsement which reads ‘all prior indorsement
Neris Phil 4,274.00 5-20-69 and/or lack of endorsement guaranteed.’
Inc. “Subsequent investigation however, conducted by the NBI showed that
P320,636.26” Raul Dizon, Arturo Sison and Antonio Mendoza were all fictitious persons.
“During the same months of March, April and May 1969, twenty-three The respective balances in their current account with the PBC and/or PCIB
(23) checks bearing the same numbers as the aforementioned NWSA stood as follows: Raul Dizon P3,455.00 as of April 30, 1969; Antonio
checks were likewise paid and cleared by PNB and debited against NWSA Mendoza P18,182.00 as of May 23, 1969; and Arturo Sison P1,398.92 as
Account No. 6, to wit: of June 30, 1969.
“Check Date Payee Amount Date Paid “On June 11, 1969, NWSA addressed a letter to PNB requesting the
No. Issued By PNB immediate restoration to its Account No. 6, of the total sum of
1. 59546 3-6-69 Raul Dizon P 84,401.00 3-16-69 P3,457,903.00 corresponding to the total amount of these twenty-three
2. 59548 3-41-69 Raul Dizon 104,790.00 4-1-69 (23) checks claimed by NWSA to be forged and/or spurious checks.
3. 59547 3-14-69 Arturo Sison 56,903.00 4-11-69 “In view of the refusal of PNB to credit back to Account No. 6 the said
4. 59549 3-20-69 Arturo Sison 48,903.00 4-15-69 total sum of P3,457,903.00 MWSS filed the instant complaint on November
5. 59552 3-24-69 Arturo Sison 63,845.00 4-16-89 10, 1972 before the Court of First Instance of Manila and docketed thereat
6. 59544 3-26-69 Arturo Sison 98,450.00 4-17- 69 as Civil Case No. 88950.
7. 59558 3-28-89 Arturo Sison 114,840.00 4-21-69 “In its answer, PNB contended among others, that the checks in
8. 59544 3-16-69 Antonio Mendoza 38,490.00 4-22-69 question were regular on its face in all respects, including the genuineness
9. 59564 3-31-69 Arturo Sison 180,900.00 4-23-69 of the signatures of authorized NWSA signing officers and there was
10. 59568 4-2-69 Arturo Sison 134,940.00 4-25-69 nothing on its face that could have aroused any suspicion as to its
11. 59570 4-1-69 Arturo Sison 64,550.00 4-28-69 genuineness and due execution and; that NWSA was guilty of negligence
12. 59574 4-2-69 Arturo Sison 148,610.00 4-29-89 which was the proximate cause of the loss. “PNB also filed a third party
13. 59578 4-10-69 Antonio Mendoza 93,950.00 4-29-69 complaint against the negotiating banks PBC and PCIB on the ground that
14. 59580 4-8-69 Arturo Sison 160,000.00 5-2-69 they failed to ascertain the identity of the payees and their title to the
15. 59582 4-10-69 Arturo Sison 155,400.00 5-5-69 checks which were deposited in the respective new accounts of the payees
16. 59581 4-8-69 Antonio Mendoza 176,580.00 5-6-69 with them.”
17. 59588 4-16-69 Arturo Sison 176,000.00 5-8-69
18. 59587 4-16-69 Arturo Sison 300,000.00 5-12-69 xxx xxx
19. 59589 4-18-69 Arturo Sison 280,000.00 5-15 -6 9
On February 6, 1976, the Court of First Instance of Manila rendered
judgment in favor of the MWSS. The dispositive portion of the decision
reads:
27
VOL, 143, JULY 14, 1986 27
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
“WHEREFORE, on the COMPLAINT by a clear preponderance of
evidence and in accordance with Section 23 of the Negotiable Instruments
Law, the Court hereby renders judgment in favor of the plaintiff
Metropolitan Waterworks and Sewerage System (MWSS) by ordering the
defendant Philippine National Bank (PNB) to restore the total sum of
THREE MILLION FOUR HUNDRED FIFTY SEVEN THOUSAND NINE
HUNDRED THREE PESOS (P3,457,903.00) to plaintiff’s Account No. 6,
otherwise known as Account No. 010-50030-3, with legal interest thereon
computed from the date of the filing of the complaint and until restored in
the said Account No. 6.
“On the THIRD PARTY COMPLAINT, the Court, for lack of evidence,
hereby renders judgment in favor of the third party defendants Philippine
Bank of Commerce (PBC) and Philippine Commercial and Industrial Bank
(PCIB) by dismissing the Third Party Complaint.
“The counterclaims of the third party defendants are likewise dismissed
for lack of evidence.
“ N o pronouncement as to costs.”
As earlier stated, the respondent court reversed the decision of the Court
of First Instance of Manila and rendered judgment in favor of the
respondent Philippine National Bank.
A motion for reconsideration filed by the petitioner MWSS was denied
by the respondent court in a resolution dated January 3, 1983.
The petitioner now raises the following assignments of errors for the
grant of this petition:
1. I.IN NOT HOLDING THAT AS THE SIGNATURES ON THE
CHECKS WERE FORGED, THE DRAWEE BANK WAS LIABLE
FOR THE LOSS UNDER SECTION 23 OF THE NEGOTIABLE
INSTRUMENTS LAW.
2. II.IN FAILING TO CONSIDER THE PROXIMATE NEGLIGENCE
OF PNB IN ACCEPTING THE SPURIOUS CHECKS DESPITE
THE OBVIOUS IRREGULARITY OF TWO SETS OF CHECKS
BEARING IDENTICAL NUMBER BEING ENCASHED WITHIN
DAYS OF EACH OTHER.
3. III.IN NOT HOLDING THAT THE SIGNATURES OF
28
28 SUPREME COURT REPORTS ANNOTATED
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
1. THE DRAWEE MWSS BEING CLEARLY FORGED, AND THE
CHECKS SPURIOUS, SAME ARE INOPERATIVE AS AGAINST
THE ALLEGED DRAWEE.
The appellate court applied Section 24 of the Negotiable Instruments Law
which provides:
“Every negotiable instrument is deemed prima facie to have been issued
for valuable consideration and every person whose signature appears
thereon to have become a party thereto for value.”
The petitioner submits that the above provision does not apply to the facts
of the instant case because the questioned checks were not those of the
MWSS and neither were they drawn by its authorized signatories. The
petitioner states that granting that Section 24 of the Negotiable Instruments
Law is applicable, the same creates only a prima facie presumption which
was overcome by the following documents, to wit: (1) the NBI Report of
November 2, 1970; (2) the NBI Report of November 21, 1974; (3) the NBI
Chemistry Report No. C-74-891; (4) the Memorandum of Mr. Juan Dino,
3rd Assistant Auditor of the respondent drawee bank addressed to the
Chief Auditor of the petitioner; (5) the admission of the respondent bank’s
counsel in open court that the National Bureau of Investigation found the
signature on the twenty-three (23) checks in question to be forgeries; and
(6) the admission of the respondent bank’s witness, Mr. Faustino Mesina,
Jr. that the checks in question were not printed by his printing press. The
petitioner contends that since the signatures of the checks were forgeries,
the respondent drawee bank must bear the loss under the rulings of this
Court.
“A bank is bound to know the signatures of its customers; and if it pays a
forged check it must be considered as making the payment out of its own
funds, and cannot ordinarily charge the amount so paid to the account of
the depositor whose name was forged.”
xxx xxx xxx
“The signatures to the checks being forged, under Section 23 of the
Negotiable Instruments Law they are not a charge against plain-
29
VOL, 143, JULY 14, 1986 29
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
tiff nor are the checks of any value to the defendant.
“It must therefore be held that the proximate cause of loss was due to
the negligence of the Bank of the Philippine Islands in honoring and
cashing the two forged checks.” (San Carlos Milling Co. v. Bank of the P.
I., 59 Phil. 59)
 “It is admitted that the Philippine National Bank cashed the check upon
a forged signature, and placed the money to the credit of Maasim, who was
the forger. That the Philippine National Bank then endorsed the check and
forwarded it to the Shanghai Bank by whom it was paid. The Philippine
National Bank had no license or authority to pay the money to Maasim or
anyone else upon a forged signature. It was its legal duty to know that
Malicor’s endorsement was genuine before cashing the check. Its remedy
is against Maasim to whom it paid the money.” (Great Eastern Life Ins. Co.
v. Hongkong & Shanghai Bank, 43 Phil. 678).
We have carefully reviewed the documents cited by the petitioner. There
is no express and categorical finding in these documents that the twenty-
three (23) questioned checks were indeed signed by persons other than
the authorized MWSS signatories. On the contrary, the findings of the
National Bureau of Investigation in its Report dated November 2, 1970
show that the MWSS fraud was an “inside job” and that the petitioner’s
delay in the reconciliation of bank statements and the laxity and loose
records control in the printing of its personalized checks facilitated the
fraud. Likewise, the questioned Documents Report No. 159-1074 dated
November 21, 1974 of the National Bureau of Investigation does not
declare or prove that the signatures appearing on the questioned checks
are forgeries. The report merely mentions the alleged differences in the
typeface, checkwriting, and printing characteristics appearing in the
standard or submitted models and the questioned typewritings. The NBI
Chemistry Report No. C-74-891 merely describes the inks and pens used
in writing the alleged forged signatures.
It is clear that these three (3) NBI Reports relied upon by the petitioner
are inadequate to sustain its allegations of forgery. These reports did not
touch on the inherent qualities
30
30 SUPREME COURT REPORTS ANNOTATED
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
of the signatures which are indispensable in the determination of the
existence of forgery. There must be conclusive findings that there is a
variance in the inherent characteristics of the signatures and that they were
written by two or more different persons.
Forgery cannot be presumed (Siasat, et al. v. Intermediate Appellate
Court, et al, 139 SCRA 238). It must be established by clear, positive, and
convincing evidence. This was not done in the present case.
The cases of San Carlos Milling Co, Ltd. v. Bank of the Philippine
Islands, et al. (59 Phil, 59) and Great Eastern Life Ins., Co. v. Hongkong
and Shanghai Bank (43 Phil. 678) relied upon by the petitioner are
inapplicable in this case because the forgeries in those cases were either
clearly established or admitted while in the instant case, the allegations of
forgery were not clearly established during trial.
Considering the absence of sufficient security in the printing of the
checks coupled with the very close similarities between the genuine
signatures and the alleged forgeries, the twenty-three (23) checks in
question could have been presented to the petitioner’s signatories without
their knowing that they were bogus checks. Indeed, the cashier of the
petitioner whose signatures were allegedly forged was unable to tell the
difference between the allegedly forged signature and his own genuine
signature. On the other hand, the MWSS officials admitted that these
checks could easily be passed on as genuine,
The memorandum of Mr. A. T. Tolentino, Assistant Chief Accountant of
the drawee Philippine National Bank to Mr. E. Villatuya, Executive Vice-
President of the petitioner dated June 9, 1969 cites an instance where even
the concerned NWSA officials could not tell the differences between the
genuine checks and the alleged forged checks.
“At about 12:00 o’clock on June 6, 1960, VP Maramag requested me to
see him in his office at the Cashier’s Dept. where Messrs. Jose M.
Sanchez, treasurer of NAWASA and Romeo Oliva of the same office were
present. Upon my arrival I observed the NAWASA officials questioning the
issue of the NAWASA checks
31
VOL, 143, JULY 14, 1988 31
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
appearing in their own list, xerox copy attached.
“For verification purposes, therefore, the checks were taken from our
file. To everybody there present namely VIP Maramag, the two
abovementioned NAWASA officials, AVP, Buhain, Asst. Cashier Castelo,
Asst. Cashiet Tejada and Messrs. A. Lopez and L. Lechuga, both C/A
bookkeepers, no one was able to point out any difference on the signatures
of the NAWASA officials appearing on the checks compared to their official
signatures on file. In fact 3 checks, one of those under question, were
presented to the NAWASA treasurer for verification but he could not point
out which was his genuine signature. After intent comparison, he pointed
on the questioned check as bearing his correct signature.”
xxx xxx xxx
Moreover, the petitioner is barred from setting up the defense of forgery
under Section 23 of the Negotiable Instruments Law which provides that:
“SEC. 23. FORGED SIGNATURE; EFFECT OF.—When the signature is
forged or made without 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.”
because it was guilty of negligence not only before the questioned checks
were negotiated but even after the same had already been negotiated.
(See Republic v. Equitable Banking Corporation. 10 SCRA 8)
The records show that at the time the twenty-three (23) checks were
prepared, negotiated, and encashed, the petitioner was using its own
personalized checks, instead of the official PNB Commercial blank checks.
In the exercise of this special privilege, however, the petitioner failed to
provide the needed security measures. That there was gross negligence
in the printing of its personalized checks is shown by the following
uncontroverted facts, to wit:
32
32 SUPREME COURT REPORTS ANNOTATED
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
1. (1)The petitioner failed to give its printer, Mesina Enterprises,
specific instructions relative to the safekeeping and disposition of
excess forms, check vouchers, and safety papers;
2. (2)The petitioner failed to retrieve from its printer all spoiled check
forms;
3. (3)The petitioner failed to provide any control regarding the paper
used in the printing of said checks;
4. (4)The petitioner failed to furnish the respondent drawee bank with
samples of “typewriting, check writing, and print used by its printer
in the printing of its checks and of the inks and pens used in
signing the same; and
5. (5)The petitioner failed to send a representative to the printing
office during the printing of said checks. This gross negligence of
the petitioner is very evident from the sworn statement dated June
19, 1969 of Faustino Mesina, Jr., the owner of the printing press
which printed the petitioner’s personalized checks:
xxx xxx xxx
“7. Do you have any business transaction with the National
Q: Waterworks and Sewerage Authority (NAWASA)?
A: Yes, sir. I have a contract with the NAWASA in printing
NAWASA Forms such as NAWASA Check Vouchers and
Office Forms.
xxx xxx xxx
“15. Were you given any instruction by the NAWASA in connection
Q: with the printing of these check vouchers?
A: There is none, sir. No instruction whatsoever was given to me.
“16. Were you not advised as to what kind of paper would be used
Q: in the check vouchers?
A: Only as per sample, sir.
x xx xxx xx x
“20. Where did you buy this Hammermill Safety check paper?
Q:
A: From Tan Chiong, a paper dealer with store located at
33
VOL. 143, JULY 14, 1986 33
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
Juan Luna, Binondo, Manila. (In front of the Metropolitan
Bank).
xxx xxx xxx
“24. Q Were all these check vouchers printed by you submitted
: to NAWASA?
A: Not all, sir. Because we have to make reservations or
allowances for spoilage.
“25. Q Out of these vouchers printed by you, how many were
: spoiled and how many were the excess printed check
vouchers?
A: Approximately four hundred (400) sheets, sir. I cannot
determine the proporti on of the excess and spoiled
because the final act of perforating these check vouchers
has not yet been done and spoilage can only be
determined after this final act of printing.
“26. Q What did you do with these excess check vouchers?
:
A: I keep it under lock and key in my filing cabinet.
xxx xxx xxx
“28. Q Were you not instructed by the NAWASA authorities to
: burn these excess check vouchers?
A: No, sir. I was not instructed.
“29. Q What do you intend to do with these excess printed
: check vouchers?
A: I intend to use them for future orders from the NAWASA.
xxx xxx xxx
“32. Q In the process of printing the check vouchers ordered by
: the NAWASA, how many sheets were actually spoiled?
A: I cannot approximate, sir. But there are spoilage in the
process of printing and perforating.
“33. Q What did you do with these spoilages?
:
A: Spoiled printed materials are usually thrown out, in the
garbage can.
“34. Q Was there any representative of the NAWASA to
: supervise the printing or watch the printing of these
check vouchers?
 A: None, sir.
xxx xxx xxx
“39. Q During the period of printing after the days work, what
: measures do you undertake to safeguard the mold and
other paraphernalia used in the printing of
34
34 SUPREME COURT REPORTS ANNOTATED
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
these particular orders of NAWASA?
A: Inasmuch as I have an employee who sleeps in the printing shop
and at the same time do the guarding, we just leave the mold
attached to the machine and the other finished or unfinished work
check vouchers are left in the rack so that the work could be
continued thefollowing day.”
The National Bureau of Investigation Report dated November 2, 1970 is
even more explicit, Thus—
xxx xxx xxx
“60. We observed also that there is some laxity and loose control in the
printing of NAWASA checks. We gathered from MESINA ENTERPRISES,
the printing firm that undertook the printing of the check vouchers of
NAWASA that NAWASA had no representative at the printing press during
the process of the printing and no particular security measure instructions
adopted to safeguard the interest of the government in connection with
printing of this accountable form.”
Another factor which facilitated the fraudulent encashment of the twenty-
three (23) checks in question was the failure of the petitioner to reconcile
the bank statements with its own records.
It is accepted banking procedure for the depository bank to furnish its
depositors bank statements and debt and credit memos through the mail
The records show that the petitioner requested the respondent drawee
bank to discontinue the practice of mailing the bank statements, but instead
to deliver the same to a certain Mr. Emiliano Zaporteza. For reasons known
only to Mr. Zaporteza however, he was unreasonably delayed in taking
prompt deliveries of the said bank statements and credit and debit memos.
As a consequence, Mr. Zaporteza failed to reconcile the bank statements
with the petitioner’s records. If Mr. Zaporteza had not been remiss in his
duty of taking the bank statements and reconciling them with the
petitioner’s records, the fraudulent encashments of the first checks should
have been discovered, and further frauds prevented. This negligence was,
therefore, the proximate cause
35
VOL. 143, JULY 14, 1986 35
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
of the failure to discover the fraud. Thus,
“When a person opens a checking account with a bank, he is given blank
checks which he may fill out and use whenever he wishes. Each time he
issues a check, he should also fill out the check stub to which the check is
usually attached. This stub, if properly kept, will contain the number of the
check, the date of its issue, the name of the payee and the amount thereof.
The drawer would therefore have a complete record of the checks he
issues. It is the custom of banks to send to its depositors a monthly
statement of the status of their accounts, together with all the cancelled
checks which have been cashed by their respective holders. If the
depositor has filled out his check stubs properly, a comparison between
them and the cancelled checks will reveal any forged check not taken from
his checkbook. It is the duty of a depositor to carefully examine the bank’s
statement, his cancelled checks, his check stubs and other pertinent
records within a reasonable time, and to report any errors without
unreasonable delay. If his negligence should cause the bank to honor a
forged check or prevent it from recovering the amount it may have already
paid on such check, he cannot later complain should the bank refuse to
recredit his account with the amount of such check. (First Nat. Bank of
Richmond v. Richmond Electric Co., 106 Va. 347, 56 SE 152, 7 LRA, NS
744 [1907]. See also Leather Manufacturers’ Bank v. Morgan, 117 US 96,
6 S. Ct. 657 [1886]; Deer Island Fish and Oyster Co. v. First Nat. Bank of
Biloxi, 166 Miss. 162, 146 So. 116 [1933]). Campos and Campos, Notes
and Selected Cases on Negotiable Instruments Law, 1971, pp. 267-268).
This failure of the petitioner to reconcile the bank statements with its
cancelled checks was noted by the National Bureau of Investigation in its
report dated November 2, 1970:
“58. One factor which facilitated this fraud was the delay in the
reconciliation of bank (PNB) statements with the NAWASA bank accounts,
xxx. Had the NAWASA representative come to the PNB early for the
statements and had the bank been advised promptly of the reported bogus
check, the negotiation of practically all of the remaining checks on May,
1969, totalling P2,224,736.00 could have been prevented.”
36
36 SUPREME COURT REPORTS ANNOTATED
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
The records likewise show that the petitioner failed to provide appropriate
security measures over its own records thereby laying confidential records
open to unauthorized persons. The petitioner’s own Fact Finding
Committee, in its report submitted to their General Manager underscored
this laxity of records control. It observed that the “office of Mr. Ongtengco
(Cashier No. VI of the Treasury Department at the NAWASA) is quite open
to any person known to him or his staff members and that the check writer
is merely on top of his table.”
 When confronted with this report at the Anti-Fraud Action Section of the
National Bureau of Investigation, Mr. Ongtengco could only state that:
“A. Generally my order is not to allow anybody to enter my office.
Only authorized persons are allowed to enter my office. There are
some cases, however, where some pers ons enter my office
because they are following up their checks. Maybe, these
persons may have been authorizedby Mr. Pantig. Most of the
people entering my office are changing checks as allowed by the
Resolution of the Board of Directors of the NAWASA and the
Treasurer. The check writer was never placed on my table. There
is a place for the checkwriter which is also under lock and key.
“Q Is Mr. Pantig authorized to allow unauthorized persons to enter
. your office?
“A. No, sir.
“Q Why are you tolerating Mr. Pantig admitting unauthorized persons
. in your office?
“A, I do not want to embarrass Mr. Pantig. Most of the people
following up checks are employees of the NAWASA.
“Q Was the authority given by the Board of Directors and the
. approval by the Treasurer for employees, and other persons to
encash their checks carry with it their authority to enter your
office?
“A. No, sir.
xxx xxx xxx
“Q From the answers that you have given to us we observed that
. actually there is laxity and poor control on your part with regards
to the preparations of check payments in-
37
VOL. 143, JULY 14, 1986 37
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
asmuch as you allow unauthorized persons to follow-up their
vouchers inside your office which may leakout confidential
informations or your books of account. After being apprised of
all the shortcomings in your office, as head of the Cashiers’
Office of the Treasury Department what remedial measures
do you intend to undertake?
“A. Time and again the Treasurer has been calling our attention
not to allow interested persons to hand carry their voucher
checks and we are trying our best and if I can do it to follow
the instructions to the letter, I will do it but unfortunately the
persons who are allowed to enter my office are my co-
employees and persons who have connections with our
higher ups and I can not possibly antagonize them. Rest
assured that even though that everybody will get hurt, I will do
my best not to allow unauthorized persons to enter my office.
xxx xxx xxx
“Q Is it not possible inasmuch as your office is in charge of the
. posting of check payments in your books that leakage of
payments to the banks came from your office?
“A. I am not aware of it but it only takes us a couple of minutes to
process the checks. And there are cases wherein every
information about the checks may be obtained from the
Accounting Department, Auditing Department, or the Office of
the General Manager.”
Relying on the foregoing statement of Mr. Ongtengco, the National Bureau
of Investigation concluded in its Report dated November 2, 1970 that the
fraudulent encashment of the twenty-three (23) checks in question was an
“inside job”. Thus—
“We have all the reasons to believe that this fraudulent act was an inside
job or one pulled with inside connivance at NAWASA. As pointed earlier in
this report, the serial numbers of these checks in question conform with the
numbers in current use of NAWASA, aside from the fact that these
fraudulent checks were found to be of the same kind and design as that of
NAWASA’s own checks. While knowledge as to such facts may be
obtained through the possession of a NAWASA check of current issue, an
outsider without information from the inside can not possibly pinpoint which
of NAWASA’s
38
38 SUPREME COURT REPORTS ANNOTATED
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
various accounts has sufficient balance to cover all these fraudulent
checks. None of these checks, it should be noted, was dishonored for
insufficiency of funds. . .”
Even if the twenty-three (23) checks in question are considered forgeries,
considering the petitioner’s gross negligence, it is barred from setting up
the defense of forgery under Section 23 of the Negotiable Instruments Law.
Nonetheless, the petitioner claims that it was the negligence of the
respondent Philippine National Bank that was the proximate cause of the
loss. The petitioner relies on our ruling in Philippine National Bank v. Court
of Appeals (25 SCRA 693) that.
“Thus, by not returning the check to the PCIB, by thereby indicating that
the PNB had found nothing wrong with the check and would honor the
same, and by actually paying its amount to the PCIB, the PNB induced the
latter, not only to believe that the check was genuine and good in every
respect, but, also, to pay its amount to Augusto Lim. In other words, the
PNB was the primary or proximate cause of the loss, and, hence, may not
recover from the PCIB.”
The argument has no merit. The records show that th e respondent drawee Under the circumstances, therefore, the petitioner was in a better
bank, had taken the necessary measures in the detection of forged checks position to detect and prevent the fraudulent encashment of its checks.
and the prevention of their fraudulent encashment. In fact, long before the WHEREFORE, the petition for review on certiorari is hereby
encashment of the twenty-three (23) checks in question, the respondent DISMISSED for lack of merit. The decision of the respondent Court of
Bank had issued constant reminders to all Current Account Bookkeepers Appeals dated October 29, 1982 is AFFIRMED. No pronouncement as to
informing them of the activities of forgery syndicates. The Memorandum of costs.
the Assistant Vice-President and Chief Accountant of the Philippine 40
National Bank dated February 17, 1966 reads in part: 40 SUPREME COURT REPORTS ANNOTATED
“SUBJECT: ACTIVITIES OF FORGERY SYNDICATE Arsenal vs. Intermediate Appellate Court
“From reliable information we have gathered that personalized checks of SO ORDERED.
current account depositors are now the target of the forgery syndicate. To Feria (Chairman), Fernan, Alampay and Cruz, JJ.,concur.
protect the interest of the bank, you are hereby enjoined to be more careful Paras **, J., took no part.
in examining said checks especially those Petition dismissed Decision affirmed.
39
VOL. 143, JULY 14, 1986 39
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
coming from the clearing, mails and window transactions. As a reminder
please be guided with the following:

1. “1.Signatures of drawers should be properly scrutinized and

compared with those we have on file.
2. “2.The serial numbers of the checks should be compared with the
serial numbers registered with the Cashier’s Dept.
3. “3.The texture of the paper used and the printing of the checks
should be compared with the sample we have on file with the
Cashier’s Dept.
4. “4.Checks bearing several indorsements should be given special
attention.
5. “5.Alteration in amount both in figures and words should be
carefully examined even if signed by the drawer.
6. “6.Checks issued in substantial amounts particularly by depositors
who do not usually issue checks in big amounts should be brought
to the attention of the drawer by telephone or any fastest means
of communication for purposes of confirmation.

and your attention is also invited to keep abreast of previous circulars

and memo instructions issued to bookkeepers.”
We cannot fault the respondent drawee Bank for not having detected the
fraudulent encashment of the checks because the printing of the
petitioner’s personalized checks was not done under the supervision and
control of the Bank. There is no evidence on record indicating that because
of this private printing, the petitioner furnished the respondent Bank with
samples of checks, pens, and inks or took other precautionary measures
with the PNB to safeguard its interests.
 VOL. 393, NOVEMBER 27, 2002 89
Ilusorio vs. Court of Appeals
G.R. No. 139130. November 27, 2002.*
RAMON K. ILUSORIO, petitioner, vs. HON. COURT OF APPEALS, and
THE MANILA BANKING CORPORATION, respondents.
Civil Law; Damages; Negligence; To be entitled to damages,
petitioner has the burden of proving negligence on the part of the bank for
failure to detect the discrepancy in the signatures on the checks.—On
the first issue, we find that petitioner has no cause of action against Manila
Bank. To be entitled to damages, petitioner has the burden of proving
negligence on the part of the bank for failure to detect the discrepancy in
the signatures on the checks. It is incumbent upon petitioner to establish
the fact of forgery, i.e., by submitting his specimen signatures and
comparing them with those on the questioned checks. Curiously though,
petitioner failed to submit additional specimen signatures as requested by
the National Bureau of Investigation from which to draw a conclusive
finding regarding forgery. The Court of Appeals found that petitioner, by his
own inaction, was precluded from setting up forgery.
Same; Same; Same; Negligence is the omission to do something
which a reasonable man, guided by those considerations which ordinarily
regulate the conduct of human affairs would do, or the doing of something
which a prudent and reasonable man would do.—As borne by the records,
it was petitioner, not the bank, who was negligent. Negligence is the
omission to do something which a reasonable man, guided by those
considerations which ordinarily regulate the conduct of human affairs,
would do, or the doing of something which a prudent and reasonable man
would do.In the present case, it appears that petitioner accorded his
secretary unusual degree of trust and unrestricted access to his credit
cards, passbooks, check books, bank statements, including custody and
possession of cancelled checks and reconciliation of accounts.
Same; Same; Same; Petitioner’s failure to examine his bank
statements appears as the proximate cause of his own damage; Proximate
Cause Defined.—Petitioner’s failure to examine his bank statements
appears as the proximate cause of his own damage. Proximate cause is
that cause, which, in natural and continuous sequence, unbroken by any
efficient intervening cause, produces the injury, and without which the
result would not have occurred. In the instant case, the bank was not
shown to
_______________
*
SECOND DIVISION.
90
90 SUPREME COURT REPORTS ANNOTATED
Ilusorio vs. Court of Appeals
be remiss in its duty of sending monthly bank statements to petitioner
so that any error or discrepancy in the entries therein could be brought to
the bank’s attention at the earliest opportunity. But, petitioner failed to
examine these bank statements not because he was prevented by some
cause in not doing so, but because he did not pay sufficient attention to the
matter. Had he done so, he could have been alerted to any anomaly
committed against him.
Same; Criminal Law; Forgery; When a signature is forged or made
without the authority of the person whose signature it purports to be, the
check is wholly inoperative unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery or want of
authority.—True, it is a rule that when a signature is forged or made without
the authority of the person whose signature it purports to be, the check is
wholly inoperative. No right to retain the instrument, or to give a discharge
therefor, or to enforce payment thereof against any party, can be acquired
through or under such signature. However, the rule does provide for an
exception, namely: “unless the party against whom it is sought to enforce
such right is precluded from setting up the forgery or want of authority.” In
the instant case, it is the exception that applies. In our view, petitioner is
precluded from setting up the forgery, assuming there is forgery, due to his
own negligence in entrusting to his secretary his credit cards and
checkbook including the verification of his statements of account.
Same; Estoppel; Petitioner cannot hold private respondent in
estoppel for the latter is not the actual party to the criminal action.—On the
second issue, the fact that Manila Bank had filed a case for estafa against
Eugenio would not estop it from asserting the fact that forgery has not been
clearly established. Petitioner cannot hold private respondent in estoppel
for the latter is not the actual party to the criminal action. In a criminal
action, the State is the plaintiff, for the commission of a felony is an offense
against the State. Thus, under Section 2, Rule 110 of the Rules of Court
the complaint or information filed in court is required to be brought in the
name of the “People of the Philippines.”
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
People’s Law Office for petitioner.
91
VOL. 393, NOVEMBER 27, 2002 91
Ilusorio vs. Court of Appeals
Puyat, Jacinto & Santos and Asedillo and Associates for private
respondent.
QUISUMBING, J.:
This petition for review seeks to reverse the decision1promulgated on
January 28, 1999 by the Court of Appeals in CA-G.R. CV No. 47942,
affirming the decision of the then Court of First Instance of Rizal, Branch
XV (now the Regional Trial Court of Ma-kati, Branch 138) dismissing Civil
Case No. 43907, for damages.
The facts as summarized by the Court of Appeals are as follows:
Petitioner is a prominent businessman who, at the time material to this
case, was the Managing Director of Multinational Investment
Bancorporation and the Chairman and/or President of several other
corporations. He was a depositor in good standing of respondent bank, the
Manila Banking Corporation, under current Checking Account No.
0609037-0. As he was then running about 20 corporations, and was going
out of the country a number of times, petitioner entrusted to his secretary,
Katherine2 E. Eugenio, his credit cards and his checkbook with blank
checks. It was also Eugenio who verified and reconciled the statements of
said checking account.3
Between the dates September 5, 1980 and January 23, 1981, Eugenio
was able to encash and deposit to her personal account about seventeen
(17) checks drawn against the account of the petitioner at the respondent
bank, with an aggregate amount of P119,634.34. Petitioner did not bother
to check his statement of account until a business partner apprised him
that he saw Eugenio use his credit cards. Petitioner fired Eugenio
immediately, and instituted a criminal action against her for estafa thru
falsification before the Office of the Provincial Fiscal of Rizal. Private
respondent, through an affidavit executed by its employee, Mr. Dante
Razon, also lodged a complaint for estafa thru falsification of commercial
documents against Eugenio on the basis of petitioner’s
_______________
1
Rollo, pp. 26-30.
2
Also spelled as “Catherine” in some parts of the record.
3 Rollo, p. 26.
92
92 SUPREME COURT REPORTS ANNOTATED
Ilusorio vs. Court of Appeals
statement that his signatures in the checks were forged.4Mr. Razon’s
affidavit states:
That I have examined and scrutinized the following checks in accordance
with prescribed verification procedures with utmost care and diligence by
comparing the signatures affixed thereat against the specimen signatures
of Mr. Ramon K. Ilusorio which we have on file at our said office on such
dates,
xxx
That the aforementioned checks were among those issued by
Manilabank in favor of its client MR. RAMON K. ILUSORIO, . . .
That the same were personally encashed by KATHERINE E.
ESTEBAN, an executive secretary of MR. RAMON K. ILUSORIO in said
Investment Corporation;
That I have met and known her as KATHERINE E. ESTEBAN the
attending verifier when she personally encashed the above-mentioned
checks at our said office;
That MR. RAMON K. ILUSORIO executed an affidavit expressly
disowning his signature appearing on the checks further alleged to have
not authorized the issuance and encashment of the same . . . .5
Petitioner then requested the respondent bank to credit back and restore
to its account the value of the checks which were wrongfully encashed but
respondent bank refused. Hence, petitioner filed the instant case.6
At the trial, petitioner testified on his own behalf, attesting to the truth of
the circumstances as narrated above, and how he discovered the alleged
forgeries. Several employees of Manila Bank were also called to the
witness stand as hostile witnesses. They testified that it is the bank’s
standard operating procedure that whenever a check is presented for
encashment or clearing, the signature on the check is first verified against
the specimen signature cards on file with the bank.
Manila Bank also sought the expertise of the National Bureau of
Investigation (NBI) in determining the genuineness of the signa-
_______________
4
TSN, October 6, 1983, p. 58.
5
Rollo, pp. 108-109.
6 Id., at p. 27.
93
VOL. 393, NOVEMBER 27, 2002 93
Ilusorio vs. Court of Appeals
tures appearing on the checks. However, in a letter dated March 25, 1987,
the NBI informed the trial court that they could not conduct the desired
examination for the reason that the standard specimens submitted were
not sufficient for purposes of rendering a definitive opinion. The NBI then
suggested that petitioner be asked to submit seven (7) or more additional
standard signatures executed before or about, and immediately after the
dates of the questioned checks. Petitioner, however, failed to comply with
this request.
 After evaluating the evidence on both sides, the court a quo rendered
judgment on May 12, 1994 with the following dispositive portion:
“WHEREFORE, finding no sufficient basis for plaintiff’s cause herein
against defendant bank, in the light of the foregoing considerations and
established facts, this case would have to be, as it is hereby DISMISSED.
Defendant’s counterclaim is likewise DISMISSED for lack of sufficient
basis.
SO ORDERED.”7
Aggrieved, petitioner elevated the case to the Court of Appeals by way of
a petition for review but without success. The appellate court held that
petitioner’s own negligence was the proximate cause of his loss. The
appellate court disposed as follows:
“WHEREFORE, the judgment appealed from is AFFIRMED. Costs against
the appellant.
SO ORDERED.”8
Before us, petitioner ascribes the following errors to the Court of Appeals:
1. A.THE COURT OF APPEALS ERRED IN NOT HOLDING THAT
THE RESPONDENT BANK IS ESTOPPED FROM RAISING THE
DEFENSE THAT THERE WAS NO FORGERY OF THE
SIGNATURES OF THE PETITIONER IN THE CHECK
BECAUSE THE RESPONDENT
_______________
7 12 Id., at p. 17.
Ibid.
8
Id., at p. 30.
94
94 SUPREME COURT REPORTS ANNOTATED
Ilusorio vs. Court of Appeals
1. FILED A CRIMINAL COMPLAINT FOR ESTAFATHRU
FALSIFICATION OF COMMERCIAL DOCUMENTS AGAINST
KATHERINE EUGENIO USING THE AFFIDAVIT OF
PETITIONER STATING THAT HIS SIGNATURES WERE
FORGED AS PART OF THE AFFIDAVITCOMPLAINT.9
2. B.THE COURT OF APPEALS ERRED IN NOT APPLYING SEC.
23, NEGOTIABLE INSTRUMENTS LAW.10
3. C.THE COURT OF APPEALS ERRED IN NOT HOLDING THE
BURDEN OF PROOF IS WITH THE RESPONDENT BANK TO
PROVE THE DUE DILIGENCE TO PREVENT DAMAGE, TO
THE PETITIONER, AND THAT IT WAS NOT NEGLIGENT IN
THE SELECTION AND SUPERVISION OF ITS EMPLOYEES.11
4. D.THE COURT OF APPEALS ERRED IN NOT HOLDING THAT
RESPONDENT BANK SHOULD BEAR THE LOSS, AND
SHOULD BE MADE TO PAY PETITIONER, WITH RECOURSE
AGAINST KATHERINE EUGENIO ESTEBAN.12
Essentially the issues in this case are: (1) whether or not petitioner has a
cause of action against private respondent; and (2) whether or not -private
respondent, in filing an estafa case against petitioner’s secretary, is barred
from raising the defense that the fact of forgery was not established.
Petitioner contends that Manila Bank is liable for damages for its
negligence in failing to detect the discrepant checks. He adds that as a
general rule a bank which has obtained possession of a check upon an
unauthorized or forged endorsement of the payee’s signature and which
collects the amount of the check from the drawee is liable for the proceeds
thereof to the payee. Petitioner invokes the doctrine of estoppel, saying
that having itself instituted a forgery case against Eugenio, Manila Bank is
now estopped from asserting that the fact of forgery was never proven.
For its part, Manila Bank contends that respondent appellate court did
not depart from the accepted and usual course of judicial
_______________
9
Id., at p. 10.
10 Id., at p. 14.
11 Id., at p. 15.
95
VOL. 393, NOVEMBER 27, 2002 95
Ilusorio vs. Court of Appeals
proceedings, hence there is no reason for the reversal of its ruling. Manila
Bank additionally points out that Section 2313 of the Negotiable Instruments
Law is inapplicable, considering that the fact of forgery was never proven.
Lastly, the bank negates petitioner’s claim of estoppel.14
On the first issue, we find that petitioner has no cause of action against
Manila Bank. To be entitled to damages, petitioner has the burden of
proving negligence on the part of the bank for failure to detect the
discrepancy in the signatures on the checks. It is incumbent upon petitioner
to establish the fact of forgery, i.e., by submitting his specimen signatures
and comparing them with those on the questioned checks. Curiously
though, petitioner failed to submit additional specimen signatures as
requested by the National Bureau of Investigation from which to draw a
conclusive finding regarding forgery. The Court of Appeals found that
petitioner, by his own inaction, was precluded from setting up forgery. Said
the appellate court:
We cannot fault the court a quo for such declaration, considering that the
plaintiff’s evidence on the alleged forgery is not convincing enough. The
burden to prove forgery was upon the plaintiff, which burden he failed to
discharge. Aside from his own testimony, the appellant presented no other
evidence to prove the fact of forgery. He did not even submit his own
specimen signatures, taken on or about the date of the questioned checks,
for examination and comparison with those of the subject checks. On the
other hand, the appellee presented specimen signature cards of the
appellant, taken at various years, namely, in 1976, 1979 and 1981 (Exhibits
“1”, “2”, “3” and “7”), showing variances in the appellant’s unquestioned
signatures. The evidence further shows that the appellee, as soon as it
was informed by the appellant about his questioned signatures, sought to
borrow the questioned checks from the appellant for purposes of
_______________
13
Sec. 23. Forged signature, effect of.—When a signature is forged or
made without the authority of the person whose signature it purports to be,
it is wholly inoperative, and no right 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.
14
Rollo, p. 49.
96
96 SUPREME COURT REPORTS ANNOTATED
Ilusorio vs. Court of Appeals
analysis and examination (Exhibit “9”), but the same was denied by the
appellant. It was also the former which sought the assistance of the NBI
for an expert analysis of the signatures on the questioned checks, but the
same was unsuccessful for lack of sufficient specimen signatures.15
Moreover, petitioner’s contention that Manila Bank was remiss in the
exercise of its duty as drawee lacks factual basis. Consistently, the CA and
the RTC found that Manila Bank employees exercised due diligence in
cashing the checks. The bank’s employees in the present case did not
have a hint as to Eugenio’s modus operandi because she was a regular
customer of the bank, having been designated by petitioner himself to
transact in his behalf. According to the appellate court, the employees of
the bank exercised due diligence in the performance of their duties. Thus,
it found that:
The evidence on both sides indicates that TMBC’s employees exercised
due diligence before encashing the checks. Its verifiers first verified the
drawer’s signatures thereon as against his specimen signature cards, and
when in doubt, the verifier went further, such as by referring to a more
experienced verifier for further verification. In some instances the verifier
made a confirmation by calling the depositor by phone. It is only after taking
such precautionary measures that the subject checks were given to the
teller for payment.
Of course it is possible that the verifiers of TMBC might have made a
mistake in failing to detect any forgery—if indeed there was. However, a
mistake is not equivalent to negligence if they were honest mistakes. In the
instant case, we believe and so hold that if there were mistakes, the same
were not deliberate, since the bank took all the precautions.16
As borne by the records, it was petitioner, not the bank, who was negligent.
Negligence is the omission to do something which a reasonable man,
guided by those considerations which ordinarily regulate the conduct of
human affairs, would do, or the doing of something which a prudent and
reasonable man would do.17 In the
_______________
15
Id., at p. 28.
16 Id., at p. 29.
17 Bank of the Philippine Islands vs. Court of Appeals, 326 SCRA 641,
657 (2000).
97
VOL. 393, NOVEMBER 27, 2002 97
Ilusorio vs. Court of Appeals
present case, it appears that petitioner accorded his secretary unusual
degree of trust and unrestricted access to his credit cards, passbooks,
check books, bank statements, including custody and possession of
cancelled checks and reconciliation of accounts. Said the Court of Appeals
on this matter:
Moreover, the appellant had introduced his secretary to the bank for
purposes of reconciliation of his account, through a letter dated July 14,
1980 (Exhibit “8”). Thus, the said secretary became a familiar figure in the
bank. What is worse, whenever the bank verifiers call the office of the
appellant, it is the same secretary who answers and confirms the checks.
The trouble is, the appellant had put so much trust and confidence in
the said secretary, by entrusting not only his credit cards with her but also
his checkbook with blank checks. He also entrusted to her the verification
and reconciliation of his account. Further adding to his injury was the fact
that while the bank was sending him the monthly Statements of Accounts,
he was not personally checking the same. His testimony did not indicate
that he was out of the country during the period covered by the checks.
Thus, he had all the opportunities to verify his account as well as the
cancelled checks issued thereunder—month after month. But he did not,
until his partner asked him whether he had entrusted his credit card to his
secretary because the said partner had seen her use the same. It was only
then that he was minded to verify the records of his account.18
The abovecited findings are binding upon the reviewing court. We stress
the rule that the factual findings of a trial court, especially when affirmed
by the appellate court, are binding upon us19 and entitled to utmost
respect20 and even finality. We find no palpable error that would warrant a
reversal of the appellate court’s assessment of facts anchored upon the
evidence on record.
Petitioner’s failure to examine his bank statements appears as the
proximate cause of his own damage. Proximate cause is that cause, which,
in natural and continuous sequence, unbroken by any efficient intervening
cause, produces the injury, and without which the result would not have
occurred.21 In the instant case, the
_______________
18
Supra, note 16.
19
Lorenzana vs. People, 353 SCRA 396, 403 (2001).
20 Ong vs. CA, 272 SCRA 725, 730 (1997).
21 Supra, note 17 at 659.
98
98 SUPREME COURT REPORTS ANNOTATED
Ilusorio vs. Court of Appeals
bank was not shown to be remiss in its duty of sending monthly bank
statements to petitioner so that any error or discrepancy in the entries
therein could be brought to the bank’s attention at the earliest opportunity.
But, petitioner failed to examine these bank statements not because he
was prevented by some cause in not doing so, but because he did not pay
sufficient attention to the matter. Had he done so, he could have been
alerted to any anomaly committed against him. In other words, petitioner
has sufficient opportunity to prevent or detect any misappropriation by his
secretary had he only reviewed the status of his accounts based on the
bank statements sent to him regularly. In view of Article 2179 of the New
Civil Code,22 when the plaintiff’s own negligence was the immediate and
proximate cause of his injury, no recovery could be had for damages.
Petitioner further contends that under Section 23 of the Negotiable
Instruments Law a forged check is inoperative, and that Manila Bank had
no authority to pay the forged checks. True, it is a rule that when a
signature is forged or made without the authority of the person whose
signature it purports to be, the check is wholly inoperative. No right to retain
the instrument, or to give a discharge therefor, or to enforce payment
thereof against any party, can be acquired through or under such
signature. However, the rule does provide for an exception,
namely: “unless the party against whom it is sought to enforce such right
is precluded from setting up the forgery or want of authority.”In the instant
case, it is the exception that applies. In our view, petitioner is precluded
from setting up the forgery, assuming there is forgery, due to his own
negligence in entrusting to his secretary his credit cards and checkbook
including the verification of his statements of account.
Petitioner’s reliance on Associated Bank vs. Court of
Appeals23 and Philippine Bank of Commerce vs. CA24 to buttress his
contention that respondent Manila Bank as the collecting or last endorser
generally suffers the loss because it has the duty to ascertain the
_______________
22
Art. 2179. When the plaintiff’s own negligence was the immediate
and proximate cause of his injury, he cannot recover damages. . .
23 252 SCRA 620, 633 (1996).
24
269 SCRA 695, 703-710 (1997).
99
VOL. 393, NOVEMBER 27, 2002 99
Ilusorio vs. Court of Appeals
genuineness of all prior endorsements is misplaced. In the cited cases, the
fact of forgery was not in issue. In the present case, the fact of forgery was
not established with certainty. In those cited cases, the collecting banks
were held to be negligent for failing to observe precautionary measures to
detect the forgery. In the case before us, both courts below uniformly found
that Manila Bank’s personnel diligently performed their duties, having
compared the signature in the checks from the specimen signatures on
record and satisfied themselves that it was petitioner’s.
On the second issue, the fact that Manila Bank had filed a case
for estafa against Eugenio would not estop it from asserting the fact that
forgery has not been clearly established. Petitioner cannot hold private
respondent in estoppel for the latter is not the actual party to the criminal
action. In a criminal action, the State is the plaintiff, for the commission of
a felony is an offense against the State.25 Thus, under Section 2, Rule 110
of the Rules of Court the complaint or information filed in court is required
to be brought in the name of the “People of the Philippines.”26
Further, as petitioner himself stated in his petition, respondent bank
filed the estafa case against Eugenio on the basis of petitioner’s own
affidavit,27 but without admitting that he had any personal knowledge of the
alleged forgery. It is, therefore, easy to understand that the filing of
the estafa case by respondent bank was a last ditch effort to salvage its
ties with the petitioner as a valuable client, by bolstering the estafa case
which he filed against his secretary.
All told, we find no reversible error that can be ascribed to the Court of
Appeals.
 WHEREFORE, the instant petition is DENIED for lack of merit. The
assailed decision of the Court of Appeals dated January 28, 1999 in CA-
G.R. CV No. 47942, is AFFIRMED.

_______________
25 Binay vs. Sandiganbayan, 316 SCRA 65, 100 (1999).
26
SEC. 2. The complaint or information.—The complaint or information
shall be in writing, in the name of the People of the Philippines and against
all persons who appear to be responsible for the offense involved.
27
Rollo, p. 9.
100
100 SUPREME COURT REPORTS ANNOTATED
People vs. Solmoro, Jr.
Costs against petitioner.
SO ORDERED.
Bellosillo (Actg. C.J., Chairman), Mendoza, Austria-
Martinez and Callejo, Sr., JJ., concur.
Petition denied, judgment affirmed.
Note.—Negligence is the omission to do something which a reasonable
man, guided by those considerations which ordinarily regulate the conduct
of human affairs would do or the doing of something which a prudent and
reasonable man would not do. (Jarco Marketing Corporation vs. Court of
Appeals, 321 SCRA 375 [1999])
 402 SUPREME COURT REPORTS ANNOTATED
Samsung Construction Company Philippines, Inc. vs. Far East Bank
and Trust Company
G.R. No. 129015. August 13, 2004.*
SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC.,
petitioner, vs. FAR EAST BANK AND TRUST COMPANY AND COURT
OF APPEALS, respondents.
Negotiable Instruments Law; Checks; A forged signature is “wholly
inoperative” and payment made “through or under such signature” is
ineffectual or does not discharge the instrument.—The general rule is to
the effect that a forged signature is “wholly inoperative,” and payment
made “through or under such signature” is ineffectual or does not discharge
the instrument. If payment is made, the drawee cannot charge it to the
drawer’s account. The traditional justification for the result is that the
drawee is in a superior position to detect a forgery because he has the
maker’s signature and is expected to know and compare it. The rule has a
healthy cautionary effect on banks by encouraging care in the comparison
of the signatures against those on the signature cards they have on file.
Moreover, the very opportunity of the drawee to insure and to distribute the
cost among its customers who use checks makes the drawee an ideal
party to spread the risk to insurance.
_______________
*
SECOND DIVISION.
403
VOL. 436, AUGUST 13, 2004 403
Samsung Construction Company Philippines, Inc. vs. Far East Bank
and Trust Company
Same; Same; Forgery; Forgery is a real or absolute defense by the
party whose signature is forged.—Under Section 23 of the Negotiable
Instruments Law, forgery is a real or absolute defense by the party whose
signature is forged. On the premise that Jong’s signature was indeed
forged, FEBTC is liable for the loss since it authorized the discharge of the
forged check. Such liability attaches even if the bank exerts due diligence
and care in preventing such faulty discharge. Forgeries often deceive the
eye of the most cautious experts; and when a bank has been so deceived,
it is a harsh rule which compels it to suffer although no one has suffered
by its being deceived. The forgery may be so near like the genuine as to
defy detection by the depositor himself, and yet the bank is liable to the
depositor if it pays the check.
Same; Same; Same; A document formally presented is presumed to
be genuine until it is proved to be fraudulent.—Thus, the first matter of
inquiry is into whether the check was indeed forged. A document formally
presented is presumed to be genuine until it is proved to be fraudulent. In
a forgery trial, this presumption must be overcome but this can only be
done by convincing testimony and effective illustrations.
Same; Same; Same; Bare fact that the forgery was committed by an
employee of the party whose signature was forged cannot necessarily
imply that such party’s negligence was the cause for the forgery.—The
bare fact that the forgery was committed by an employee of the party
whose signature was forged cannot necessarily imply that such party’s
negligence was the cause for the forgery. Employers do not possess the
preternatural gift of cognition as to the evil that may lurk within the hearts
and minds of their employees.
Same; Same; Same; If a bank pays a forged check, it must be
considered as paying out of its funds and cannot charge the amount so
paid to the account of the depositor.—Still, even if the bank performed with
utmost diligence, the drawer whose signature was forged may still recover
from the bank as long as he or she is not precluded from setting up the
defense of forgery. After all, Section 23 of the Negotiable Instruments Law
plainly states that no right to enforce the payment of a check can arise out
of a forged signature. Since the drawer, Samsung Construction, is not
precluded by negligence from setting up the forgery, the general rule
should apply. Consequently, if a bank pays a forged check, it must be
considered as paying out of its funds and cannot charge the amount so
paid to the account of the depositor. A bank is liable, irrespective of its good
faith, in paying a forged check.
Same; Same; Same; Negligence; The presumption remains that
every person takes ordinary care of his concerns, and that the ordinary
course of business has been followed; Negligence is not presumed but
must be proven
404
404 SUPREME COURT REPORTS ANNOTATED
Samsung Construction Company Philippines, Inc. vs. Far East Bank
and Trust Company
by him who alleges it.—Still, in the absence of evidence to the
contrary, we can conclude that there was no negligence on Samsung
Construction’s part. The presumption remains that every person takes
ordinary care of his concerns, and that the ordinary course of business has
been followed. Negligence is not presumed, but must be proven by him
who alleges it. While the complaint was lodged at the instance of Samsung
Construction, the matter it had to prove was the claim it had alleged—
whether the check was forged. It cannot be required as well to prove that
it was not negligent, because the legal presumption remains that ordinary
care was employed.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Alan A. Leynes for petitioner.
Angara, Abello, Concepcion, Regala & Cruz for respondent.
TINGA, J.:
Called to fore in the present petition is a classic textbook question—if a
bank pays out on a forged check, is it liable to reimburse the drawer from
whose account the funds were paid out? The Court of Appeals, in reversing
a trial court decision adverse to the bank, invoked tenuous reasoning to
acquit the bank of liability. We reverse, applying time-honored principles of
law.
The salient facts follow.
Plaintiff Samsung Construction Company Philippines, Inc. (“Samsung
Construction”), while based in Biñan, Laguna, maintained a current
account with defendant Far East Bank and Trust Company1 (“FEBTC”) at
the latter’s Bel-Air, Makati branch.2 The sole signatory to Samsung
Construction’s account was Jong Kyu Lee (“Jong”), its Project
Manager,3 while the checks remained in the custody of the company’s
accountant, Kyu Yong Lee (“Kyu”).4
_______________
1
Later acquired by or merged with the Bank of the Philippine Islands.
2 Rollo, p. 35.
3 Ibid.
4 Id., at p. 28.
405
VOL. 436, AUGUST 13, 2004 405
Samsung Construction Company Philippines, Inc. vs. Far East Bank
and Trust Company
On 19 March 1992, a certain Roberto Gonzaga presented for payment
FEBTC Check No. 432100 to the bank’s branch in BelAir, Makati. The
check, payable to cash and drawn against Samsung Construction’s current
account, was in the amount of Nine Hundred Ninety Nine Thousand Five
Hundred Pesos (P999,500.00). The bank teller, Cleofe Justiani, first
checked the balance of Samsung Construction’s account. After
ascertaining there were enough funds to cover the check,5 she compared
the signature appearing on the check with the specimen signature of Jong
as contained in the specimen signature card with the bank. After comparing
the two signatures, Justiani was satisfied as to the authenticity of the
signature appearing on the check. She then asked Gonzaga to submit
proof of his identity, and the latter presented three (3) identification cards.6
At the same time, Justiani forwarded the check to the branch Senior
Assistant Cashier Gemma Velez, as it was bank policy that two bank
branch officers approve checks exceeding One Hundred Thousand Pesos,
for payment or encashment. Velez likewise counterchecked the signature
on the check as against that on the signature card. He too concluded that
the check was indeed signed by Jong. Velez then forwarded the check and
signature card to Shirley Syfu, another bank officer, for approval. Syfu then
noticed that Jose Sempio III (“Sempio”), the assistant accountant of
Samsung Construction, was also in the bank. Sempio was well-known to
Syfu and the other bank officers, he being the assistant accountant of
Samsung Construction. Syfu showed the check to Sempio, who vouched
for the genuineness of Jong’s signature. Confirming the identity of
Gonzaga, Sempio said that the check was for the purchase of equipment
for Samsung Construction. Satisfied with the genuineness of the signature
of Jong, Syfu authorized the bank’s encashment of the check to Gonzaga.
The following day, the accountant of Samsung Construction, Kyu,
examined the balance of the bank account and discovered that a check in
the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos
(P999,500.00) had been encashed. Aware that he had not prepared such
a check for Jong’s signature, Kyu perused the checkbook and found that
the last blank check was
_______________
5
Ibid.
6 Ibid.
406
406 SUPREME COURT REPORTS ANNOTATED
Samsung Construction Company Philippines, Inc. vs. Far East Bank
and Trust Company
missing.7 He reported the matter to Jong, who then proceeded to the bank.
Jong learned of the encashment of the check, and realized that his
signature had been forged. The Bank Manager reputedly told Jong that he
would be reimbursed for the amount of the check.8 Jong proceeded to the
police station and consulted with his lawyers.9Subsequently, a criminal
case for qualified theft was filed against Sempio before the Laguna court.10
 In a letter dated 6 May 1992, Samsung Construction, through counsel,
demanded that FEBTC credit to it the amount of Nine Hundred Ninety Nine
Thousand Five Hundred Pesos (P999,500.00), with interest.11 In
response, FEBTC said that it was still conducting an investigation on the
matter. Unsatisfied, Samsung Construction filed a Complaint on 10 June
1992 for violation of Section 23 of the Negotiable Instruments Law, and
prayed for the payment of the amount debited as a result of the questioned
check plus interest, and attorney’s fees.12 The case was docketed as Civil
Case No. 92-61506 before the Regional Trial Court (“RTC”) of Manila,
Branch 9.13
During the trial, both sides presented their respective expert witnesses
to testify on the claim that Jong’s signature was forged. Samsung
Corporation, which had referred the check for investigation to the NBI,
presented Senior NBI Document Examiner Roda B. Flores. She testified
that based on her examination, she concluded that Jong’s signature had
been forged on the check. On the other hand, FEBTC, which had sought
the assistance of the Philippine National Police (PNP),14 presented
Rosario C. Perez, a document examiner from the PNP Crime Laboratory.
She testified that her findings showed that Jong’s signature on the check
was genuine.15
_______________
7
Rollo, p. 35.
8 See TSN dated 25 June 1993, p. 10.
9 Id., at p. 9.
10 See TSN dated 15 June 1993, p. 26.
11 Ibid.
12 Act No. 2031.
13 Presided
by Judge E.G. Sandoval, now Justice of the
Sandiganbayan.
14 TSN dated 8 October 1993, p. 8.
15 Rollo, p. 24.
407
VOL. 436, AUGUST 13, 2004 407
Samsung Construction Company Philippines, Inc. vs. Far East Bank
and Trust Company
Confronted with conflicting expert testimony, the RTC chose to believe the
findings of the NBI expert. In a Decision dated 25 April 1994, the RTC held
that Jong’s signature on the check was forged and accordingly directed the
bank to pay or credit back to Samsung Construction’s account the amount
of Nine Hundred Ninety Nine Thousand Five Hundred Pesos
(P999,500.00), together with interest tolled from the time the complaint was
filed, and attorney’s fees in the amount of Fifteen Thousand Pesos
(P15,000.00). FEBTC timely appealed to the Court of Appeals. On 28
November 1996, the Special Fourteenth Division of the Court of Appeals
rendered a Decision,16reversing the RTC Decision and absolving
FEBTC from any liability. The Court of Appeals held that the
contradictory findings of the NBI and the PNP created doubt as to whether
there was forgery.17 Moreover, the appellate court also held that assuming
there was forgery, it occurred due to the negligence of Samsung
Construction, imputing blame on the accountant Kyu for lack of care and
prudence in keeping the checks, which if observed would have prevented
Sempio from gaining access thereto.18 The Court of Appeals invoked the
ruling in PNB v. National City Bank of New York19 that, if a loss, which must
be borne by one or two innocent persons, can be traced to the neglect or
fault of either, such loss would be borne by the negligent party, even if
innocent of intentional fraud.20
Samsung Construction now argues that the Court of Appeals had
seriously misapprehended the facts when it overturned the RTC’s finding
of forgery. It also contends that the appellate court erred in finding that it
had been negligent in safekeeping the check, and in applying the equity
principle enunciated in PNB v. National City Bank of New York.
Since the trial court and the Court of Appeals arrived at contrary
findings on questions of fact, the Court is obliged to examine the record to
draw out the correct conclusions. Upon examination of the record, and
based on the applicable laws and jurisprudence, we reverse the Court of
Appeals.
_______________
16
Penned by Justice S. Montoya, concurred in by Justices G. Jacinto
and A. Tuquero.
17 Rollo, p. 38.
18 Ibid.
19 63 Phil. 711 (1936).
20 Rollo, p. 38.
408
408 SUPREME COURT REPORTS ANNOTATED
Samsung Construction Company Philippines, Inc. vs. Far East Bank
and Trust Company
Section 23 of the Negotiable Instruments Law states:
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.
(Emphasis supplied)
The general rule is to the effect that a forged signature is “wholly
inoperative,” and payment made “through or under such signature” is
ineffectual or does not discharge the instrument.21 If payment is made, the
drawee cannot charge it to the drawer’s account. The traditional
justification for the result is that the drawee is in a superior position to
detect a forgery because he has the maker’s signature and is expected to
know and compare it.22 The rule has a healthy cautionary effect on banks
by encouraging care in the comparison of the signatures against those on
the signature cards they have on file. Moreover, the very opportunity of the
drawee to insure and to distribute the cost among its customers who use
checks makes the drawee an ideal party to spread the risk to insurance.23
Brady, in his treatise The Law of Forged and Altered Checks,
elucidates:
When a person deposits money in a general account in a bank, against
which he has the privilege of drawing checks in the ordinary course of
business, the relationship between the bank and the depositor is that of
debtor and creditor. So far as the legal relationship between the two is
concerned, the situation is the same as though the bank had borrowed
money from the depositor, agreeing to repay it on demand, or had bought
goods from the depositor, agreeing to pay for them on demand. The bank
owes the depositor money in the same sense that any debtor owes money
to his creditor. Added to this, in the case of bank and depositor, there is, of
course, the bank’s obligation to pay checks drawn by the depositor in
proper form and presented in due course. When the bank re-
_______________
21 Bank of Philippine Islands v. Court of Appeals, G.R. No. 102383, 26
November 1992, 216 SCRA 51, 65.
22 FARNSWORTH, E.A., NEGOTIABLE INSTRUMENTS: Cases and
Materials, 2nd ed. (1959), at p. 173.
23 Id., at p. 174.
409
VOL. 436, AUGUST 13, 2004 409
Samsung Construction Company Philippines, Inc. vs. Far East Bank
and Trust Company
ceives the deposit, it impliedly agrees to pay only upon the depositor’s
order. When the bank pays a check, on which the depositor’s signature is
a forgery, it has failed to comply with its contract in this respect. Therefore,
the bank is held liable.
The fact that the forgery is a clever one is immaterial. The forged
signature may so closely resemble the genuine as to defy detection by the
depositor himself. And yet, if a bank pays the check, it is paying out its own
money and not the depositor’s.
The forgery may be committed by a trusted employee or confidential
agent. The bank still must bear the loss. Even in a case where the forged
check was drawn by the depositor’s partner, the loss was placed upon the
bank. The case referred to is Robinson v. Security Bank, Ark., 216 S. W.
Rep. 717. In this case, the plaintiff brought suit against the defendant bank
for money which had been deposited to the plaintiff’s credit and which the
bank had paid out on checks bearing forgeries of the plaintiff’s signature.
xxx
It was held that the bank was liable. It was further held that the fact that
the plaintiff waited eight or nine months after discovering the forgery,
before notifying the bank, did not, as a matter of law, constitute a ratification
of the payment, so as to preclude the plaintiff from holding the bank liable.
xxx
This rule of liability can be stated briefly in these words: “A bank is
bound to know its depositors’ signature.” The rule is variously expressed
in the many decisions in which the question has been considered. But they
all sum up to the proposition that a bank must know the signatures of those
whose general deposits it carries.24
By no means is the principle rendered obsolete with the advent of
modern commercial transactions. Contemporary texts still affirm this well-
entrenched standard. Nickles, in his book Negotiable Instruments and
Other Related Commercial Paper wrote, thus:
The deposit contract between a payor bank and its customer
determines who can draw against the customer’s account by specifying
whose signature is necessary on checks that are chargeable against the
customer’s account. Therefore, a check drawn against the account of an
individual customer that is signed by someone other than the customer,
and without authority from her, is not properly payable and is not
chargeable to the customer’s account, inasmuch as any “unauthorized
signature on an
_______________
24
Brady, J.E., The Law of Forged and Altered Checks (1925), at pp. 6-
7. Case citations omitted.
410
410 SUPREME COURT REPORTS ANNOTATED
Samsung Construction Company Philippines, Inc. vs. Far East Bank
and Trust Company
instrument is ineffective” as the signature of the person whose name is
signed.25
Under Section 23 of the Negotiable Instruments Law, forgery is a real
or absolute defense by the party whose signature is forged.26 On the
premise that Jong’s signature was indeed forged, FEBTC is liable for the
loss since it authorized the discharge of the forged check. Such liability
attaches even if the bank exerts due diligence and care in preventing such
faulty discharge. Forgeries often deceive the eye of the most cautious
experts; and when a bank has been so deceived, it is a harsh rule which
compels it to suffer although no one has suffered by its being
deceived.27The forgery may be so near like the genuine as to defy
detection by the depositor himself, and yet the bank is liable to the
depositor if it pays the check.28
Thus, the first matter of inquiry is into whether the check was indeed
forged. A document formally presented is presumed to be genuine until it
is proved to be fraudulent. In a forgery trial, this presumption must be
overcome but this can only be done by convincing testimony and effective
illustrations.29
In ruling that forgery was not duly proven, the Court of Appeals held:
[There] is ground to doubt the findings of the trial court sustaining the
alleged forgery in view of the conflicting conclusions made by handwriting
experts from the NBI and the PNP, both agencies of the government.
xxx
These contradictory findings create doubt on whether there was indeed
a forgery. In the case of Tenio-Obsequio v. Court of Appeals, 230
_______________
25 Nickles,
S.H., Negotiable Instruments and Other Related
Commercial Paper, 2nd ed. (1993), at p. 415.
26 Gempesaw v. Court of Appeals, G.R. No. 92244, 9 February
1993, 218 SCRA 682, 689.
27 Philippine National Bank v. National City Bank of New York, 63 Phil.
711, 743-744 (1936); citing 17 A. L. R., 891; 5 R. C. L., 559.
28 BRADY, H.J., BRADY ON BANK CHECKS, 3rd ed. (1962), at p. 475;
citing Hardy v. Chesapeake Bank (1879) 51Md. 562, 34 Am. Rep. 325.
29 OSBORN, A., QUESTIONED DOCUMENT PROBLEMS, 2nd ed.
(1946), at pp. 181-182.
411
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Samsung Construction Company Philippines, Inc. vs. Far East Bank
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SCRA 550, the Supreme Court held that forgery cannot be presumed; it
must be proved by clear, positive and convincing evidence.
This reasoning is pure sophistry. Any litigator worth his or her salt would
never allow an opponent’s expert witness to stand uncontradicted, thus the
spectacle of competing expert witnesses is not unusual. The trier of fact
will have to decide which version to believe, and explain why or why not
such version is more credible than the other. Reliance therefore cannot be
placed merely on the fact that there are colliding opinions of two experts,
both clothed with the presumption of official duty, in order to draw a
conclusion, especially one which is extremely crucial. Doing so is
tantamount to a jurisprudential cop-out.
Much is expected from the Court of Appeals as it occupies the
penultimate tier in the judicial hierarchy. This Court has long deferred to
the appellate court as to its findings of fact in the understanding that it has
the appropriate skill and competence to plough through the minutiae that
scatters the factual field. In failing to thoroughly evaluate the evidence
before it, and relying instead on presumptions haphazardly drawn, the
Court of Appeals was sadly remiss. Of course, courts, like humans, are
fallible, and not every error deserves a stern rebuke. Yet, the appellate
court’s error in this case warrants special attention, as it is absurd and even
dangerous as a precedent. If this rationale were adopted as a governing
standard by every court in the land, barely any actionable claim would
prosper, defeated as it would be by the mere invocation of the existence of
a contrary “expert” opinion.
On the other hand, the RTC did adjudge the testimony of the NBI expert
as more credible than that of the PNP, and explained its reason behind the
conclusion:
After subjecting the evidence of both parties to a crucible of analysis,
the court arrived at the conclusion that the testimony of the NBI document
examiner is more credible because the testimony of the PNP Crime
Laboratory Services document examiner reveals that there are a lot of
differences in the questioned signature as compared to the standard
specimen signature. Furthermore, as testified to by Ms. Rhoda Flores, NBI
expert, the manner of execution of the standard signatures used reveals
that it is a free rapid continuous execution or stroke as shown by the
tampering terminal stroke of the signatures whereas the questioned
signature is a hesitating slow drawn execution stroke. Clearly, the person
who exe-
412
412 SUPREME COURT REPORTS ANNOTATED
Samsung Construction Company Philippines, Inc. vs. Far East Bank
and Trust Company
cuted the questioned signature was hesitant when the signature was
made.30
During the testimony of PNP expert Rosario Perez, the RTC bluntly
noted that “apparently, there [are] differences on that questioned signature
and the standard signatures.”31 This Court, in examining the signatures,
makes a similar finding. The PNP expert excused the noted “differences”
by asserting that they were mere “variations,” which are normal deviations
found in writing.32 Yet the RTC, which had the opportunity to examine the
relevant documents and to personally observe the expert witness, clearly
disbelieved the PNP expert. The Court similarly finds the testimony of the
PNP expert as unconvincing. During the trial, she was confronted several
times with apparent differences between strokes in the questioned
signature and the genuine samples. Each time, she would just blandly
assert that these differences were just “variations,”33 as if the mere
conjuration of the word would sufficiently disquiet whatever doubts about
the deviations. Such conclusion, standing alone, would be of little or no
value unless supported by sufficiently cogent reasons which might amount
almost to a demonstration.34
The most telling difference between the questioned and genuine
signatures examined by the PNP is in the final upward stroke in the
signature, or “the point to the short stroke of the terminal in the capital letter
‘L,’ ” as referred to by the PNP examiner who had marked it in her
comparison chart as “point no. 6.” To the plain eye, such upward final
stroke consists of a vertical line which forms a ninety degree (90°) angle
with the previous stroke. Of the twenty one (21) other genuine samples
examined by the PNP, at least nine (9) ended with an upward
stroke.35However, unlike the questioned signature, the upward strokes of
eight (8) of these signatures are looped, while the upward stroke of the
seventh36
_______________
30 Rollo, p. 31.
31
TSN dated 8 October 1993, p. 15.
32 Id., at pp. 15 and 19.
33 See TSN dated 8 October 1993, pp. 15, 17, 19, 34, 36 and 38.
34 Venuto v. Lizzo, 148 App. Div. 164, 132 N.Y. Supp. 1066 (1911),
as cited in A. Osborn, supra, note 29.
35 Defendant’s Exhibits Nos. “S-1”, “S-7”, “S-8”, “S-9”, “S-10”, “S-12”,
“S-14”, “S-15”, and “S-16”.
36 Defendant’s Exhibit No. “S-9”.
413
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Samsung Construction Company Philippines, Inc. vs. Far East Bank
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forms a severe forty-five degree (45°) with the previous stroke. The
difference is glaring, and indeed, the PNP examiner was confronted with
the inconsistency in point no. 6.
Q Now, in this questioned document point no. 6, the “s” stroke is
: directly upwards.
A: Yes, sir.
Q Now, can you look at all these standard signature (sic) were (sic)
: point 6 is repeated or the last stroke “s” is pointing directly upwards?
A: There is none in the standard signature, sir.37
Again, the PNP examiner downplayed the uniqueness of the final stroke
in the questioned signature as a mere variation,38 the same excuse she
proffered for the other marked differences noted by the Court and the
counsel for petitioner.39
There is no reason to doubt why the RTC gave credence to the
testimony of the NBI examiner, and not the PNP expert’s. The NBI expert,
Rhoda Flores, clearly qualifies as an expert witness. A document examiner
for fifteen years, she had been promoted to the rank of Senior Document
Examiner with the NBI, and had held that rank for twelve years prior to her
testimony. She had placed among the top five examinees in the
Competitive Seminar in Question Document Examination, conducted by
the NBI Academy, which qualified her as a document examiner.40 She had
trained with the Royal Hongkong Police Laboratory and is a member of the
International Association for Identification.41 As of the time she testified,
she had examined more than fifty to fifty-five thousand questioned
documents, on an average of fifteen to twenty documents a day.42 In
comparison, PNP document examiner Perez admitted to having examined
only around five hundred documents as of her testimony.43
_______________
37 TSN dated 8 October 1993, p. 35.
38
Id., at pp. 19 and 36.
39 Supra, note 26.
40 TSN dated 27 April 1993, p. 5.
41 Id., at p. 7.
42 Id., at pp. 7-8.
43 TSN dated 8 October 1993, p. 4.
414
414 SUPREME COURT REPORTS ANNOTATED
Samsung Construction Company Philippines, Inc. vs. Far East Bank
and Trust Company

In analyzing the signatures, NBI Examiner Flores utilized the scientific
comparative examination method consisting of analysis, recognition,
comparison and evaluation of the writing habits with the use of instruments
such as a magnifying lense, a stereoscopic microscope, and varied lighting
substances. She also prepared enlarged photographs of the signatures in
order to facilitate the necessary comparisons.44 She compared the
questioned signature as against ten (10) other sample signatures of Jong.
Five of these signatures were executed on checks previously issued by
Jong, while the other five contained in business letters Jong had
signed.45 The NBI found that there were significant differences in the
handwriting characteristics existing between the questioned and the
sample signatures, as to manner of execution, link/connecting strokes,
proportion characteristics, and other identifying details.46
The RTC was sufficiently convinced by the NBI examiner’s testimony,
and explained her reasons in its Decisions. While the Court of Appeals
disagreed and upheld the findings of the PNP, it failed to convincingly
demonstrate why such findings were more credible than those of the NBI
expert. As a throwaway, the assailed Decision noted that the PNP, not the
NBI, had the opportunity to examine the specimen signature card signed
by Jong, which was relied upon by the employees of FEBTC in
authenticating Jong’s signature. The distinction is irrelevant in establishing
forgery. Forgery can be established comparing the contested signatures
as against those of any sample signature duly established as that of the
persons whose signature was forged.
FEBTC lays undue emphasis on the fact that the PNP examiner did
compare the questioned signature against the bank signature cards. The
crucial fact in question is whether or not the check was forged, not whether
the bank could have detected the forgery. The latter issue becomes
relevant only if there is need to weigh the comparative negligence between
the bank and the party whose signature was forged.
_______________
44
TSN dated 27 April 1993, pp. 18-19.
45
Id., at p. 14.
46 Per NBI Questioned Documents Report No. 244-492, Plaintiff’s
Exhibit “D”.
415
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Samsung Construction Company Philippines, Inc. vs. Far East Bank
and Trust Company
At the same time, the Court of Appeals failed to assess the effect of
Jong’s testimony that the signature on the check was not his.47 The
assertion may seem self-serving at first blush, yet it cannot be ignored that
Jong was in the best position to know whether or not the signature on the
check was his. While his claim should not be taken at face value, any
averments he would have on the matter, if adjudged as truthful, deserve
primacy in consideration. Jong’s testimony is supported by the findings of
the NBI examiner. They are also backed by factual circumstances that
support the conclusion that the assailed check was indeed forged. Judicial
notice can be taken that is highly unusual in practice for a business
establishment to draw a check for close to a million pesos and make it
payable to cash or bearer, and not to order. Jong immediately reported the
forgery upon its discovery. He filed the appropriate criminal charges
against Sempio, the putative forger.48
Now for determination is whether Samsung Construction was
precluded from setting up the defense of forgery under Section 23 of the
Negotiable Instruments Law. The Court of Appeals concluded that
Samsung Construction was negligent, and invoked the doctrines that
“where a loss must be borne by one of two innocent person, can be traced
to the neglect or fault of either, it is reasonable that it would be borne by
him, even if innocent of any intentional fraud, through whose means it has
succeeded49 or who put into the power of the third person to perpetuate
the wrong.”50 Applying these rules, the Court of Appeals determined that it
was the negligence of Samsung Construction that allowed the encashment
of the forged check.
In the case at bar, the forgery appears to have been made possible
through the acts of one Jose Sempio III, an assistant accountant employed
by the plaintiff Samsung [Construction] Co. Philippines, Inc. who suppos-
_______________
47
See TSN dated 25 January 1993, p. 7.
48
See note 10.
49 Rollo, p. 38, citing PNB v. National City Bank of New York, 63 Phil.
711, 733 (1936), which in turn cites Gloucester Bank v. Salem Bank, 17
Mass., 33; First Nat. Bank of Danvers vs. First National Bank of Salem,
151 Mass., 280; and B.B. Ford & Co. v. People’s Bank of Orangeburg, 74
S.C., 180.
50 Ibid., citing PNB v. Court of Appeals, 134 Phil. 829, 834; 25 SCRA
693, 699 (1968), which in turn cites Blondeau v. Nano, 61 Phil. 625, 631,
632 (1935).
416
416 SUPREME COURT REPORTS ANNOTATED
 Samsung Construction Company Philippines, Inc. vs. Far East Bank
and Trust Company
edly stole the blank check and who presumably is responsible for its
encashment through a forged signature of Jong Kyu Lee. Sempio was
assistant to the Korean accountant who was in possession of the blank
checks and who through negligence, enabled Sempio to have access to
the same. Had the Korean accountant been more careful and prudent in
keeping the blank checks Sempio would not have had the chance to steal
a page thereof and to effect the forgery. Besides, Sempio was an employee
who appears to have had dealings with the defendant Bank in behalf of the
plaintiff corporation and on the date the check was encashed, he was there
to certify that it was a genuine check issued to purchase equipment for the
company.51
We recognize that Section 23 of the Negotiable Instruments Law bars
a party from setting up the defense of forgery if it is guilty of
negligence.52 Yet, we are unable to conclude that Samsung Construction
was guilty of negligence in this case. The appellate court failed to explain
precisely how the Korean accountant was negligent or how more care and
prudence on his part would have prevented the forgery. We cannot sustain
this “tar and feathering” resorted to without any basis.
The bare fact that the forgery was committed by an employee of the
party whose signature was forged cannot necessarily imply that such
party’s negligence was the cause for the forgery. Employers do not
possess the preternatural gift of cognition as to the evil that may lurk within
the hearts and minds of their employees. The Court’s pronouncement
in PCI Bank v. Court of Appeals53applies in this case, to wit:
[T]he mere fact that the forgery was committed by a drawer-payor’s
confidential employee or agent, who by virtue of his position had unusual
facilities for perpetrating the fraud and imposing the forged paper upon the
bank, does not entitle the bank to shift the loss to the drawer-payor, in the
absence of some circumstance raising estoppel against the drawer.54
Admittedly, the record does not clearly establish what measures
Samsung Construction employed to safeguard its blank checks.
_______________
51
Rollo, p. 38.
52 MWSS v. Court of Appeals, G.R. No. L-62943, 14 July 1986, 143
SCRA 20, 31.
53 G.R. Nos. 121413, 121479 and 128604, 29 January 2001, 350
SCRA 446.
54 Ibid., at p. 465.
417
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Samsung Construction Company Philippines, Inc. vs. Far East Bank
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Jong did testify that his accountant, Kyu, kept the checks inside a “safety
box,”55 and no contrary version was presented by FEBTC. However, such
testimony cannot prove that the checks were indeed kept in a safety box,
as Jong’s testimony on that point is hearsay, since Kyu, and not Jong,
would have the personal knowledge as to how the checks were kept.
Still, in the absence of evidence to the contrary, we can conclude that
there was no negligence on Samsung Construction’s part. The
presumption remains that every person takes ordinary care of his
concerns,56 and that the ordinary course of business has been
followed.57 Negligence is not presumed, but must be proven by him who
alleges it.58 While the complaint was lodged at the instance of Samsung
Construction, the matter it had to prove was the claim it had alleged—
whether the check was forged. It cannot be required as well to prove that
it was not negligent, because the legal presumption remains that ordinary
care was employed.
Thus, it was incumbent upon FEBTC, in defense, to prove the negative
fact that Samsung Construction was negligent. While the payee, as in this
case, may not have the personal knowledge as to the standard procedures
observed by the drawer, it well has the means of disputing the presumption
of regularity. Proving a negative fact may be “a difficult office,”59 but
necessarily so, as it seeks to overcome a presumption in law. FEBTC was
unable to dispute the presumption of ordinary care exercised by Samsung
Construction, hence we cannot agree with the Court of Appeals’ finding of
negligence.
The assailed Decision replicated the extensive efforts which FEBTC
devoted to establish that there was no negligence on the part of the bank
in its acceptance and payment of the forged check. However, the degree
of diligence exercised by the bank would be irrelevant if the drawer is not
precluded from setting up the defense of forgery under Section 23 by his
own negligence. The rule of
_______________
55 TSN dated 25 January 1993, pp. 19, 31.
56
See Section 3(d), Rule 131, Rules of Court.
57 See Section 3(q), Rule 131, Rules of Court.
58 Taylor
v. Manila Electric Railroad, 16 Phil. 8, 28
(1910), citingScaevola, Jurisprudencia del Codigo Civil, vol. 6, 551, 552.
59 US v. Tria, 17 Phil. 303, 307 (1910).
418
 418 SUPREME COURT REPORTS ANNOTATED
Samsung Construction Company Philippines, Inc. vs. Far East Bank
and Trust Company
equity enunciated in PNB v. National City Bank of New York, 60 as relied
upon by the Court of Appeals, deserves careful examination.
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.61 (Emphasis supplied)
Quite palpably, the general rule remains that the drawee who has paid
upon the forged signature bears the loss. The exception to this rule arises
only when negligence can be traced on the part of the drawer whose
signature was forged, and the need arises to weigh the comparative
negligence between the drawer and the drawee to determine who should
bear the burden of loss. The Court finds no basis to conclude that Samsung
Construction was negligent in the safekeeping of its checks. For one, the
settled rule is that the mere fact that the depositor leaves his check book
lying around does not constitute such negligence as will free the bank from
liability to him, where a clerk of the depositor or other persons, taking
advantage of the opportunity, abstract some of the check blanks, forges
the depositor’s signature and collect on the checks from the bank.62 And
for another, in point of fact Samsung Construction was not negligent at all
since it reported the forgery almost immediately upon discovery.63
_______________
60
63 Phil. 711 (1936).
61
Id., at p. 740; citing 2 Morse on Banks and Banking, 5th ed., secs.
464 and 466, pp. 82-85 and 86, 87.
62 BRADY,
J.E., THE LAW OF FORGED AND ALTERED
CHECKS, supra, note 24, at 24-27; citing MacIntosh v. Bank, 123 Mass.
393; East St. Louis Cotton Oil Co. v. Bank of Steele, Mo., 205 S.W. Rep.
96.
63 “For his failure or negligence 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 the forged indorse-
ment.” Gempesaw v. Court of Appeals, G.R. No. 92244, 9 February
1993, 218 SCRA 682, 690; citing American jurisprudence. “A bank may
escape liability where the depositor’s negligence consists of failure to
properly examine his bank statements and cancelled checks and failure to
notify
419
VOL. 436, AUGUST 13, 2004 419
Samsung Construction Company Philippines, Inc. vs. Far East Bank
and Trust Company
It is also worth noting that the forged signatures in PNB v. National City
Bank of New York were not of the drawer, but of indorsers. The same
circumstance attends PNB v. Court of Appeals,64 which was also cited by
the Court of Appeals. It is accepted that a forged signature of the drawer
differs in treatment than a forged signature of the indorser.
The justification for the distinction between forgery of the signature of
the drawer and forgery of an indorsement is that the drawee is in a position
to verify the drawer’s signature by comparison with one in his hands, but
has ordinarily no opportunity to verify an indorsement.65
Thus, a drawee bank is generally liable to its depositor in paying a
check which bears either a forgery of the drawer’s signature or a forged
indorsement. But the bank may, as a general rule, recover back the money
which it has paid on a check bearing a forged indorsement, whereas it has
not this right to the same extent with reference to a check bearing a forgery
of the drawer’s signature.66
The general rule imputing liability on the drawee who paid out on the
forgery holds in this case.
Since FEBTC puts into issue the degree of care it exercised before
paying out on the forged check, we might as well comment on the bank’s
performance of its duty. It might be so that the bank complied with its own
internal rules prior to paying out on the questionable check. Yet, there are
several troubling circumstances that lead us to believe that the bank itself
was remiss in its duty.
The fact that the check was made out in the amount of nearly one
million pesos is unusual enough to require a higher degree of caution on
the part of the bank. Indeed, FEBTC confirms this through its own internal
procedures. Checks below twenty-five thousand pesos require only the
approval of the teller; those between twenty-five thousand to one hundred
thousand pesos necessitate the approval of one bank officer; and should
the amount exceed one hundred thousand pesos, the concurrence of two
bank officers is required.67
_______________
 the bank of forgery within a reasonable time.” H. Bailey, supra, note 28,
at p. 477. But see note 24.
64
G.R. No. L-26001, 29 October 1968, 25 SCRA 693.
65
Farnsworth, E.A., supra note 22, at p. 173.
66
Brady, J.E., supra, note 24, at p. 5.
67
See TSN dated 12 July 1993, p. 8.
420
420 SUPREME COURT REPORTS ANNOTATED
Samsung Construction Company Philippines, Inc. vs. Far East Bank
and Trust Company
In this case, not only did the amount in the check nearly total one million
pesos, it was also payable to cash. That latter circumstance should have
aroused the suspicion of the bank, as it is not ordinary business practice
for a check for such large amount to be made payable to cash or to bearer,
instead of to the order of a specified person.68Moreover, the check was
presented for payment by one Roberto Gonzaga, who was not designated
as the payee of the check, and who did not carry with him any written proof
that he was authorized by Samsung Construction to encash the check.
Gonzaga, a stranger to FEBTC, was not even an employee of Samsung
Construction.69 These circumstances are already suspicious if taken
independently, much more so if they are evaluated in concurrence. Given
the shadiness attending Gonzaga’s presentment of the check, it was not
sufficient for FEBTC to have merely complied with its internal procedures,
but mandatory that all earnest efforts be undertaken to ensure the validity
of the check, and of the authority of Gonzaga to collect payment therefor.
According to FEBTC Senior Assistant Cashier Gemma Velez, the bank
tried, but failed, to contact Jong over the phone to verify the check.70 She
added that calling the issuer or drawer of the check to verify the same was
not part of the standard procedure of the bank, but an “extra effort.”71 Even
assuming that such personal verification is tantamount to extraordinary
diligence, it cannot be denied that FEBTC still paid out the check despite
the absence of any proof of verification from the drawer. Instead, the bank
seems to have relied heavily on the say-so of Sempio, who was present at
the bank at the time the check was presented.
_______________
68 “When the instrument is payable to order the payee must be named
or otherwise indicated therein with reasonable certainty.” Sec. 8, Act No.
2031 (Negotiable Instruments Law). Worthy of note is the fact that a check
payable to bearer is more likely to be forged than one that is payable to
order. The unofficial essence of bearer check is that anyone who
possesses or holds it can indorse or receive payment for it which implies
that payment is not limited to a particular person. See Nickles, S.H.,
Matheson, J.H., and Adams, E.S., Modern Commercial Paper: The New
Law of Negotiable Instruments and Related Commercial Paper (1994), at
p. 61.
69
See TSN dated 26 July 1993, p. 18.
70
See TSN dated 12 July 1993, p. 11.
71
Ibid.
421
VOL. 436, AUGUST 13, 2004 421
Samsung Construction Company Philippines, Inc. vs. Far East Bank
and Trust Company
FEBTC alleges that Sempio was well-known to the bank officers, as he
had regularly transacted with the bank in behalf of Samsung Construction.
It was even claimed that everytime FEBTC would contact Jong about
problems with his account, Jong would hand the phone over to
Sempio.72However, the only proof of such allegations is the testimony of
Gemma Velez, who also testified that she did not know Sempio
personally,73 and had met Sempio for the first time only on the day the
check was encashed.74 In fact, Velez had to inquire with the other officers
of the bank as to whether Sempio was actually known to the employees of
the bank.75Obviously, Velez had no personal knowledge as to the past
relationship between FEBTC and Sempio, and any averments of her to
that effect should be deemed hearsay evidence. Interestingly, FEBTC did
not present as a witness any other employee of their Bel-Air branch,
including those who supposedly had transacted with Sempio before.
Even assuming that FEBTC had a standing habit of dealing with
Sempio, acting in behalf of Samsung Construction, the irregular
circumstances attending the presentment of the forged check should have
put the bank on the highest degree of alert. The Court recently emphasized
that the highest degree of care and diligence is required of banks.
Banks are engaged in a business impressed with public interest, and it
is their duty to protect in return their many clients and depositors who
transact business with them. They have the obligation to treat their client’s
account meticulously and with the highest degree of care, considering the
fiduciary nature of their relationship. The diligence required of banks,
therefore, is more than that of a good father of a family.76
Given the circumstances, extraordinary diligence dictates that FEBTC
should have ascertained from Jong personally that the signature in the
questionable check was his.
_______________
 72
Id., at p. 17.
73 Id., at p. 18.
74
TSN dated 26 July 1993, p. 3.
75
Id., at p. 6.
76
Westmont Bank v. Ong, G.R. No. 132560, 30 January 2002, 375
SCRA 212, 220-221.
422
422 SUPREME COURT REPORTS ANNOTATED
Samsung Construction Company Philippines, Inc. vs. Far East Bank
and Trust Company

Still, even if the bank performed with utmost diligence, the drawer
whose signature was forged may still recover from the bank as long as he
or she is not precluded from setting up the defense of forgery. After all,
Section 23 of the Negotiable Instruments Law plainly states that no right to
enforce the payment of a check can arise out of a forged signature. Since
the drawer, Samsung Construction, is not precluded by negligence from
setting up the forgery, the general rule should apply. Consequently, if a
bank pays a forged check, it must be considered as paying out of its funds
and cannot charge the amount so paid to the account of the depositor.77 A
bank is liable, irrespective of its good faith, in paying a forged check.78
WHEREFORE, the Petition is GRANTED. The Decisionof the Court of
Appeals dated 28 November 1996 is REVERSED, and the Decision of the
Regional Trial Court of Manila, Branch 9, dated 25 April 1994 is
REINSTATED. Costs against respondent.
SO ORDERED.
Puno (Chairman), Austria-Martinez, Callejo, Sr. and Chico-Nazario,
JJ., concur.
Petition granted, judgment reversed. That of the court a quo reinstated.

Note.—Issue of whether a party is negligent is a question of fact.

(Thermochem Incorporated vs. Naval, 344 SCRA 76 [2000])

——o0o——

_______________
77
Traders Royal Bank v. Radio Philippines Network, Inc., G.R. No.
138510, 10 October 2002, 390 SCRA 608, 614.
78 Bailey, H.J., supra, note 28 at p. 474.

VOL. 510, DECEMBER 6, 2006 259
Metropolitan Bank and Trust Company vs. Cabilzo
G.R. No. 154469. December 6, 2006.*
METROPOLITAN BANK AND TRUST COMPANY,
petitioner, vs. RENATO D. CABILZO, respondent.
Equitable Estoppel; The doctrine of equitable estoppel states that
when one of the two innocent persons, each guiltless of any intentional or
moral wrong, must suffer a loss, it must be borne by the one whose
erroneous conduct, either by omission or commission, was the cause of
injury.—Metrobank cannot lightly impute that Cabilzo was negligent and is
therefore prevented from asserting his rights under the doctrine of
equitable estoppel when the facts on record are bare of evidence to
support such conclusion. The doctrine of equitable estoppel states that
when one of the two innocent persons, each guiltless of any intentional or
moral wrong, must suffer a loss, it must be borne by the one whose
erroneous conduct, either by omission or commission, was the cause of
injury. Metrobank’s reliance on this dictum, is misplaced. For one,
Metrobank’s representation that it is an innocent party is flimsy and
evidently, misleading. At the same time, Metrobank cannot asseverate that
Cabilzo was negligent and this negligence was the proximate cause of the
loss in the absence of even a scintilla proof to buttress such claim.
Negligence is not presumed but must be proven by the one who alleges it.
Banks and Banking; The point is that as a business affected with
public interest and because of the nature of its functions, the bank is under
obligation to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their relationship.—The point
is that as a business affected with public interest and because of the nature
of its functions, the bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the fiduciary nature
of their relationship. The appropriate degree of diligence required of a bank
must be a high degree of diligence, if not the utmost diligence.
Negotiable Instruments; Checks; Payment made under materially
altered instrument is not payment done in accordance with the instruction
of the drawer.—The bank on which the check is drawn,
_______________
* FIRST DIVISION.
260
260 SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. Cabilzo
known as the drawee bank, is under strict liability to pay to the order
of the payee in accordance with the drawer’s instructions as reflected on
the face and by the terms of the check. Payment made under materially
altered instrument is not payment done in accordance with the instruction
of the drawer. When the drawee bank pays a materially altered check, it
violates the terms of the check, as well as its duty to charge its client’s
account only for bona fide disbursements he had made. Since the drawee
bank, in the instant case, did not pay according to the original tenor of the
instrument, as directed by the drawer, then it has no right to claim
reimbursement from the drawer, much less, the right to deduct the
erroneous payment it made from the drawer’s account which it was
expected to treat with utmost fidelity.
Same; It owes the highest degree fidelity to its client and should not
therefore lightly rely on the judgment of other banks on occasions where
its clients money were involve, no matter how small or substantial the
amount at stake.—The reliance made by Metrobank on Westmont Bank’s
indorsement is clearly inconsistent, if not totally offensive to the dictum that
being impressed with public interest, banks should exercise the highest
degree of diligence, if not utmost diligence in dealing with the accounts of
its own clients. It owes the highest degree fidelity to its clients and should
not therefore lightly rely on the judgment of other banks on occasions
where its clients money were involve, no matter how small or substantial
the amount at stake.
PETITION for review on certiorari of the decision and resolution of the
Court of Appeals.
The facts are stated in the opinion of the Court.
Sedigo, Sison & Associates for petitioner.
Jose A. Suing for respondent.
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari, filed by petitioner
Metropolitan Bank and Trust Company
261
VOL. 510, DECEMBER 6, 2006 261
Metropolitan Bank and Trust Company vs. Cabilzo
(Metrobank) seeking to reverse and set aside the Decision1of the Court of
Appeals dated 8 March 2002 and its Resolution dated 26 July 2002
affirming the Decision of the Regional Trial Court (RTC) of Manila, Branch
13 dated 4 September 1998. The dispositive portion of the Court of
Appeals Decision reads:
“WHEREFORE, the assailed decision dated September 4, 1998 is
AFFIRMED with modifications (sic) that the awards for exemplary
damages and attorney’s fees are hereby deleted.”
Petitioner Metrobank is a banking institution duly organized and existing as
such under Philippine laws.2
Respondent Renato D. Cabilzo (Cabilzo) was one of Metrobank’s
clients who maintained a current account with Metrobank Pasong Tamo
Branch.3
On 12 November 1994, Cabilzo issued a Metrobank Check No.
985988, payable to “CASH” and postdated on 24 November 1994 in the
amount of One Thousand Pesos (P1,000.00). The check was drawn
against Cabilzo’s Account with Metrobank Pasong Tamo Branch under
Current Account No. 618044873-3 and was paid by Cabilzo to a certain
Mr. Marquez, as his sales commission.4
Subsequently, the check was presented to Westmont Bank for
payment. Westmont Bank, in turn, indorsed the check to Metrobank for
appropriate clearing. After the entries thereon were examined, including
the availability of funds and the authenticity of the signature of the drawer,
Metrobank cleared the check for encashment in accordance with the
Philippine Clearing House Corporation (PCHC) Rules.
_______________
1
Penned by Associate Justice Delilah Vidallon-Magtolis with Associate
Justices Candido V. Rivera and Juan Q. Enriquez, Jr., concurring, CA-G.R.
CV No. 66384. Rollo, pp. 18-25.
2
Records, p. 1.
3 Id.
4 Id., at p. 2.
262
262 SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. Cabilzo
On 16 November 1994, Cabilzo’s representative was at Metrobank Pasong
Tamo Branch to make some transaction when he was asked by a bank
personnel if Cabilzo had issued a check in the amount of P91,000.00 to
which the former replied in the negative. On the afternoon of the same
date, Cabilzo himself called Metrobank to reiterate that he did not issue a
check in the amount of P91,000.00 and requested that the questioned
check be returned to him for verification, to which Metrobank complied.5
Upon receipt of the check, Cabilzo discovered that Metrobank Check
No. 985988 which he issued on 12 November 1994 in the amount
of P1,000.00 was altered to P91,000.00 and the date 24 November
1994 was changed to 14 November 1994.6
Hence, Cabilzo demanded that Metrobank re-credit the amount of
P91,000.00 to his account. Metrobank, however, refused reasoning that it
has to refer the matter first to its Legal Division for appropriate action.
Repeated verbal demands followed but Metrobank still failed to re-credit
the amount of P91,000.00 to Cabilzo’s account.7
On 30 June 1995, Cabilzo, thru counsel, finally sent a letter-demand8 to
Metrobank for the payment of P90,000.00, after deducting the original
value of the check in the amount of P1,000.00. Such written demand
notwithstanding, Metrobank still failed or refused to comply with its
obligation.
Consequently, Cabilzo instituted a civil action for damages against
Metrobank before the RTC of Manila, Branch 13. In his Complaint docketed
as Civil Case No. 95-75651, Renato D. Cabilzo v. Metropolitan Bank and
Trust Company, Cabilzo prayed that in addition to his claim for
reimbursement, actual
_______________
5
Id.
6
Id., at pp. 2-3.
7
Id., at p. 3.
8 Id., at p. 11.
263
VOL. 510, DECEMBER 6, 2006 263
Metropolitan Bank and Trust Company vs. Cabilzo
and moral damages plus costs of the suit be awarded in his favor.9
For its part, Metrobank countered that upon the receipt of the said
check through the PCHC on 14 November 1994, it examined the
genuineness and the authenticity of the drawer’s signature appearing
thereon and the technical entries on the check including the amount in
figures and in words to determine if there were alterations, erasures,
superimpositions or intercalations thereon, but none was noted. After
verifying the authenticity and propriety of the aforesaid entries, including
the indorsement of the collecting bank located at the dorsal side of the
check which stated that, “all prior indorsements and lack of indorsement
guaranteed,” Metrobank cleared the check.10
Anent thereto, Metrobank claimed that as a collecting bank and the last
indorser, Westmont Bank should be held liable for the value of the check.
Westmont Bank indorsed the check as the an unqualified indorser, by
virtue of which it assumed the liability of a general indorser, and thus,
among others, warranted that the instrument is genuine and in all respect
what it purports to be.
In addition, Metrobank, in turn, claimed that Cabilzo was partly
responsible in leaving spaces on the check, which, made the fraudulent
insertion of the amount and figures thereon, possible. On account of his
negligence in the preparation and issuance of the check, which according
to Metrobank, was the proximate cause of the loss, Cabilzo cannot
thereafter claim indemnity by virtue of the doctrine of equitable estoppel.
Thus, Metrobank demanded from Cabilzo, for payment in the amount
of P100,000.00 which represents the cost of litiga-
_______________
9
Id., at pp. 1-6.
10
Id., at pp. 19-20.
264
264 SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. Cabilzo
tion and attorney’s fees, for allegedly bringing a frivolous and baseless
suit.11
On 19 April 1996, Metrobank filed a Third-Party Complaint12 against
Westmont Bank on account of its unqualified indorsement stamped at the
dorsal side of the check which the former relied upon in clearing what
turned out to be a materially altered check.
Subsequently, a Motion to Dismiss13 the Third-Party Complaint was
then filed by Westmont bank because another case involving the same
cause of action was pending before a different court. The said case arose
from an action for reimbursement filed by Metrobank before the Arbitration
Committee of the PCHC against Westmont Bank, and now the subject of
a Petition for Review before the RTC of Manila, Branch 19.
In an Order14 dated 4 February 1997, the trial court granted the Motion
to Dismiss the Third-Party Complaint on the ground of litis pendentia.
On 4 September 1998, the RTC rendered a Decision15 in favor of
Cabilzo and thereby ordered Metrobank to pay the sum of P90,000.00, the
amount of the check. In stressing the fiduciary nature of the relationship
between the bank and its clients and the negligence of the drawee bank in
failing to detect an apparent alteration on the check, the trial court ordered
for the payment of exemplary damages, attorney’s fees and cost of
litigation. The dispositive portion of the Decision reads:
“WHEREFORE, judgment is rendered ordering defendant Metropolitan
Bank and Trust Company to pay plaintiff Renato Cabilzo the sum of
P90,000 with legal interest of 6 percent per annum from
_______________
11 Id., at pp. 18-22.
12
Id., at pp. 38-43.
13 Id., at pp. 70-76.
14 Id., at pp. 94-95.
15 Id., at pp. 193-196.
265
VOL. 510, DECEMBER 6, 2006 265
Metropolitan Bank and Trust Company vs. Cabilzo
November 16, 1994 until payment is made plus P20,000 attorney’s fees,
exemplary damages of P50,000, and costs of the suit.”16
Aggrieved, Metrobank appealed the adverse decision to the Court of
Appeals reiterating its previous argument that as the last indorser,
Westmont Bank shall bear the loss occasioned by the fraudulent alteration
of the check. Elaborating, Metrobank maintained that by reason of its
unqualified indorsement, Westmont Bank warranted that the check in
question is genuine, valid and subsisting and that upon presentment the
check shall be accepted according to its tenor.
Even more, Metrobank argued that in clearing the check, it was not
remiss in the performance of its duty as the drawee bank, but rather, it
exercised the highest degree of diligence in accordance with the generally
accepted banking practice. It further insisted that the entries in the check
were regular and authentic and alteration could not be determined even
upon close examination.
In a Decision17 dated 8 March 2002, the Court of Appeals affirmed with
modification the Decision of the court a quo,similarly finding Metrobank
liable for the amount of the check, without prejudice, however, to the
outcome of the case between Metrobank and Westmont Bank which was
pending before another tribunal. The decretal portion of the Decision
reads:
“WHEREFORE, the assailed decision dated September 4, 1998 is
AFFIRMED with the modifications (sic) that the awards for exemplary
damages and attorney’s fees are hereby deleted.”18
Similarly ill-fated was Metrobank’s Motion for Reconsideration which was
also denied by the appellate court in its Resolution19 issued on 26 July
2002, for lack of merit.
_______________
16
Id., at p. 196.
17 CA Rollo, pp. 45-52.
18 Id., at p. 52.
19 Id., at p. 95.
266
266 SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. Cabilzo
Metrobank now poses before this Court this sole issue:
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
HOLDING METROBANK, AS DRAWEE BANK, LIABLE FOR THE
ALTERATIONS ON THE SUBJECT CHECK BEARING THE AUTHENTIC
SIGNATURE OF THE DRAWER THEREOF.
We resolve to deny the petition.
An alteration is said to be material if it changes the effect of the
instrument. It means that an unauthorized change in an instrument that
purports to modify in any respect the obligation of a party or an
unauthorized addition of words or numbers or other change to an
incomplete instrument relating to the obligation of a party.20 In other words,
a material alteration is one which changes the items which are required to
be stated under Section 1 of the Negotiable Instruments Law.
Section 1 of the Negotiable Instruments Law provides:
“Section 1. Form of negotiable instruments.—An instrument to be
negotiable must conform to the following requirements:
1. (a)It must be in writing and signed by the maker or drawer;
2. (b)Must contain an unconditional promise or order to pay a sum
certain in money;
3. (c)Must be payable on demand or at a fixed determinable future
time;
4. (d)Must be payable to order or to bearer; and
5. (e)Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.”
Also pertinent is the following provision in the Negotiable Instrument Law
which states:
_______________
20
Philippine National Bank v. Court of Appeals, 326 Phil. 504, 511; 256
SCRA 491, 497 (1996).
267
VOL. 510, DECEMBER 6, 2006 267
Metropolitan Bank and Trust Company vs. Cabilzo
“Section 125. What constitutes material alteration.—Any alteration which
changes:
1. (a)The date;
2. (b)The sum payable, either for principal or interest;
3. (c)The time or place of payment;
4. (d)The number or the relation of the parties;
5. (e)The medium or currency in which payment is to be made;
Or which adds a place of payment where no place of payment is
specified, or any other change or addition which alters the effect of the
instrument in any respect is a material alteration.”
In the case at bar, the check was altered so that the amount was increased
from P1,000.00 to P91,000.00 and the date was changed from 24
November 1994 to 14 November 1994. Apparently, since the entries
altered were among those enumerated under Section 1 and 125, namely,
the sum of money payable and the date of the check, the instant
controversy therefore squarely falls within the purview of material
alteration.
Now, having laid the premise that the present petition is a case of
material alteration, it is now necessary for us to determine the effect of a
materially altered instrument, as well as the rights and obligations of the
parties thereunder. The following provision of the Negotiable Instrument
Law will shed us some light in threshing out this issue:
“Section 124. Alteration of instrument; effect of.—Where a negotiable
instrument is materially altered without the assent of all parties liable
thereon, it is avoided, except as against a party who has himself made,
authorized, and assented to the alteration and subsequent indorsers.
But when the instrument has been materially altered and is in the hands
of a holder in due course not a party to the alteration, he may enforce the
payment thereof according to its original tenor.” (Emphasis ours.)
268
268 SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. Cabilzo
Indubitably, Cabilzo was not the one who made nor authorized the
alteration. Neither did he assent to the alteration by his express or implied
acts. There is no showing that he failed to exercise such reasonable
degree of diligence required of a prudent man which could have otherwise
prevented the loss. As correctly ruled by the appellate court, Cabilzo was
never remiss in the preparation and issuance of the check, and there were
no indicia of evidence that would prove otherwise. Indeed, Cabilzo placed
asterisks before and after the amount in words and figures in order to
forewarn the subsequent holders that nothing follows before and after the
amount indicated other than the one specified between the asterisks.
The degree of diligence required of a reasonable man in the exercise
of his tasks and the performance of his duties has been faithfully complied
with by Cabilzo. In fact, he was wary enough that he filled with asterisks
the spaces between and after the amounts, not only those stated in words,
but also those in numerical figures, in order to prevent any fraudulent
insertion, but unfortunately, the check was still successfully altered,
indorsed by the collecting bank, and cleared by the drawee bank, and
encashed by the perpetrator of the fraud, to the damage and prejudice of
Cabilzo.

Verily, Metrobank cannot lightly impute that Cabilzo was negligent and
is therefore prevented from asserting his rights under the doctrine of
equitable estoppel when the facts on record are bare of evidence to
support such conclusion. The doctrine of equitable estoppel states that
when one of the two innocent persons, each guiltless of any intentional or
moral wrong, must suffer a loss, it must be borne by the one whose
erroneous conduct, either by omission or commission, was the cause of
injury.21Metrobank’s reliance on this dictum, is misplaced. For one,
Metrobank’s representation that it is an innocent party is flimsy and
evidently, misleading. At the same
_______________
21 Metropolitan Waterworks and Sewerage System v. Court of
Appeals, G.R. No. L-62943, 14 July 1986, 143 SCRA 20.
269
VOL. 510, DECEMBER 6, 2006 269
Metropolitan Bank and Trust Company vs. Cabilzo
time, Metrobank cannot asseverate that Cabilzo was negligent and this
negligence was the proximate cause22 of the loss in the absence of even
a scintilla proof to buttress such claim. Negligence is not presumed but
must be proven by the one who alleges it.23
Undoubtedly, Cabilzo was an innocent party in this instant controversy.
He was just an ordinary businessman who, in order to facilitate his
business transactions, entrusted his money with a bank, not knowing that
the latter would yield a substantial amount of his deposit to fraud, for which
Cabilzo can never be faulted.
We never fail to stress the remarkable significance of a banking
institution to commercial transactions, in particular, and to the country’s
economy in general. The banking system is an indispensable institution in
the modern world and plays a vital role in the economic life of every civilized
nation. Whether as mere passive entities for the safekeeping and saving
of money or as active instruments of business and commerce, banks have
become an ubiquitous presence among the people, who have come to
regard them with respect and even gratitude and, most of all, confidence.24
Thus, even the humble wage-earner does not hesitate to entrust his
life’s savings to the bank of his choice, knowing that they will be safe in its
custody and will even earn some interest for him. The ordinary person, with
equal faith, usually maintains a modest checking account for security and
convenience in the settling of his monthly bills and the pay-
_______________
22
Proximate cause is that cause, which, in natural and continuous
sequence, unbroken by any efficient and intervening cause, produces the
injury, and without which the result would not have occurred. Vda de
Bataclan v. Medina, 102 Phil. 181, 186 (1957).
23
Samsung Construction Company Philippines, Inc. v. Far East Bank
and Trust Company, G.R. No. 129015, 13 August 2004, 436 SCRA 402,
417.
24
Simex v. Court of Appeals, G.R. No. 88013, 19 March 1990, 183
SCRA 360, 361, 366-367.
270
270 SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. Cabilzo
ment of ordinary expenses. As for a businessman like the respondent, the
bank is a trusted and active associate that can help in the running of his
affairs, not only in the form of loans when needed but more often in the
conduct of their dayto-day transactions like the issuance or encashment of
checks.25
In every case, the depositor expects the bank to treat his account with
the utmost fidelity, whether such account consists only of a few hundred
pesos or of millions. The bank must record every single transaction
accurately, down to the last centavo, and as promptly as possible. This has
to be done if the account is to reflect at any given time the amount of money
the depositor can dispose of as he sees fit, confident that the bank will
deliver it as and to whomever he directs.26
The point is that as a business affected with public interest and because
of the nature of its functions, the bank is under obligation to treat the
accounts of its depositors with meticulous care, always having in mind the
fiduciary nature of their relationship. The appropriate degree of diligence
required of a bank must be a high degree of diligence, if not the utmost
diligence.27
In the present case, it is obvious that Metrobank was remiss in that duty
and violated that relationship. As observed by the Court of Appeals, there
are material alterations on the check that are visible to the naked eye.
Thus:
“x x x The number “1” in the date is clearly imposed on a white figure in the
shape of the number “2.” The appellant’s employees who examined the
said check should have likewise been put on guard as to why at the end of
the amount in words, i.e., after the word “ONLY”, there are 4 asterisks,
while at the beginning of the line or before said phrase, there is none, even
as 4 asterisks have been placed before and after the word “CASH” in the
space for payee. In addition, the 4 asterisks before the words “ONE
THOUSAND PE
_______________
 25
Id.
26 Id.
27
Id.
271
VOL. 510, DECEMBER 6, 2006 271
Metropolitan Bank and Trust Company vs. Cabilzo
SOS ONLY” have noticeably been erased with typing correction paper,
leaving white marks, over which the word “NINETY” was superimposed.
The same can be said of the numeral “9” in the amount “91,000,” which is
superimposed over a whitish mark, obviously an erasure, in lieu of the
asterisk which was deleted to insert the said figure. The appellant’s
employees should have again noticed why only 2 asterisks were placed
before the amount in figures, while 3 asterisks were placed after such
amount. The word “NINETY” is also typed differently and with a lighter ink,
when compared with the words “ONE THOUSAND PESOS ONLY.” The
letters of the word “NINETY” are likewise a little bigger when compared
with the letters of the words “ONE THOUSAND PESOS ONLY.”28
Surprisingly, however, Metrobank failed to detect the above alterations
which could not escape the attention of even an ordinary person. This
negligence was exacerbated by the fact that, as found by the trial court,
the check in question was examined by the cash custodian whose
functions do not include the examinations of checks indorsed for payment
against drawer’s accounts.29Obviously, the employee allowed by
Metrobank to examine the check was not versed and competent to handle
such duty. These factual findings of the trial court are conclusive upon this
court especially when such findings were affirmed the appellate court.30
Apropos thereto, we need to reiterate that by the very nature of their
work the degree of responsibility, care and trustworthiness expected of
their employees and officials is far better than those of ordinary clerks and
employees. Banks are expected to exercise the highest degree of diligence
in the selection and supervision of their employees.31
_______________
28 Rollo, p. 22.
29
Records, p. 195.
30 Samahan ng Magsasaka sa San Josep v. Valisno, G.R. No. 158314,
3 June 2004, 430 SCRA 629, 635.
31 Philippine Commercial and Industrial Bank v. Court of Appeals, G.R.
No. 121413, 29 January 2001, 350 SCRA 446, 472.
272
272 SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. Cabilzo
In addition, the bank on which the check is drawn, known as the drawee
bank, is under strict liability to pay to the order of the payee in accordance
with the drawer’s instructions as reflected on the face and by the terms of
the check. Payment made under materially altered instrument is not
payment done in accordance with the instruction of the drawer.
When the drawee bank pays a materially altered check, it violates the
terms of the check, as well as its duty to charge its client’s account only
for bona fide disbursements he had made. Since the drawee bank, in the
instant case, did not pay according to the original tenor of the instrument,
as directed by the drawer, then it has no right to claim reimbursement from
the drawer, much less, the right to deduct the erroneous payment it made
from the drawer’s account which it was expected to treat with utmost
fidelity.
Metrobank vigorously asserts that the entries in the check were
carefully examined: The date of the instrument, the amount in words and
figures, as well as the drawer’s signature, which after verification, were
found to be proper and authentic and was thus cleared. We are not
persuaded. Metrobank’s negligence consisted in the omission of that
degree of diligence required of a bank owing to the fiduciary nature of its
relationship with its client. Article 1173 of the Civil Code 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 circumstances of the persons, of the time and of the place. x x x.”
Beyond question, Metrobank failed to comply with the degree required by
the nature of its business as provided by law and jurisprudence. If indeed
it was not remiss in its obligation, then it would be inconceivable for it not
to detect an evident alteration considering its vast knowledge and technical
expertise in the intricacies of the banking business. This Court is not
completely unaware of banks’ practices of em-
273
VOL. 510, DECEMBER 6, 2006 273
Metropolitan Bank and Trust Company vs. Cabilzo
ploying devices and techniques in order to detect forgeries, insertions,
intercalations, superimpositions and alterations in checks and other
negotiable instruments so as to safeguard their authenticity and
negotiability. Metrobank cannot now feign ignorance nor claim diligence;
neither can it point its finger at the collecting bank, in order to evade liability.
Metrobank argues that Westmont Bank, as the collecting bank and the
last indorser, shall bear the loss. Without ruling on the matter between the
drawee bank and the collecting bank, which is already under the
jurisdiction of another tribunal, we find that Metrobank cannot rely on such
indorsement, in clearing the questioned check. The corollary liability of
such indorsement, if any, is separate and independent from the liability of
Metrobank to Cabilzo.
 The reliance made by Metrobank on Westmont Bank’s indorsement is account of the depositor. (Traders Royal Bank vs. Radio Philippines
clearly inconsistent, if not totally offensive to the dictum that being Network, Inc., 390 SCRA 608 [2002])
impressed with public interest, banks should exercise the highest degree As a business affected with public interest and because of the nature
of diligence, if not utmost diligence in dealing with the accounts of its own of its functions, a bank is under obligation to treat the accounts of its
clients. It owes the highest degree fidelity to its clients and should not depositors with meticulous care, always
therefore lightly rely on the judgment of other banks on occasions where
its clients money were involve, no matter how small or substantial the _______________
amount at stake.
Metrobank’s contention that it relied on the strength of collecting bank’s 32
Id.
indorsement may be merely a lame excuse to evade liability, or may be 275
indeed an actual banking practice. In either case, such act constitutes a VOL. 510, DECEMBER 6, 2006 275
deplorable banking practice and could not be allowed by this Court bearing Villanueva vs. Philippine National Bank
in mind that the confidence of public in general is of paramount importance having in mind the fiduciary nature of their relationship. (Philippine
in banking business. Commercial International Bank vs. Court of Appeals, 350 SCRA
What is even more deplorable is that, having been informed of the 446 [2001])
alteration, Metrobank did not immediately recredit the amount that was
erroneously debited from Cabilzo’s account but permitted a full blown
litigation to push through, to the prejudice of its client. Anyway, Metrobank
is not left with no recourse for it can still run after the one who made
274
274 SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. Cabilzo
the alteration or with the collecting bank, which it had already done. It bears
repeating that the records are bare of evidence to prove that Cabilzo was
negligent. We find no justifiable reason therefore why Metrobank did not
immediately reimburse his account. Such ineptness comes within the
concept of wanton manner contemplated under the Civil Code which
warrants the imposition of exemplary damages, “by way of example or
correction for the public good,” in the words of the law. It is expected that
this ruling will serve as a stern warning in order to deter the repetition of
similar acts of negligence, lest the confidence of the public in the banking
system be further eroded.32
WHEREFORE, premises considered, the instant Petition is DENIED.
The Decision dated 8 March 2002 and the Resolution dated 26 July 2002
of the Court of Appeals are AFFIRMED with modification that exemplary
damages in the amount of P50,000.00 be awarded. Costs against the
petitioner.
SO ORDERED.
Panganiban (C.J., Chairperson), Ynares-Santiago, Austria-
Martinez and Callejo, Sr., JJ., concur.
Petition denied, judgment and resolution affirmed with modification.
Notes.—When a bank pays a forged check it must be considered as
paying out of its funds and cannot charge the amount so paid to the
 G.R. No. 150228. July 30, 2009.*
BANK OF AMERICA NT & SA, petitioner, vs. PHILIPPINE RACING CLUB,
respondent.
Banks and Banking; Negotiable Instruments Law; If the signatures
are genuine, the bank has the unavoidable legal and contractual duty to
pay.—Petitioner insists that it merely fulfilled its obligation under law and
contract when it encashed the aforesaid checks. Invoking Sections 126
and 185 of the Negotiable Instruments Law (NIL), petitioner claims that its
duty as a drawee bank to a drawer-client maintaining a checking account
with it is to pay orders for checks bearing the drawer-client’s genuine
signatures. The genuine signatures of the client’s duly authorized
signatories affixed on the checks signify the order for payment. Thus,
pursuant to the said obligation, the drawee bank has the duty to determine
whether the signatures appearing on the check are the drawer-client’s or
its duly authorized signatories. If the signatures are genuine, the bank has
the unavoidable legal and contractual duty to pay. If the signatures are
forged and falsified, the drawee bank has the corollary, but equally
unavoidable legal and contractual, duty not to pay.
Same; Same; A material alteration is defined in Section 125 of the
Negotiable Instruments Law (NIL) to be one which changes the date, the
sum payable, the time or place of payment, the number or relations of the
parties, the currency in which payment is to be made or one which adds a
place of payment where no place of payment is specified, or any change
or addition which alters the effect of the instrument in any respect.—
Petitioner maintains that there exists a duty on the drawee bank to inquire
from the drawer before encashing a check only when the check bears a
material alteration. A material alteration is defined in Section 125 of the NIL
to be one which changes the date, the sum payable, the time or place of
payment, the number or relations of the parties, the currency in which
payment is to be made or one which adds a place of payment where no
place of payment is specified, or any other change or addition which alters
the effect of the instrument in any respect. With respect to the checks at
issue, petitioner points out that they do not contain
_______________
* FIRST DIVISION.
302
302 SUPREME COURT REPORTS ANNOTATED
Bank of America NT & SA vs. Philippine Racing Club
any material alteration. This is a fact which was affirmed by the trial
court itself.
Same; It is well-settled that banks are engaged in a business
impressed with public interest, and it is their duty to protect in return their
many clients and depositors who transact business with them.—It is well-
settled that banks are engaged in a business impressed with public
interest, and it is their duty to protect in return their many clients and
depositors who transact business with them. They have the obligation to
treat their client’s account meticulously and with the highest degree of care,
considering the fiduciary nature of their relationship. The diligence required
of banks, therefore, is more than that of a good father of a family.
Same; Every client should be treated equally by a banking institution
regardless of the amount of his deposits and each client has the right to
expect that every centavo he entrusts to a bank would be handled with the
same degree of care as the accounts of other clients.—Taking this with the
testimony of petitioner’s operations manager that in case of an irregularity
on the face of the check (such as when blanks were not properly filled out)
the bank may or may not call the client depending on how busy the bank
is on a particular day, we are even more convinced that petitioner’s
safeguards to protect clients from check fraud are arbitrary and subjective.
Every client should be treated equally by a banking institution regardless
of the amount of his deposits and each client has the right to expect that
every centavo he entrusts to a bank would be handled with the same
degree of care as the accounts of other clients. Perforce, we find that
petitioner plainly failed to adhere to the high standard of diligence expected
of it as a banking institution.
Same; Doctrine of Last Clear Chance; In instances where both parties
are at fault, this Court has consistently applied the doctrine of last clear
chance in order to assign liability.—Even if we assume that both parties
were guilty of negligent acts that led to the loss, petitioner will still emerge
as the party foremost liable in this case. In instances where both parties
are at fault, this Court has consistently applied the doctrine of last clear
chance in order to assign liability. In Westmont Bank v. Ong, 375 SCRA
212 (2002), we ruled: …[I]t is petitioner [bank] which had the last clear
chance to stop the fraudulent encashment of the subject checks had it
exercised due diligence
303
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Bank of America NT & SA vs. Philippine Racing Club
and followed the proper and regular banking procedures in clearing
checks. As we had earlier ruled, the one who had a last clear
opportunity to avoid the impending harm but failed to do so is
chargeable with the consequences thereof.
Damages; Following established jurisprudential precedents, we
believe the allocation of sixty percent (60%) of the actual damages,
involved in this case (represented by the amount of the checks with legal
interest) to petitioner is proper under the premises.—Following established
jurisprudential precedents, we believe the allocation of sixty percent (60%)
of the actual damages involved in this case (represented by the amount of
the checks with legal interest) to petitioner is proper under the premises.
Respondent should, in light of its contributory negligence, bear forty
percent (40%) of its own loss.
Attorney’s Fees; An adverse decision does not ipso facto justify an
award of attorney’s fees to the winning party.—We find that the awards of
attorney’s fees and litigation expenses in favor of respondent are not
justified under the circumstances and, thus, must be deleted. The power
of the court to award attorney’s fees and litigation expenses under Article
2208 of the NCC demands factual, legal, and equitable justification. An
adverse decision does not ipso facto justify an award of attorney’s fees to
the winning party. Even when a claimant is compelled to litigate with third
persons or to incur expenses to protect his rights, still attorney’s fees may
not be awarded where no sufficient showing of bad faith could be reflected
in a party’s persistence in a case other than an erroneous conviction of the
righteousness of his cause.
PETITION for review on certiorari of the decision and resolution of the
Court of Appeals.
The facts are stated in the opinion of the Court.
Sycip, Salazar, Hernandez & Gatmaitan for petitioner.
Reyno, Tiu, Domingo & Santos for respondent.
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Bank of America NT & SA vs. Philippine Racing Club
LEONARDO-DE CASTRO, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of
Court from the Decision1 promulgated on July 16, 2001 by the former
Second Division of the Court of Appeals (CA), in CA-G.R. CV No.
45371 entitled “Philippine Racing Club, Inc. v. Bank of America NT & SA,”
affirming the Decision2 dated March 17, 1994 of the Regional Trial Court
(RTC) of Makati, Branch 135 in Civil Case No. 89-5650, in favor of the
respondent. Likewise, the present petition assails the
Resolution3 promulgated on September 28, 2001, denying the Motion for
Reconsideration of the CA Decision.
The facts of this case as narrated in the assailed CA Decision are as
follows:
“Plaintiff-appellee PRCI is a domestic corporation which maintains
several accounts with different banks in the Metro Manila area. Among the
accounts maintained was Current Account No. 58891-012 with defendant-
appellant BA (Paseo de Roxas Branch). The authorized joint signatories
with respect to said Current Account were plaintiff-appellee’s President
(Antonia Reyes) and Vice President for Finance (Gregorio Reyes).
On or about the 2nd week of December 1988, the President and Vice
President of plaintiff-appellee corporation were scheduled to go out of the
country in connection with the corporation’s business. In order not to
disrupt operations in their absence, they pre-signed several checks relating
to Current Account No. 58891-012. The intention was to insure continuity
of plaintiff-appellee’s operations by making available cash/money
especially to settle obligations that might become due. These checks were
entrusted to the accountant with instruction to make use of the same as
the need arose. The internal arrangement was, in the event there was need
to make use of the checks, the accountant would prepare the
corresponding voucher and thereafter complete the entries on the pre-
signed checks.
_______________
1 Rollo, pp. 80-87.
2 Id., at pp. 122-126.
3 Id., at p. 89.
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Bank of America NT & SA vs. Philippine Racing Club
It turned out that on December 16, 1988, a John Doe presented to
defendant-appellant bank for encashment a couple of plaintiff-appellee
corporation’s checks (Nos. 401116 and 401117) with the indicated value
of P110,000.00 each. It is admitted that these 2 checks were among those
presigned by plaintiff-appellee corporation’s authorized signatories.
The two (2) checks had similar entries with similar infirmities and
irregularities. On the space where the name of the payee should be
indicated (Pay To The Order Of) the following 2-line entries were instead
typewritten: on the upper line was the word “CASH” while the lower line
had the following typewritten words, viz: “ONE HUNDRED TEN
THOUSAND PESOS ONLY.” Despite the highly irregular entries on the
face of the checks, defendant-appellant bank, without as much as verifying
and/or confirming the legitimacy of the checks considering the substantial
amount involved and the obvious infirmity/defect of the checks on their
faces, encashed said checks. A verification process, even by was of a
telephone call to PRCI office, would have taken less than ten (10) minutes.
But this was not done by BA. Investigation conducted by plaintiff-appellee
corporation yielded the fact that there was no transaction involving PRCI
that call for the payment of P220,000.00 to anyone. The checks appeared
to have come into the hands of an employee of PRCI (one Clarita Mesina
who was subsequently criminally charged for qualified theft) who
eventually completed without authority the entries on the pre-signed
checks. PRCI’s demand for defendant-appellant to pay fell on deaf ears.
Hence, the complaint.”4
 After due proceedings, the trial court rendered a Decision in favor of
respondent, the dispositive portion of which reads:
“PREMISES CONSIDERED, judgment is hereby rendered in favor of
plaintiff and against the defendant, and the latter is ordered to pay plaintiff:
(1) The sum of Two Hundred Twenty Thousand (P220,000.00)
Pesos, with legal interest to be computed from date of the filing of the
herein complaint;
(2) The sum of Twenty Thousand (P20,000.00) Pesos by way of
attorney’s fees;
_______________
4 Id., at pp. 81-82.
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306 SUPREME COURT REPORTS ANNOTATED
Bank of America NT & SA vs. Philippine Racing Club
(3) The sum of Ten Thousand (P10,000.00) Pesos for litigation
expenses, and
To pay the costs of suit.
SO ORDERED.”5
Petitioner appealed the aforesaid trial court Decision to the CA which,
however, affirmed said decision in toto in its July 16, 2001
Decision. Petitioner’s Motion for Reconsideration of the CA Decision was
subsequently denied on September 28, 2001.
Petitioner now comes before this Court arguing that:
I. The Court of Appeals gravely erred in holding that the proximate cause
of respondent’s loss was petitioner’s encashment of the checks.
A. The Court of Appeals gravely erred in holding that petitioner
was liable for the amount of the checks despite the fact that
petitioner was merely fulfilling its obligation under law and
contract.
B. The Court of Appeals gravely erred in holding that petitioner
had a duty to verify the encashment, despite the absence of
any obligation to do so.
C. The Court of Appeals gravely erred in not applying Section
14 of the Negotiable Instruments Law, despite its clear
applicability to this case;
II. The Court of Appeals gravely erred in not holding that the proximate
cause of respondent’s loss was its own grossly negligent practice of
pre-signing checks without payees and amounts and delivering these
pre-signed checks to its employees (other than their signatories).
III. The Court of Appeals gravely erred in affirming the trial court’s award
of attorney’s fees despite the absence of any applicable ground under
Article 2208 of the Civil Code.
_______________
5 Id., at p. 126.
307
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Bank of America NT & SA vs. Philippine Racing Club
IV. The Court of Appeals gravely erred in not awarding attorney’s fees,
moral and exemplary damages, and costs of suit in favor of petitioner,
who clearly deserves them.6
From the discussions of both parties in their pleadings, the key issue to
be resolved in the present case is whether the proximate cause of the
wrongful encashment of the checks in question was due to (a) petitioner’s
failure to make a verification regarding the said checks with the respondent
in view of the misplacement of entries on the face of the checks or (b) the
practice of the respondent of pre-signing blank checks and leaving the
same with its employees.
Petitioner insists that it merely fulfilled its obligation under law and
contract when it encashed the aforesaid checks. Invoking Sections
1267 and 1858 of the Negotiable Instruments Law (NIL), petitioner claims
that its duty as a drawee bank to a drawer-client maintaining a checking
account with it is to pay orders for checks bearing the drawer-client’s
genuine signatures. The genuine signatures of the client’s duly authorized
signatories affixed on the checks signify the order for payment. Thus,
pursuant to the said obligation, the drawee bank has the duty to determine
whether the signatures appearing on the check are the drawer-client’s or
its duly authorized signatories. If the signatures are genuine, the bank has
the unavoidable legal and contractual duty to pay. If the signatures are
forged and falsified, the drawee bank has
_______________
6 Id., at pp. 55-56.
7 Sec. 126. Bill of exchange defined.—A bill of exchange is an
unconditional order in writing addressed by one person to another, signed
by the person giving it, requiring the person to whom it is addressed to pay
on demand or at a fixed or determinable future time a sum certain in money
to order or to bearer.
8 Sec. 185. Check defined.—A check is a bill of exchange drawn on
a bank payable on demand. Except as herein otherwise provided, the
provisions of this act applicable to a bill of exchange payable on demand
apply to a check.
308
308 SUPREME COURT REPORTS ANNOTATED
Bank of America NT & SA vs. Philippine Racing Club
the corollary, but equally unavoidable legal and contractual, duty not to
pay.9
Furthermore, petitioner maintains that there exists a duty on the drawee
bank to inquire from the drawer before encashing a check only when the
check bears a material alteration. A material alteration is defined in Section
125 of the NIL to be one which changes the date, the sum payable, the
time or place of payment, the number or relations of the parties, the
currency in which payment is to be made or one which adds a place of
payment where no place of payment is specified, or any other change or
addition which alters the effect of the instrument in any respect. With
respect to the checks at issue, petitioner points out that they do not contain
any material alteration.10 This is a fact which was affirmed by the trial court
itself.11
There is no dispute that the signatures appearing on the subject checks
were genuine signatures of the respondent’s authorized joint signatories;
namely, Antonia Reyes and Gregorio Reyes who were respondent’s
President and Vice President for Finance, respectively. Both pre-signed
the said checks since they were both scheduled to go abroad and it was
apparently their practice to leave with the company accountant checks
signed in black to answer for company obligations that might fall due during
the signatories’ absence. It is likewise admitted that neither of the subject
checks contains any material alteration or erasure.
However, on the blank space of each check reserved for the payee, the
following typewritten words appear: “ONE HUNDRED TEN THOUSAND
PESOS ONLY.” Above the same is the typewritten word, “CASH.” On the
blank reserved for the amount, the same amount of One Hundred Ten
Thousand Pesos was indicated with the use of a check writer. The pres-
_______________
9 Rollo, pp. 296-297.
10 Id., at p. 298.
11 Id., at p. 125.
309
VOL. 594, JULY 30, 2009 309
Bank of America NT & SA vs. Philippine Racing Club
ence of these irregularities in each check should have alerted the petitioner
to be cautious before proceeding to encash them which it did not do.
It is well-settled that banks are engaged in a business impressed with
public interest, and it is their duty to protect in return their many clients and
depositors who transact business with them. They have the obligation to
treat their client’s account meticulously and with the highest degree of care,
considering the fiduciary nature of their relationship. The diligence required
of banks, therefore, is more than that of a good father of a family.12
Petitioner asserts that it was not duty-bound to verify with the
respondent since the amount below the typewritten word “CASH,”
expressed in words, is the very same amount indicated in figures by means
of a check writer on the amount portion of the check. The amount stated in
words is, therefore, a mere reiteration of the amount stated in figures.
Petitioner emphasizes that a reiteration of the amount in words is merely a
repetition and that a repetition is not an alteration which if present and
material would have enjoined it to commence verification with
respondent.13
We do not agree with petitioner’s myopic view and carefully crafted
defense. Although not in the strict sense “material alterations,” the
misplacement of the typewritten entries for the payee and the amount on
the same blank and the repetition of the amount using a check writer were
glaringly obvious irregularities on the face of the check. Clearly, someone
made a mistake in filling up the checks and the repetition of the entries was
possibly an attempt to rectify the mistake. Also, if the check had been filled
up by the person who customarily accomplishes the checks of respondent,
it should
_______________
12 Samsung Construction Company Philippines, Inc. v. Far East Bank
and Trust Company, Inc., G.R. No. 129015, August 13, 2004, 436 SCRA
402, 421.
13 Id., at p. 299.
310
310 SUPREME COURT REPORTS ANNOTATED
Bank of America NT & SA vs. Philippine Racing Club
have occurred to petitioner’s employees that it would be unlikely such
mistakes would be made. All these circumstances should have alerted the
bank to the possibility that the holder or the person who is attempting to
encash the checks did not have proper title to the checks or did not have
authority to fill up and encash the same. As noted by the CA, petitioner
could have made a simple phone call to its client to clarify the irregularities
and the loss to respondent due to the encashment of the stolen checks
would have been prevented.
In the case at bar, extraordinary diligence demands that petitioner
should have ascertained from respondent the authenticity of the subject
checks or the accuracy of the entries therein not only because of the
presence of highly irregular entries on the face of the checks but also of
the decidedly unusual circumstances surrounding their encashment.
Respondent’s witness testified that for checks in amounts greater than
Twenty Thousand Pesos (P20,000.00) it is the company’s practice to
ensure that the payee is indicated by name in the check.14 This was not
rebutted by petitioner. Indeed, it is highly uncommon for a corporation to
make out checks payable to “CASH” for substantial amounts such as in
this case. If each irregular circumstance in this case were taken singly or
isolated, the bank’s employees might have been justified in ignoring them.
However, the confluence of the irregularities on the face of the checks and
circumstances that depart from the usual banking practice of respondent
should have put petitioner’s employees on guard that the checks were
possibly not issued by the respondent in due course of its business.
Petitioner’s subtle sophistry cannot exculpate it from behavior that fell
extremely short of the highest degree of care and diligence required of it
as a banking institution.
Indeed, taking this with the testimony of petitioner’s operations
manager that in case of an irregularity on the face of
_______________
14 TSN, testimony of Carlos H. Reyes, October 1, 1991, p. 3.
311
VOL. 594, JULY 30, 2009 311
Bank of America NT & SA vs. Philippine Racing Club
the check (such as when blanks were not properly filled out) the bank may
or may not call the client depending on how busy the bank is on a particular
day,15 we are even more convinced that petitioner’s safeguards to protect
clients from check fraud are arbitrary and subjective. Every client should
be treated equally by a banking institution regardless of the amount of his
deposits and each client has the right to expect that every centavo he
entrusts to a bank would be handled with the same degree of care as the
accounts of other clients. Perforce, we find that petitioner plainly failed to
adhere to the high standard of diligence expected of it as a banking
institution.
In defense of its cashier/teller’s questionable action, petitioner insists
that pursuant to Sections 1416 and 1617 of the
_______________
15 TSN, testimony of Rose Acuban, August 20, 1991, pp. 8-9.
16 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. 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. But if any such instrument, after
completion, is negotiated to a holder in due course, it is valid and effectual
for all purposes in his hands, and he may enforce it as if it had been filled
up strictly in accordance with the authority given and within a reasonable
time.
17 Sec. 16. Delivery; when effectual; when presumed.—Every
contract on a negotiable instrument is incomplete and revocable until
delivery of the instrument for the purpose of giving effect thereto. As
between immediate parties, and as regards a remote party other than a
holder in due course, the delivery in order to be effectual, must be made
either by or under the authority of the party making, drawing, accepting, or
indorsing as the case may be; and in such case the delivery may be shown
to have been conditional, or for
312
312 SUPREME COURT REPORTS ANNOTATED
Bank of America NT & SA vs. Philippine Racing Club
NIL, it could validly presume, upon presentation of the checks, that the
party who filled up the blanks had authority and that a valid and intentional
delivery to the party presenting the checks had taken place. Thus, in
petitioner’s view, the sole blame for this debacle should be shifted to
respondent for having its signatories pre-sign and deliver the subject
checks.18 Petitioner argues that there was indeed delivery in this case
because, following American jurisprudence, the gross negligence of
respondent’s accountant in safekeeping the subject checks which resulted
in their theft should be treated as a voluntary delivery by the maker who is
estopped from claiming non-delivery of the instrument.19
Petitioner’s contention would have been correct if the subject checks
were correctly and properly filled out by the thief and presented to the bank
in good order. In that instance, there would be nothing to give notice to the
bank of any infirmity in the title of the holder of the checks and it could
validly presume that there was proper delivery to the holder. The bank
could not be faulted if it encashed the checks under those circumstances.
However, the undisputed facts plainly show that there were circumstances
that should have alerted the bank to the likelihood that the checks were not
properly delivered to the person who encashed the same. In all, we see no
reason to depart from the finding in the assailed CA Decision that the
subject checks are properly characterized as
_______________
a special purpose only, and not for the purpose of transferring the property
in the instrument. But where the instrument is in the hands of a holder of a
due course, a valid delivery thereof by all parties prior to him so as to make
them liable to him is conclusively presumed. 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 until the contrary is
proved.
18 Rollo, p. 304.
19 Id., at p. 306.
313
VOL. 594, JULY 30, 2009 313
Bank of America NT & SA vs. Philippine Racing Club
incomplete and undelivered instruments thus making Section 1520 of the
NIL applicable in this case.
However, we do agree with petitioner that respondent’s officers’
practice of pre-signing of blank checks should be deemed seriously
negligent behavior and a highly risky means of purportedly ensuring the
efficient operation of businesses. It should have occurred to respondent’s
officers and managers that the pre-signed blank checks could fall into the
wrong hands as they did in this case where the said checks were stolen
from the company accountant to whom the checks were entrusted.
Nevertheless, even if we assume that both parties were guilty of
negligent acts that led to the loss, petitioner will still emerge as the party
foremost liable in this case. In instances where both parties are at fault,
this Court has consistently applied the doctrine of last clear chance in order
to assign liability.
In Westmont Bank v. Ong,21 we ruled:
“…[I]t is petitioner [bank] which had the last clear chance to stop the
fraudulent encashment of the subject checks had it exercised due diligence
and followed the proper and regular banking procedures in clearing
checks. As we had earlier ruled, the one who had a last clear
opportunity to avoid the impending harm but failed to do so is
chargeable with the consequences thereof.”22 (emphasis ours)
In the case at bar, petitioner cannot evade responsibility for the loss by
attributing negligence on the part of respon-
_______________
20 Sec. 15. Incomplete instrument not delivered.—Where an
incomplete instrument has not been delivered it will not, if completed and
negotiated, without authority, be a valid contract in the hands of any holder,
as against any person whose signature was placed thereon before
delivery.
21 G.R. No. 132560, January 30, 2002, 375 SCRA 212.
22 Id., at p. 223, citing Philippine Bank of Commerce v. Court of
Appeals, G.R. No. 97626, 269 SCRA 695, 707-708.
314
314 SUPREME COURT REPORTS ANNOTATED
Bank of America NT & SA vs. Philippine Racing Club
dent because, even if we concur that the latter was indeed negligent in pre-
signing blank checks, the former had the last clear chance to avoid the
loss. To reiterate, petitioner’s own operations manager admitted that they
could have called up the client for verification or confirmation before
honoring the dubious checks. Verily, petitioner had the final opportunity to
avert the injury that befell the respondent. Failing to make the necessary
verification due to the volume of banking transactions on that particular day
is a flimsy and unacceptable excuse, considering that the “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.”23 Petitioner’s negligence has been undoubtedly
established and, thus, pursuant to Art. 1170 of the NCC,24 it must suffer
the consequence of said negligence.
In the interest of fairness, however, we believe it is proper to consider
respondent’s own negligence to mitigate petitioner’s liability. Article 2179
of the Civil Code provides:
“Art. 2179. When the plaintiff’s own negligence was the immediate
and proximate cause of his injury, he cannot recover damages. But if his
negligence was only contributory, the immediate and proximate cause of
the injury being the defendant’s lack of due care, the plaintiff may recover
damages, but the courts shall mitigate the damages to be awarded.”
Explaining this provision in Lambert v. Heirs of Ray Castillon,25 the
Court held:
_______________
23 Gempesaw v. Court of Appeals, G.R. No. 92244, February 9, 1993,
218 SCRA 682, 697.
24 Art. 1170. Those who in the performance of their obligations are
guilty of fraud, negligence, or delay, and those who in any manner
contravene the tenor thereof, are liable for damages.
25 G.R. No. 160709, February 23, 2005, 452 SCRA 285, 293.
315
VOL. 594, JULY 30, 2009 315
Bank of America NT & SA vs. Philippine Racing Club
“The underlying precept on contributory negligence is that a plaintiff
who is partly responsible for his own injury should not be entitled to recover
damages in full but must bear the consequences of his own negligence.
The defendant must thus be held liable only for the damages actually
caused by his negligence. xxx xxx xxx”
 As we previously stated, respondent’s practice of signing checks in
blank whenever its authorized bank signatories would travel abroad was a
dangerous policy, especially considering the lack of evidence on record
that respondent had appropriate safeguards or internal controls to prevent
the pre-signed blank checks from falling into the hands of unscrupulous
individuals and being used to commit a fraud against the company. We
cannot believe that there was no other secure and reasonable way to
guarantee the non-disruption of respondent’s business. As testified to by
petitioner’s expert witness, other corporations would ordinarily have
another set of authorized bank signatories who would be able to sign
checks in the absence of the preferred signatories.26 Indeed, if not for the
fortunate happenstance that the thief failed to properly fill up the subject
checks, respondent would expectedly take the blame for the entire loss
since the defense of forgery of a drawer’s signature(s) would be
unavailable to it. Considering that respondent knowingly took the risk that
the pre-signed blank checks might fall into the hands of wrongdoers, it is
but just that respondent shares in the responsibility for the loss.
We also cannot ignore the fact that the person who stole the pre-signed
checks subject of this case from respondent’s accountant turned out to be
another employee, purportedly a clerk in respondent’s accounting
department. As the employer of the “thief,” respondent supposedly had
control and supervi-
_______________
26 TSN, testimony of Gerardo Martin, a certified public
accountant/auditor from Sycip Gorres & Velayo, February 25, 1992, p. 6.
316
316 SUPREME COURT REPORTS ANNOTATED
Bank of America NT & SA vs. Philippine Racing Club
sion over its own employee. This gives the Court more reason to allocate
part of the loss to respondent.
Following established jurisprudential precedents,27 we believe the
allocation of sixty percent (60%) of the actual damages involved in this
case (represented by the amount of the checks with legal interest) to
petitioner is proper under the premises. Respondent should, in light of its
contributory negligence, bear forty percent (40%) of its own loss.
Finally, we find that the awards of attorney’s fees and litigation
expenses in favor of respondent are not justified under the circumstances
and, thus, must be deleted. The power of the court to award attorney’s fees
and litigation expenses under Article 2208 of the NCC28 demands factual,
legal, and equitable justification.
_______________
27 Philippine Bank of Commerce v. Court of Appeals, G.R. No. 97626,
March 14, 1997, 269 SCRA 695; Consolidated Bank and Trust Corporation
v. Court of Appeals, G.R. No. 138569, September 11, 2003, 410 SCRA
562.
28 Art. 2208. In the absence of stipulation, attorney’s fees and
expenses of litigation, other than judicial costs, cannot be recovered,
except:
(1) When exemplary damages are awarded;
(2) When the defendant’s act or omission has compelled
the plaintiff to litigate with third persons or to incur
expenses to protect his interest;
(3) In criminal cases of malicious prosecution against the
plaintiff;
(4) In case of a clearly unfounded civil action or proceeding
against the plaintiff;
(5) Where the defendant acted in gross and evident bad
faith in refusing to satisfy the plaintiff’s plainly valid,
just and demandable claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household
helpers, laborers and skilled workers;
317
VOL. 594, JULY 30, 2009 317
Bank of America NT & SA vs. Philippine Racing Club
An adverse decision does not ipso facto justify an award of attorney’s
fees to the winning party.29 Even when a claimant is compelled to litigate
with third persons or to incur expenses to protect his rights, still attorney’s
fees may not be awarded where no sufficient showing of bad faith could be
reflected in a party’s persistence in a case other than an erroneous
conviction of the righteousness of his cause.30
WHEREFORE, the Decision of the Court of Appeals dated July 16,
2001 and its Resolution dated September 28, 2001 are AFFIRMED with
the following MODIFICATIONS: (a) petitioner Bank of America NT & SA
shall pay to respondent Philippine Racing Club sixty percent (60%) of the
sum of Two Hundred Twenty Thousand Pesos (P220,000.00) with legal
interest as awarded by the trial court and (b) the awards of attorney’s fees
and litigation expenses in favor of respondent are deleted.
Proportionate costs.
SO ORDERED.
Puno (C.J., Chairperson), Carpio, Corona andBersamin, JJ., concur.
_______________
 (8) In actions for indemnity under workmen’s
compensation and employer’s liability laws;
(9) In a separate civil action to recover civil liability
arising from a crime;
(10) When at least double judicial costs are awarded;
(11) In any other case where the court deems it just and
equitable that attorney’s fees and expenses of
litigation should be recovered.
In all cases, the attorney’s fees and expenses of litigation must be
reasonable.
29 “J” Marketing Corp. v. Sia, Jr., G.R. No. 127823, January 29, 1998,
285 SCRA 580, 584.
30 Felsan Realty & Development Corporation v. Commonwealth of
Australia, G.R. No. 169656, October 11, 2007, 535 SCRA 618, 632.