Republic of the Philippines

SUPREME COURT
Baguio City
FIRST DIVISION

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.

KAPUNAN, J.:p
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.
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had already withdrawn the amount of the check as of October 15, 1981.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 re-crediting 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 fourthparty 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.) On plaintiffs 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.) 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.) 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;
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;
5.) The Counterclaims of PBCom and PNB are hereby dismissed;
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.
II
WHETHER OR NOT A CERTIFICATION HEREIN ISSUED BY THE MINISTRY OF
EDUCATION CAN BE GIVEN WEIGHT IN EVIDENCE.
III
WHETHER OR NOT A DRAWEE BANK WHO FAILED TO RETURN A. CHECK
WITHIN THE TWENTY FOUR (24) HOUR CLEARING PERIOD MAY RECOVER
THE VALUE OF THE CHECK FROM THE COLLECTING BANK.
IV
WHETHER OR NOT IN THE ABSENCE OF MALICE OR ILL WILL PETITIONER
PNB MAY BE HELD LIABLE FOR ATTORNEY'S FEES. 4
We find no merit in the petition.
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) 5 which provides:
Sec. 225. What constitutes a material alteration. Any alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
(f) Or which adds a place of payment where no place of payment is specified, or any
other change or addition which alters the effect of the instrument in any respect, is a
material alteration.
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. 6
We do not agree.

An alteration is said to be material if it alters the effect of the

instrument. 7 It means an unauthorized change in an instrument that purports to modify in any respect the
obligation of a party or an unauthorized addition of words or numbers or other change to an incomplete
instrument relating to the obligation of a party. 8 In other words, a material alteration is one which changes
the items which are required to be stated under Section 1 of the Negotiable Instruments Law.

Section 1 of the Negotiable Instruments Law provides:

Sec. 1. Form of negotiable instruments. An instrument to be negotiable must
conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
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." 9
Reproduced hereunder are some examples of material and immaterial alterations:
A. Material Alterations:
(1) Substituting the words "or bearer" for "order."
(2) Writing "protest waived" above blank indorsements.
(3) A change in the date from which interest is to run.
(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) Adding the words "with interest" with or without a fixed rate.
(6) An alteration in the maturity of a note, whether the time for payment is thereby
curtailed or extended.
(7) An instrument was payable "First Nat'l Bank" the plaintiff added the word
"Marion."

(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) Striking out the name of the payee and substituting that of the person who
actually discounted the note.
(10) Substituting the address of the maker for the name of a co-maker. 10
B. Immaterial Alterations:

(1) Changing "I promise to pay" to "We promise to pay", where there are two makers.
(2) Adding the word "annual" after the interest clause.
(3) Adding the date of maturity as a marginal notation.
(4) Filling in the date of actual delivery where the makers of a note gave it with the
date in blank, "July ____."
(5) An alteration of the marginal figures of a note where the sum stated in words in
the body remained unchanged.
(6) The insertion of the legal rate of interest where the note had a provision for
"interest at _______ per cent."
(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) Where there was a blank for the place of payment, filling in the blank with the
place desired.
(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) 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) 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:
xxx xxx xxx

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 of 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 MEG.
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 xxx 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 xxx 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 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 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 . . . 13(Emphasis 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:

TO WHOM IT MAY CONCERN:

This is to certify that according to the records of this Office, TCAA PNB Check Mo.
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.
V
e
r
y
t
r
u
l
y
y
o
u
r
s
,
(SGD.) MINRADO C. BATONGHINOG
C
a
s
h
i
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r
I

I
I
1
4

Petitioner claims that even if the author of the certification issued by the Ministry of Education and
Culture (MEG) 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. 16 Absent 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.
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 (Emphasis ours.)
And contrary to the Court of Appeal's 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 inConsolidated 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. 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 [176 SCRA 539]).
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, Bellosillo, Vitug and Hermosisima, Jr., JJ., concur.
Footnotes
1 CA Rollo, p. 28.
2 Rollo, pp. 21-28.
3 Id., at 30-31.
4 Id., at 10-11.
5 The Negotiable Instruments Law of the Philippines was patterned after the draft approved
by the Commissioner on Uniform State Laws in the United States. (Agbayani, Commentaries
and Jurisprudence on the COMMERCIAL LAWS OF THE PHILIPPINES, Vol. 1, p. 99-100.)
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 Paper, 1993 2nd ed., p.
168.
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.
11 Id., at 404-405.
12 Rollo, p. 78.
13 Rollo, pp. 21-28.
14 Rollo, p. 26.

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 . . .
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 )

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 92244 February 9, 1993

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

CAMPOS, JR., J.:

From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447), petitioner, Natividad
Gempesaw, appealed to this Court in a Petition for Review, on the issue of the right of the drawer to
recover from the drawee bank who pays a check with a forged indorsement of the payee, debiting
the same against the drawer's account.
The records show that on January 23, 1985, petitioner filed a Complaint against the private
respondent Philippine Bank of Communications (respondent drawee Bank) for recovery of the
money value of eighty-two (82) checks charged against the petitioner's account with the respondent
drawee Bank on the ground that the payees' indorsements were forgeries. The Regional Trial Court,
Branch CXXVIII of Caloocan City, which tried the case, rendered a decision on November 17, 1987
dismissing the complaint as well as the respondent drawee Bank's counterclaim. On appeal, the
Court of Appeals in a decision rendered on February 22, 1990, affirmed the decision of the RTC on
two grounds, namely (1) that the plaintiff's (petitioner herein) gross negligence in issuing the checks
was the proximate cause of the loss and (2) assuming that the bank was also negligent, the loss
must nevertheless be borne by the party whose negligence was the proximate cause of the loss. On
March 5, 1990, the petitioner filed this petition under Rule 45 of the Rules of Court setting forth the
following as the alleged errors of the respondent Court:1
I
THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE
NEGLIGENCE OF THE DRAWER IS THE PROXIMATE CAUSE OF THE
RESULTING INJURY TO THE DRAWEE BANK, AND THE DRAWER IS
PRECLUDED FROM SETTING UP THE FORGERY OR WANT OF AUTHORITY.
II

THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT FINDING AND

RULING THAT IT IS THE GROSS AND INEXCUSABLE NEGLIGENCE AND
FRAUDULENT ACTS OF THE OFFICIALS AND EMPLOYEES OF THE
RESPONDENT BANK IN FORGING THE SIGNATURE OF THE PAYEES AND THE
WRONG AND/OR ILLEGAL PAYMENTS MADE TO PERSONS, OTHER THAN TO
THE INTENDED PAYEES SPECIFIED IN THE CHECKS, IS THE DIRECT AND
PROXIMATE CAUSE OF THE DAMAGE TO PETITIONER WHOSE SAVING (SIC)
ACCOUNT WAS DEBITED.
III
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT ORDERING
THE RESPONDENT BANK TO RESTORE OR RE-CREDIT THE CHECKING
ACCOUNT OF THE PETITIONER IN THE CALOOCAN CITY BRANCH BY THE
VALUE OF THE EIGHTY-TWO (82) CHECKS WHICH IS IN THE AMOUNT OF
P1,208,606.89 WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery stores located at
Rizal Avenue Extension and at Second Avenue, Caloocan City. Among these groceries are D.G.
Shopper's Mart and D.G. Whole Sale Mart. Petitioner maintains a checking account numbered 1300038-1 with the Caloocan City Branch of the respondent drawee Bank. To facilitate payment of
debts to her suppliers, petitioner draws checks against her checking account with the respondent
bank as drawee. Her customary practice of issuing checks in payment of her suppliers was as
follows: the checks were prepared and filled up as to all material particulars by her trusted
bookkeeper, Alicia Galang, an employee for more than eight (8) years. After the bookkeeper
prepared the checks, the completed checks were submitted to the petitioner for her signature,
together with the corresponding invoice receipts which indicate the correct obligations due and
payable to her suppliers. Petitioner signed each and every check without bothering to verify the
accuracy of the checks against the corresponding invoices because she reposed full and implicit
trust and confidence on her bookkeeper. The issuance and delivery of the checks to the payees
named therein were left to the bookkeeper. Petitioner admitted that she did not make any verification
as to whether or not the checks were delivered to their respective payees. Although the respondent
drawee Bank notified her of all checks presented to and paid by the bank, petitioner did not verify he
correctness of the returned checks, much less check if the payees actually received the checks in
payment for the supplies she received. In the course of her business operations covering a period of
two years, petitioner issued, following her usual practice stated above, a total of eighty-two (82)
checks in favor of several suppliers. These checks were all presented by the indorsees as holders
thereof to, and honored by, the respondent drawee Bank. Respondent drawee Bank correspondingly
debited the amounts thereof against petitioner's checking account numbered 30-00038-1. Most of
the aforementioned checks were for amounts in excess of her actual obligations to the various
payees as shown in their corresponding invoices. To mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of P11,895.23 in
favor of Kawsek Inc. (Exh. A-60), appellant's actual obligation to said payee was only
P895.33 (Exh. A-83); (2) in Check No. 652282 issued on September 18, 1984 in
favor of Senson Enterprises in the amount of P11,041.20 (Exh. A-67) appellant's
actual obligation to said payee was only P1,041.20 (Exh. 7); (3) in Check No. 589092
dated April 7, 1984 for the amount of P11,672.47 in favor of Marchem (Exh. A-61)
appellant's obligation was only P1,672.47 (Exh. B); (4) in Check No. 620450 dated
May 10, 1984 in favor of Knotberry for P11,677.10 (Exh. A-31) her actual obligation

was only P677.10 (Exhs. C and C-1); (5) in Check No. 651862 dated August 9, 1984
in favor of Malinta Exchange Mart for P11,107.16 (Exh. A-62), her obligation was
only P1,107.16 (Exh. D-2); (6) in Check No. 651863 dated August 11, 1984 in favor
of Grocer's International Food Corp. in the amount of P11,335.60 (Exh. A-66), her
obligation was only P1,335.60 (Exh. E and E-1); (7) in Check No. 589019 dated
March 17, 1984 in favor of Sophy Products in the amount of P11,648.00 (Exh. A-78),
her obligation was only P648.00 (Exh. G); (8) in Check No. 589028 dated March 10,
1984 for the amount of P11,520.00 in favor of the Yakult Philippines (Exh. A-73), the
latter's invoice was only P520.00 (Exh. H-2); (9) in Check No. 62033 dated May 23,
1984 in the amount of P11,504.00 in favor of Monde Denmark Biscuit (Exh. A-34),
her obligation was only P504.00 (Exhs. I-1 and I-2). 2
Practically, all the checks issued and honored by the respondent drawee bank were crossed
checks. 3 Aside from the daily notice given to the petitioner by the respondent drawee Bank, the latter
also furnished her with a monthly statement of her transactions, attaching thereto all the cancelled checks
she had issued and which were debited against her current account. It was only after the lapse of more
two (2) years that petitioner found out about the fraudulent manipulations of her bookkeeper.

All the eighty-two (82) checks with forged signatures of the payees were brought to Ernest L. Boon,
Chief Accountant of respondent drawee Bank at the Buendia branch, who, without authority therefor,
accepted them all for deposit at the Buendia branch to the credit and/or in the accounts of Alfredo Y.
Romero and Benito Lam. Ernest L. Boon was a very close friend of Alfredo Y. Romero. Sixty-three
(63) out of the eighty-two (82) checks were deposited in Savings Account No. 00844-5 of Alfredo Y.
Romero at the respondent drawee Bank's Buendia branch, and four (4) checks in his Savings
Account No. 32-81-9 at its Ongpin branch. The rest of the checks were deposited in Account No.
0443-4, under the name of Benito Lam at the Elcao branch of the respondent drawee Bank.
About thirty (30) of the payees whose names were specifically written on the checks testified that
they did not receive nor even see the subject checks and that the indorsements appearing at the
back of the checks were not theirs.
The team of auditors from the main office of the respondent drawee Bank which conducted periodic
inspection of the branches' operations failed to discover, check or stop the unauthorized acts of
Ernest L. Boon. Under the rules of the respondent drawee Bank, only a Branch Manager and no
other official of the respondent drawee bank, may accept a second indorsement on a check for
deposit. In the case at bar, all the deposit slips of the eighty-two (82) checks in question were
initialed and/or approved for deposit by Ernest L. Boon. The Branch Managers of the Ongpin and
Elcao branches accepted the deposits made in the Buendia branch and credited the accounts of
Alfredo Y. Romero and Benito Lam in their respective branches.
On November 7, 1984, petitioner made a written demand on respondent drawee Bank to credit her
account with the money value of the eighty-two (82) checks totalling P1,208.606.89 for having been
wrongfully charged against her account. Respondent drawee Bank refused to grant petitioner's
demand. On January 23, 1985, petitioner filed the complaint with the Regional Trial Court.
This is not a suit by the party whose signature was forged on a check drawn against the drawee
bank. The payees are not parties to the case. Rather, it is the drawer, whose signature is genuine,
who instituted this action to recover from the drawee bank the money value of eighty-two (82)
checks paid out by the drawee bank to holders of those checks where the indorsements of the
payees were forged. How and by whom the forgeries were committed are not established on the
record, but the respective payees admitted that they did not receive those checks and therefore

never indorsed the same. The applicable law is the Negotiable Instruments Law 4 (heretofore referred
to as the NIL). Section 23 of the NIL provides:

When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against any
party thereto, can be acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded from setting up the
forgery or want of authority.
Under the aforecited provision, forgery is a real or absolute defense by the party whose
signature is forged. A party whose signature to an instrument was forged was never a party
and never gave his consent to the contract which gave rise to the instrument. Since his
signature does not appear in the instrument, he cannot be held liable thereon by anyone, not
even by a holder in due course. Thus, if a person's signature is forged as a maker of a
promissory note, he cannot be made to pay because he never made the promise to pay. Or
where a person's signature as a drawer of a check is forged, the drawee bank cannot charge
the amount thereof against the drawer's account because he never gave the bank the order
to pay. And said section does not refer only to the forged signature of the maker of a
promissory note and of the drawer of a check. It covers also a forged indorsement, i.e., the
forged signature of the payee or indorsee of a note or check. Since under said provision a
forged signature is "wholly inoperative", no one can gain title to the instrument through such
forged indorsement. Such an indorsement prevents any subsequent party from acquiring any
right as against any party whose name appears prior to the forgery. Although rights may
exist between and among parties subsequent to the forged indorsement, not one of them
can acquire rights against parties prior to the forgery. Such forged indorsement cuts off the
rights of all subsequent parties as against parties prior to the forgery. However, the law
makes an exception to these rules where a party is precluded from setting up forgery as a
defense.
As a matter of practical significance, problems arising from forged indorsements of checks may
generally be broken into two types of cases: (1) where forgery was accomplished by a person not
associated with the drawer for example a mail robbery; and (2) where the indorsement was
forged by an agent of the drawer. This difference in situations would determine the effect of the
drawer's negligence with respect to forged indorsements. While there is no duty resting on the
depositor to look for forged indorsements on his cancelled checks in contrast to a duty imposed
upon him to look for forgeries of his own name, a depositor is under a duty to set up an accounting
system and a business procedure as are reasonably calculated to prevent or render difficult the
forgery of indorsements, particularly by the depositor's own employees. And if the drawer (depositor)
learns that a check drawn by him has been paid under a forged indorsement, the drawer is under
duty promptly to report such fact to the drawee bank. 5For his negligence or failure either to discover or
to report promptly the fact of such forgery to the drawee, the drawer loses his right against the drawee
who has debited his account under a forged indorsement. 6 In other words, he is precluded from using
forgery as a basis for his claim for re-crediting of his account.

In the case at bar, petitioner admitted that the checks were filled up and completed by her trusted
employee, Alicia Galang, and were given to her for her signature. Her signing the checks made the
negotiable instrument complete. Prior to signing the checks, there was no valid contract yet.
Every contract on a negotiable instrument is incomplete and revocable until delivery of the
instrument to the payee for the purpose of giving effect thereto. 7 The first delivery of the instrument,
complete in form, to the payee who takes it as a holder, is called issuance of the instrument. 8 Without the

initial delivery of the instrument from the drawer of the check to the payee, there can be no valid and
binding contract and no liability on the instrument.

Petitioner completed the checks by signing them as drawer and thereafter authorized her employee
Alicia Galang to deliver the eighty-two (82) checks to their respective payees. Instead of issuing the
checks to the payees as named in the checks, Alicia Galang delivered them to the Chief Accountant
of the Buendia branch of the respondent drawee Bank, a certain Ernest L. Boon. It was established
that the signatures of the payees as first indorsers were forged. The record fails to show the identity
of the party who made the forged signatures. The checks were then indorsed for the second time
with the names of Alfredo Y. Romero and Benito Lam, and were deposited in the latter's accounts as
earlier noted. The second indorsements were all genuine signatures of the alleged holders. All the
eighty-two (82) checks bearing the forged indorsements of the payees and the genuine second
indorsements of Alfredo Y. Romero and Benito Lam were accepted for deposit at the Buendia
branch of respondent drawee Bank to the credit of their respective savings accounts in the Buendia,
Ongpin and Elcao branches of the same bank. The total amount of P1,208,606.89, represented by
eighty-two (82) checks, were credited and paid out by respondent drawee Bank to Alfredo Y.
Romero and Benito Lam, and debited against petitioner's checking account No. 13-00038-1,
Caloocan branch.
As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot
charge the drawer's account for the amount of said check. An exception to this rule is where the
drawer is guilty of such negligence which causes the bank to honor such a check or checks. If a
check is stolen from the payee, it is quite obvious that the drawer cannot possibly discover the
forged indorsement by mere examination of his cancelled check. This accounts for the rule that
although a depositor owes a duty to his drawee bank to examine his cancelled checks for forgery of
his own signature, he has no similar duty as to forged indorsements. A different situation arises
where the indorsement was forged by an employee or agent of the drawer, or done with the active
participation of the latter. Most of the cases involving forgery by an agent or employee deal with the
payee's indorsement. The drawer and the payee often time shave business relations of long
standing. The continued occurrence of business transactions of the same nature provides the
opportunity for the agent/employee to commit the fraud after having developed familiarity with the
signatures of the parties. However, sooner or later, some leak will show on the drawer's books. It will
then be just a question of time until the fraud is discovered. This is specially true when the agent
perpetrates a series of forgeries as in the case at bar.
The negligence of a depositor which will prevent recovery of an unauthorized payment is based on
failure of the depositor to act as a prudent businessman would under the circumstances. In the case
at bar, the petitioner relied implicitly upon the honesty and loyalty of her bookkeeper, and did not
even verify the accuracy of amounts of the checks she signed against the invoices attached thereto.
Furthermore, although she regularly received her bank statements, she apparently did not carefully
examine the same nor the check stubs and the returned checks, and did not compare them with the
same invoices. Otherwise, she could have easily discovered the discrepancies between the checks
and the documents serving as bases for the checks. With such discovery, the subsequent forgeries
would not have been accomplished. It was not until two years after the bookkeeper commenced her
fraudulent scheme that petitioner discovered that eighty-two (82) checks were wrongfully charged to
her account, at which she notified the respondent drawee bank.
It is highly improbable that in a period of two years, not one of Petitioner's suppliers complained of
non-payment. Assuming that even one single complaint had been made, petitioner would have been
duty-bound, as far as the respondent drawee Bank was concerned, to make an adequate
investigation on the matter. Had this been done, the discrepancies would have been discovered,
sooner or later. Petitioner's failure to make such adequate inquiry constituted negligence which
resulted in the bank's honoring of the subsequent checks with forged indorsements. On the other

hand, since the record mentions nothing about such a complaint, the possibility exists that the
checks in question covered inexistent sales. But even in such a case, considering the length of a
period of two (2) years, it is hard to believe that petitioner did not know or realize that she was
paying more than she should for the supplies she was actually getting. A depositor may not sit idly
by, after knowledge has come to her that her funds seem to be disappearing or that there may be a
leak in her business, and refrain from taking the steps that a careful and prudent businessman would
take in such circumstances and if taken, would result in stopping the continuance of the fraudulent
scheme. If she fails to take steps, the facts may establish her negligence, and in that event, she
would be estopped from recovering from the bank. 9
One thing is clear from the records that the petitioner failed to examine her records with
reasonable diligence whether before she signed the checks or after receiving her bank statements.
Had the petitioner examined her records more carefully, particularly the invoice receipts, cancelled
checks, check book stubs, and had she compared the sums written as amounts payable in the
eighty-two (82) checks with the pertinent sales invoices, she would have easily discovered that in
some checks, the amounts did not tally with those appearing in the sales invoices. Had she noticed
these discrepancies, she should not have signed those checks, and should have conducted an
inquiry as to the reason for the irregular entries. Likewise had petitioner been more vigilant in going
over her current account by taking careful note of the daily reports made by respondent drawee
Bank in her issued checks, or at least made random scrutiny of cancelled checks returned by
respondent drawee Bank at the close of each month, she could have easily discovered the fraud
being perpetrated by Alicia Galang, and could have reported the matter to the respondent drawee
Bank. The respondent drawee Bank then could have taken immediate steps to prevent further
commission of such fraud. Thus, petitioner's negligence was the proximate cause of her loss. And
since it was her negligence which caused the respondent drawee Bank to honor the forged checks
or prevented it from recovering the amount it had already paid on the checks, petitioner cannot now
complain should the bank refuse to recredit her account with the amount of such checks. 10 Under
Section 23 of the NIL, she is now precluded from using the forgery to prevent the bank's debiting of her
account.

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

Petitioner argues that respondent drawee Bank should not have honored the checks because they
were crossed checks. Issuing a crossed check imposes no legal obligation on the drawee not to
honor such a check. It is more of a warning to the holder that the check cannot be presented to the
drawee bank for payment in cash. Instead, the check can only be deposited with the payee's bank
which in turn must present it for payment against the drawee bank in the course of normal banking
transactions between banks. The crossed check cannot be presented for payment but it can only be
deposited and the drawee bank may only pay to another bank in the payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank from having checks with
more than one indorsement. The banking rule banning acceptance of checks for deposit or cash
payment with more than one indorsement unless cleared by some bank officials does not invalidate
the instrument; neither does it invalidate the negotiation or transfer of the said check. In effect, this
rule destroys the negotiability of bills/checks by limiting their negotiation by indorsement of only the

payee. Under the NIL, the only kind of indorsement which stops the further negotiation of an
instrument is a restrictive indorsement which prohibits the further negotiation thereof.
Sec. 36. When indorsement restrictive. An indorsement is restrictive which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written in
express words at the back of the instrument, so that any subsequent party may be forewarned that
ceases to be negotiable. However, the restrictive indorsee acquires the right to receive payment and
bring any action thereon as any indorser, but he can no longer transfer his rights as such indorsee
where the form of the indorsement does not authorize him to do so. 12
Although the holder of a check cannot compel a drawee bank to honor it because there is no privity
between them, as far as the drawer-depositor is concerned, such bank may not legally refuse to
honor a negotiable bill of exchange or a check drawn against it with more than one indorsement if
there is nothing irregular with the bill or check and the drawer has sufficient funds. The drawee
cannot be compelled to accept or pay the check by the drawer or any holder because as a drawee,
he incurs no liability on the check unless he accepts it. But the drawee will make itself liable to a suit
for damages at the instance of the drawer for wrongful dishonor of the bill or check.
Thus, it is clear that under the NIL, petitioner is precluded from raising the defense of forgery by
reason of her gross negligence. But under Section 196 of the NIL, any case not provided for in the
Act shall be governed by the provisions of existing legislation. Under the laws of quasi-delict, she
cannot point to the negligence of the respondent drawee Bank in the selection and supervision of its
employees as being the cause of the loss because negligence is the proximate cause thereof and
under Article 2179 of the Civil Code, she may not be awarded damages. However, under Article
1170 of the same Code the respondent drawee Bank may be held liable for damages. The article
provides
Those who in the performance of their obligations are guilty of fraud, negligence or
delay, and those who in any manner contravene the tenor thereof, are liable for
damages.
There is no question that there is a contractual relation between petitioner as depositor (obligee) and
the respondent drawee bank as the obligor. In the performance of its obligation, the drawee bank is
bound by its internal banking rules and regulations which form part of any contract it enters into with
any of its depositors. When it violated its internal rules that second endorsements are not to be
accepted without the approval of its branch managers and it did accept the same upon the mere
approval of Boon, a chief accountant, it contravened the tenor of its obligation at the very least, if it
were not actually guilty of fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not discover the irregularity with respect
to the acceptance of checks with second indorsement for deposit even without the approval of the
branch manager despite periodic inspection conducted by a team of auditors from the main office
constitutes negligence on the part of the bank in carrying out its obligations to its depositors. Article
1173 provides

The fault or negligence of the obligor consists in the omission of that diligence which
is required by the nature of the obligation and corresponds with the circumstance of
the persons, of the time and of the place. . . .
We hold that banking business is so impressed with public interest where the trust and confidence of
the public in general is of paramount importance such that the appropriate standard of diligence
must be a high degree of diligence, if not the utmost diligence. Surely, respondent drawee Bank
cannot claim it exercised such a degree of diligence that is required of it. There is no way We can
allow it now to escape liability for such negligence. Its liability as obligor is not merely vicarious but
primary wherein the defense of exercise of due diligence in the selection and supervision of its
employees is of no moment.
Premises considered, respondent drawee Bank is adjudged liable to share the loss with the
petitioner on a fifty-fifty ratio in accordance with Article 172 which provides:
Responsibility arising from negligence in the performance of every kind of obligation
is also demandable, but such liability may be regulated by the courts according to the
circumstances.
With the foregoing provisions of the Civil Code being relied upon, it is being made clear that the
decision to hold the drawee bank liable is based on law and substantial justice and not on mere
equity. And although the case was brought before the court not on breach of contractual obligations,
the courts are not precluded from applying to the circumstances of the case the laws pertinent
thereto. Thus, the fact that petitioner's negligence was found to be the proximate cause of her loss
does not preclude her from recovering damages. The reason why the decision dealt on a discussion
on proximate cause is due to the error pointed out by petitioner as allegedly committed by the
respondent court. And in breaches of contract under Article 1173, due diligence on the part of the
defendant is not a defense.
PREMISES CONSIDERED, the case is hereby ordered REMANDED to the trial court for the
reception of evidence to determine the exact amount of loss suffered by the petitioner, considering
that she partly benefited from the issuance of the questioned checks since the obligation for which
she issued them were apparently extinguished, such that only the excess amount over and above
the total of these actual obligations must be considered as loss of which one half must be paid by
respondent drawee bank to herein petitioner.
SO ORDERED.
Narvasa, C.J., Feliciano, Regalado and Nocon, JJ., concur.

# Footnotes
* Penned by Associate Justice Celso L. Magsino, Associate Justices Nathanael P.
De Pano, Jr. and Cezar D. Francisco, concurring.
1 Rollo, p.11.
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. 65, 30 L.R.A., N.S. 697.
4 Act No. 2031, enacted on February 3, 1911.
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 Savings Bank, 252 Mich. 163,
233 N.W. 185 (1930); C.E. Erickson Co. vs. Iowa Nat. Bank 211 Iowa 495, 230 N.W.
342 (1930).
7 NIL, Sec. 16.
8 Ibid., Sec. 191, par. 10.
9 Detroit Piston Ring Co. vs. Wayne County & Home Savings Bank, supra, note 3.
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. Iowa National Bank, supra, note 3.
11 43 Phil. 678 (1922).
12 NIL, Sec. 37.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 139130

November 27, 2002

RAMON K. ILUSORIO, petitioner,

vs.
HON. COURT OF APPEALS, and THE MANILA BANKING CORPORATION, respondents.
DECISION
QUISUMBING, J.:
This petition for review seeks to reverse the decision1 promulgated 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 Makati, 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. 06-09037-0. 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 petitioners statement
that his signatures in the checks were forged.4 Mr. Razons 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 banks
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 signatures 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.
Defendants 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 petitioners 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:
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 FILED A

CRIMINAL COMPLAINT FOR ESTAFA THRU FALSIFICATION OF COMMERCIAL DOCUMENTS

AGAINST KATHERINE EUGENIO USING THE AFFIDAVIT OF PETITIONER STATING THAT HIS
SIGNATURES WERE FORGED AS PART OF THE AFFIDAVIT-COMPLAINT.9
B. THE COURT OF APPEALS ERRED IN NOT APPLYING SEC. 23, NEGOTIABLE
INSTRUMENTS LAW.10
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
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
petitioners 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 payees 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 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
petitioners 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 plaintiffs 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 appellants 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 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, petitioners 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 banks employees in the present case did not have a hint
as to Eugenios 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 TMBCs employees exercised due diligence before
encashing the checks. Its verifiers first verified the drawers 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 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 courts assessment of facts anchored upon the evidence on record.

Petitioners 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 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 banks 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 had 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 plaintiffs
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.
Petitioners 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 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 Banks personnel diligently performed
their duties, having compared the signature in the checks from the specimen signatures on record
and satisfied themselves that it was petitioners.
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 petitioners 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.

Costs against petitioner.

SO ORDERED.
Bellosillo, Acting C.J., (Chairman), Mendoza, Austria-Martinez, and Callejo, Sr., JJ., concur.

Footnotes

Rollo, pp. 26-30.

Also spelled as "Catherine" in some parts of the record.

Rollo, p. 26.

TSN, October 6, 1983, p. 58.

Rollo, pp. 108-109.

Id. at 27.

Ibid.

Id. at 30.

Id. at 10.

10

Id. at 14.

11

Id. at 15.

12

Id. at 17.

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.

15

Id. at 28.

16

Id. at 29.

17

Bank of the Philippine Islands vs. Court of Appeals, 326 SCRA 641, 657 (2000).

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.

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).

25

Binay vs. Sandiganbayan, 316 SCRA 65, 100 (1999).

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.
26

27

Rollo, p. 9.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. L-40796 July 31, 1975

REPUBLIC BANK, plaintiff-appellee,
vs.
MAURICIA T. EBRADA, defendant-appellant.
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
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 forgery 2 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. That they admit their respective capacities to sue and be sued;
2. That on January 15, 1963 the Treasury of the Philippines issued its Check No. BP508060, payable to the order of one MARTIN LORENZO, in the sum of P1,246.08,
and drawn on the Republic Bank, plaintiff herein, which check will be marked as
Exhibit "A" for the plaintiff;
3. That the back side of aforementioned check bears the following signatures, in this
order:
1) MARTIN LORENZO;
2) RAMON R. LORENZO;
3) DELIA DOMINGUEZ; and
4) MAURICIA T. EBRADA;
4. That the aforementioned check was delivered to the defendant MAURICIA T. EBRADA by the
Third-Party defendant and Fourth-Party plaintiff ADELAIDA DOMINGUEZ, for the purpose of
encashment;
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;
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 fourthparty defendant JUSTINA TINIO on the same date, as evidenced by the receipt
signed by her which will be marked as Exhibit "1-Dominguez"; and
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 which reads as follows:
WHEREFORE, the Court renders judgment ordering the defendant Mauricia T.
Ebrada to pay the plaintiff the amount of ONE THOUSAND TWO FORTY-SIX 08/100
(P1,246.08), with interest at the legal rate from the filing of the complaint on June 16,
1966, until fully paid, plus the costs in both instances against Mauricia T. Ebrada.

The right of Mauricia T. Ebrada to file whatever claim she may have 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.
SO ORDERED.
In her appeal, defendant-appellant presses that the lower court erred:
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 DECEASED FOR 11- YEARS AND
THAT THE APPELLANT DID NOT BENEFIT FROM ENCASHING SAID CHECK.
From the stipulation of facts it is admitted that the check in question was delivered to defendantappellant by Adelaida Dominguez for the purpose of encashment and that her signature was affixed
on said check when she cashed it with the plaintiff Bank. Likewise it is admitted that defendantappellant was the last indorser of the said check. As such indorser, she was supposed to have
warranted that she has good title to said check; for under Section 65 of the Negotiable Instruments
Law: 6
Every person negotiating an instrument by delivery or by qualified indorsement,
warrants:
(a) That the instrument is genuine and in all respects what it purports to be.
(b) That she has good title to it.
xxx xxx xxx
and under Section 65 of the same Act:
Every indorser who indorses without qualification warrants to all subsequent holders
in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next
preceding sections;
(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 dead 7 almost 11 years before the check in question was issued by
the Bureau of Treasury. Under action 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 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 signature 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 affect, 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 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. 9 The 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 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 cheek 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 it 10 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 title 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 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.

Footnotes
1 ROA, p. 2.
2 ROA, p. 2.
3 ROA, p. 2.
4 Exhibit "F-l".
5 ROA, P. 5.
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).
8 Gloucester Bank v. Salem Bank, 17 Mass. 33; Bank of U.S. Bank of Georgia, 10
Wheat 333, 6
L. Ed. 384; National 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 v. Bank, 30 Ill. 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. 628, 64 Am. Dec. 610; Bank v. Bank, 58 Ohio
St. 207, 50 N.E. 723; Bank v. Bank, 22 Neb. 769, 36 N.W. 289, 3 Am. St. Rep. 294;
Canadian Bank v. Bingham, 20 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.
10 Sec. 65, par. (b). Negotiable Instruments Law (Act 2031). Every person
negotiating an instrument by delivery or by a qualified instrument warrants:
(a) ...
(b) That he has a good title to it.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 117857

February 2, 2001

LUIS S. WONG, petitioner,

vs.
COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents.
QUISUMBING, J.:
For review on certiorari is the decision dated October 28, 1994 of the Court of Appeals in C.A. G.R.
CR 118561which affirmed the decision of the Regional Trial Court of Cebu City, Branch 17,
convicting petitioner on three (3) counts of Batas Pambansa Blg. 22 (the Bouncing Checks Law)
violations, and sentencing him to imprisonment of four (4) months for each count, and to pay private
respondent the amounts of P5,500.00, P6,410.00 and P3,375.00, respectively, corresponding to the
value of the checks involved, with the legal rate of interest from the time of filing of the criminal
charges, as well as to pay the costs.
1w phi 1.nt

The factual antecedents of the case are as follows:

Petitioner Wong was an agent of Limtong Press. Inc. (LPI), a manufacturer of calendars. LPI would
print sample calendars, then give them to agents to present to customers. The agents would get the
purchase orders of customers and forward them to LPI. After printing the calendars, LPI would ship
the calendars directly to the customers. Thereafter, the agents would come around to collect the
payments. Petitioner, however, had a history of unremitted collections, which he duly acknowledged
in a confirmation receipt he co-signed with his wife.2 Hence, petitioners customers were required to
issue postdated checks before LPI would accept their purchase orders.
In early December 1985, Wong issued six (6) postdated checks totaling P18,025.00, all dated
December 30, 1985 and drawn payable to the order of LPI, as follows:
(1) Allied Banking Corporation (ABC) Check No. 660143464-C for P6,410.00 (Exh. "B");
(2) ABC Check No. 660143460-C for P540.00 (Exh. "C");
(3) ABC Check No. PA660143451-C for P5,500.00 (Exh. "D");
(4) ABC Check No. PA660143465-C for P1,100.00 (Exh. "E");
(5) ABC Check No. PA660143463-C for P3,375.00 (Exh. "F");
(6) ABC Check No. PA660143452-C for P1,100.00 (Exh. "G").
These checks were initially intended to guarantee the calendar orders of customers who failed to
issue post-dated checks. However, following company policy, LPI refused to accept the checks as
guarantees. Instead, the parties agreed to apply the checks to the payment of petitioners unremitted
collections for 1984 amounting to P18,077.07.3LPI waived the P52.07 difference.

Before the maturity of the checks, petitioner prevailed upon LPI not to deposit the checks and
promised to replace them within 30 days. However, petitioner reneged on his promise. Hence, on
June 5, 1986, LPI deposited the checks with Rizal Commercial Banking Corporation (RCBC). The
checks were returned for the reason "account closed." The dishonor of the checks was evidenced by
the RCBC return slip.
On June 20, 1986, complainant through counsel notified the petitioner of the dishonor. Petitioner
failed to make arrangements for payment within five (5) banking days.
On November 6, 1987, petitioner was charged with three (3) counts of violation of B.P. Blg.
224 under three separate Informations for the three checks amounting to P5,500.00, P3,375.00, and
P6,410.00.5
The Information in Criminal Case No. CBU-12055 reads as follows:6
That on or about the 30th day of December, 1985 and for sometime subsequent thereto, in
the City of Cebu, Philippines, and within the jurisdiction of this Honorable Court, the said
accused, knowing at the time of issue of the check she/he does not have sufficient funds in
or credit with the drawee bank for the payment of such check in full upon its presentment,
with deliberate intent, with intent of gain and of causing damage, did then and there issue,
make or draw Allied Banking Corporation Check No. 660143451 dated 12-30-85 in the
amount of P5,500.00 payable to Manuel T. Limtong which check was issued in payment of
an obligation of said accused, but when the said check was presented with said bank, the
same was dishonored for reason ACCOUNT CLOSED and despite notice and demands
made to redeem or make good said check, said accused failed and refused, and up to the
present time still fails and refuses to do so, to the damage and prejudice of said Manuel T.
Limtong in the amount of P5,500.00 Philippine Currency.
Contrary to law.
Petitioner was similarly charged in Criminal Case No. 12057 for ABC Check No. 660143463 in the
amount of P3,375.00, and in Criminal Case No. 12058 for ABC Check No. 660143464 for
P6,410.00. Both cases were raffled to the same trial court.
Upon arraignment, Wong pleaded not guilty. Trial ensued.
Manuel T. Limtong, general manager of LPI, testified on behalf of the company, Limtong averred that
he refused to accept the personal checks of petitioner since it was against company policy to accept
personal checks from agents. Hence, he and petitioner simply agreed to use the checks to pay
petitioners unremitted collections to LPI. According to Limtong, a few days before maturity of the
checks, Wong requested him to defer the deposit of said checks for lack of funds. Wong promised to
replace them within thirty days, but failed to do so. Hence, upon advice of counsel, he deposited the
checks which were subsequently returned on the ground of "account closed."
The version of the defense is that petitioner issued the six (6) checks to guarantee the 1985
calendar bookings of his customers. According to petitioner, he issued the checks not as payment
for any obligation, but to guarantee the orders of his customers. In fact, the face value of the six (6)
postdated checks tallied with the total amount of the calendar orders of the six (6) customers of the
accused, namely, Golden Friendship Supermarket, Inc. (P6,410.00), New Society Rice and Corn Mill
(P5,500.00), Cuesta Enterprises (P540.00), Pelrico Marketing (P1,100.00), New Asia Restaurant
P3,375.00), and New China Restaurant (P1,100.00). Although these customers had already paid
their respective orders, petitioner claimed LPI did not return the said checks to him.

On August 30, 1990, the trial court issued its decision, disposing as follows:7
"Wherefore, premises considered, this Court finds the accused Luis S. Wong GUILTY
beyond reasonable doubt of the offense of Violations of Section 1 of Batas Pambansa Bilang
22 in THREE (3) Counts and is hereby sentenced to serve an imprisonment of FOUR (4)
MONTHS for each count; to pay Private Complainant Manuel T. Limtong the sums of Five
Thousand Five Hundred (P5,500.00) Pesos, Six Thousand Four Hundred Ten (P6,410.00)
Pesos and Three Thousand Three Hundred Seventy-Five (P3,375.00) Pesos corresponding
to the amounts indicated in Allied Banking Checks Nos. 660143451, 66[0]143464 and
660143463 all issued on December 30, 1985 together with the legal rate of interest from the
time of the filing of the criminal charges in Court and pay the costs."8
Petitioner appealed his conviction to the Court of Appeals. On October 28, 1994, it affirmed the trial
courts decisionin toto.9
Hence, the present petition.10 Petitioner raises the following questions of law -11
May a complainant successfully prosecute a case under BP 22 --- if there is no more
consideration or price or value ever the binding tie that it is in contracts in general and in
negotiable instruments in particular behind the checks? if even before he deposits the
checks, he has ceased to be a holder for value because the purchase orders (POs)
guaranteed by the checks were already paid?
Given the fact that the checks lost their reason for being, as above stated, is it not then the
duty of complainant knowing he is no longer a holder for value to return the checks and
not to deposit them ever? Upon what legal basis then may such a holder deposit them and
get paid twice?
Is petitioner, as the drawer of the guarantee checks which lost their reason for being, still
bound under BP 22 to maintain his account long after 90 days from maturity of the checks?
May the prosecution apply the prima facie presumption of "knowledge of lack of funds"
against the drawer if the checks were belatedly deposited by the complainant 157 days after
maturity, or will it be then necessary for the prosecution to show actual proof of "lack of
funds" during the 90-day term?
Petitioner insists that the checks were issued as guarantees for the 1985 purchase orders (POs) of
his customers. He contends that private respondent is not a "holder for value" considering that the
checks were deposited by private respondent after the customers already paid their orders. Instead
of depositing the checks, private respondent should have returned the checks to him. Petitioner
further assails the credibility of complainant considering that his answers to cross-examination
questions included: "I cannot recall, anymore" and "We have no more record."
In his Comment,12 the Solicitor General concedes that the checks might have been initially intended
by petitioner to guarantee payments due from customers, but upon the refusal of LPI to accept said
personal checks per company policy, the parties had agreed that the checks would be used to pay
off petitioners unremitted collections. Petitioners contention that he did not demand the return of the
checks because he trusted LPIs good faith is contrary to human nature and sound business
practice, according to the Solicitor General.
The issue as to whether the checks were issued merely as guarantee or for payment of petitioners
unremitted collections is a factual issue involving as it does the credibility of witnesses. Said factual

issue has been settled by the trial court and Court of Appeals. Although initially intended to be used
as guarantee for the purchase orders of customers, they found the checks were eventually used to
settle the remaining obligations of petitioner with LPI. Although Manuel Limtong was the sole witness
for the prosecution, his testimony was found sufficient to prove all the elements of the offense
charged.13 We find no cogent reason to depart from findings of both the trial and appellate courts. In
cases elevated from the Court of Appeals, our review is confined to allege errors of law. Its findings
of fact are generally conclusive. Absent any showing that the findings by the respondent court are
entirely devoid of any substantiation on record, the same must stand.14 The lack of accounting
between the parties is not the issue in this case. As repeatedly held, this Court is not a trier of
facts.15 Moreover, in Llamado v. Court of Appeals,16 we held that "[t]o determine the reason for which
checks are issued, or the terms and conditions for their issuance, will greatly erode the faith the
public reposes in the stability and commercial value of checks as currency substitutes, and bring
about havoc in trade and in banking communities. So what the law punishes is the issuance of a
bouncing check and not the purpose for which it was issued nor the terms and conditions relating to
its issuance. The mere act of issuing a worthless check is malum prohibitum." Nothing herein
persuades us to hold otherwise.
The only issue for our resolution now is whether or not the prosecution was able to establish beyond
reasonable doubt all the elements of the offense penalized under B.P. Blg. 22.
There are two (2) ways of violating B.P. Blg. 22: (1) by making or drawing and issuing a check to
apply on account or for value knowing at the time of issue that the check is not sufficiently funded;
and (2) by having sufficient funds in or credit with the drawee bank at the time of issue but failing to
keep sufficient funds therein or credit with said bank to cover the full amount of the check when
presented to the drawee bank within a period of ninety (90) days.17
The elements of B.P. Blg. 22 under the first situation, pertinent to the present case, are:18
"(1) The making, drawing and issuance of any check to apply for account or for value;
(2) The knowledge of the maker, drawer, or issuer that at the time of issue he does not have
sufficient funds in or credit with the drawee bank for the payment of such check in full upon
its presentment; and
(3) The subsequent dishonor of the check by the drawee bank for insufficiency of funds or
credit or dishonor for the same reason had not the drawer, without any valid cause, ordered
the bank to stop payment."
Petitioner contends that the first element does not exist because the checks were not issued to apply
for account or for value. He attempts to distinguish his situation from the usual "cut-and-dried" B.P.
22 case by claiming that the checks were issued as guarantee and the obligations they were
supposed to guarantee were already paid. This flawed argument has no factual basis, the RTC and
CA having both ruled that the checks were in payment for unremitted collections, and not as
guarantee. Likewise, the argument has no legal basis, for what B.P. Blg. 22 punishes is the issuance
of a bouncing check and not the purpose for which it was issued nor the terms and conditions
relating to its issuance.19
As to the second element, B.P. Blg. 22 creates a presumption juris tantum that the second
element prima facieexists when the first and third elements of the offense are present.20 Thus, the
makers knowledge is presumed from the dishonor of the check for insufficiency of funds.21

Petitioner avers that since the complainant deposited the checks on June 5, 1986, or 157 days after
the December 30, 1985 maturity date, the presumption of knowledge of lack of funds under Section
2 of B.P. Blg. 22 should not apply to him. He further claims that he should not be expected to keep
his bank account active and funded beyond the ninety-day period.
Section 2 of B.P. Blg. 22 provides:
Evidence of knowledge of insufficient funds. 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, when presented within ninety (90) days from the date of the check, shall be prima
facie evidence of knowledge of such insufficiency of funds or credit unless such maker or
drawer pays the holder thereof the amount due thereon, 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.
An essential element of the offense is "knowledge" on the part of the maker or drawer of the check of
the insufficiency of his funds in or credit with the bank to cover the check upon its presentment.
Since this involves a state of mind difficult to establish, the statute itself creates a prima
facie presumption of such knowledge where payment of the check "is refused by the drawee
because of insufficient funds in or credit with such bank when presented within ninety (90) days from
the date of the check." To mitigate the harshness of the law in its application, the statute provides
that such presumption shall not arise if within five (5) banking days from receipt of the notice of
dishonor, the maker or drawer makes arrangements for payment of the check by the bank or pays
the holder the amount of the check.22
Contrary to petitioners assertions, nowhere in said provision does the law require a maker to
maintain funds in his bank account for only 90 days. Rather, the clear import of the law is to
establish a prima facie presumption of knowledge of such insufficiency of funds under the following
conditions (1) presentment within 90 days from date of the check, and (2) the dishonor of the check
and failure of the maker to make arrangements for payment in full within 5 banking days after notice
thereof. That the check must be deposited within ninety (90) days is simply one of the conditions for
the prima facie presumption of knowledge of lack of funds to arise. It is not an element of the
offense. Neither does it discharge petitioner from his duty to maintain sufficient funds in the account
within a reasonable time thereof. Under Section 186 of the Negotiable Instruments Law, "a check
must be presented for payment within a reasonable time after its issue or the drawer will be
discharged from liability thereon to the extent of the loss caused by the delay." By current banking
practice, a check becomes stale after more than six (6) months,23 or 180 days. Private respondent
herein deposited the checks 157 days after the date of the check. Hence said checks cannot be
considered stale. Only the presumption of knowledge of insufficiency of funds was lost, but such
knowledge could still be proven by direct or circumstantial evidence. As found by the trial court,
private respondent did not deposit the checks because of the reassurance of petitioner that he would
issue new checks. Upon his failure to do so, LPI was constrained to deposit the said checks. After
the checks were dishonored, petitioner was duly notified of such fact but failed to make
arrangements for full payment within five (5) banking days thereof. There is, on record, sufficient
evidence that petitioner had knowledge of the insufficiency of his funds in or credit with the drawee
bank at the time of issuance of the checks. And despite petitioners insistent plea of innocence, we
find no error in the respondent courts affirmance of his conviction by the trial court for violations of
the Bouncing Checks Law.
However, pursuant to the policy guidelines in Administrative Circular No. 12-2000, which took effect
on November 21, 2000, the penalty imposed on petitioner should now be modified to a fine of not
less than but not more than double the amount of the checks that were dishonored.

WHEREFORE, the petition is DENIED. Petitioner Luis S. Wong is found liable for violation of Batas
Pambansa Blg. 22 but the penalty imposed on him is hereby MODIFIED so that the sentence of
imprisonment is deleted. Petitioner is ORDERED to pay a FINE of (1) P6,750.00, equivalent to
double the amount of the check involved in Criminal Case No. CBU-12057, (2) P12,820.00,
equivalent to double the amount of the check involved in Criminal Case No. CBU-12058, and (3)
P11,000.00, equivalent to double the amount of the check involved in Criminal Case No. CBU12055, with subsidiary imprisonment24 in case of insolvency to pay the aforesaid fines. Finally, as
civil indemnity, petitioner is also ordered to pay to LPI the face value of said checks totaling
P18,025.00 with legal interest thereon from the time of filing the criminal charges in court, as well as
to pay the costs.
1w phi1.nt

SO ORDERED.
Bellosillo, Mendoza, Buena, and De Leon, Jr., JJ., concur.
Footnotes:
1

Penned by Associate Justice Alfredo L. Benipayo, concurred in by Justices Ricardo P.

Galvez and Eugenio S. Labitoria.
2

Records, p. 119.

Id. at 130.

Otherwise known as "An Act Penalizing the Making or Drawing and Issuance of a Check
without Sufficient Funds or Credit and for Other Purposes."
5

As to the three (3) remaining checks, petitioner was also charged with violation of B.P. Blg.
22 in the Municipal Trial Court of Cebu City, Branch 3 in Criminal Cases Nos. 25078-R,
25079-R, and 28440-R. The MTC convicted petitioner but on appeal, the Regional Trial
Court of Cebu City, Branch 14, acquitted him for lack of proof beyond reasonable doubt.
6

Records, p. 89.

Rollo, pp. 185-199.

Id. at 198-199.

Id. at 88-108.

10

Id. at 11-86.

11

Id. at 17.

12

Id. at 290-321.

13

Tadeo v. People, 300 SCRA 744, 749 (1998).

14

Bunag Jr. vs. Court of Appeals, 211 SCRA 440, 447-448 (1992); Morales vs. Court of
Appeals, et. al., 197 SCRA 391, 401 (1991).

15

Aleria v. Velez, 298 SCRA 611, 618 (1998).

16

270 SCRA 423, 431 (1997).

17

Section 1, B.P. Blg. 22.

18

Lim v. People, G.R. No. 130038, September 18, 2000, p. 7.

19

Dichaves v. Apalit, A.M. No. MTJ-00-1274, June 8, 2000, p. 6.

20

Sycip Jr. v. Court of Appeals, G.R. No. 125059, March 17, 2000, p. 8.

21

Vaca v. Court of Appeals, 298 SCRA 657, 661 (1998).

22

Lozano v. Martinez, 146 SCRA 323, 330-331 (1986).

23

Pacheco v. Court of Appeals, G.R. No. 126670, December 2, 1999, p. 9.

24

Lim v. People, G.R. No. 130038, September 18, 2000, p. 11.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 141968

February 12, 2001

THE INTERNATIONAL CORPORATE BANK (now UNION BANK OF THE

PHILIPPINES), petitioner,
vs.
SPS. FRANCIS S. GUECO and MA. LUZ E. GUECO, respondents.
KAPUNAN, J.:
The respondent Gueco Spouses obtained a loan from petitioner International Corporate Bank (now
Union Bank of the Philippines) to purchase a car - a Nissan Sentra 1600 4DR, 1989 Model. In
consideration thereof, the Spouses executed promissory notes which were payable in monthly
installments and chattel mortgage over the car to serve as security for the notes.
1w phi 1.nt

The Spouses defaulted in payment of installments. Consequently, the Bank filed on August 7, 1995
a civil action docketed as Civil Case No. 658-95 for "Sum of Money with Prayer for a Writ of
Replevin"1 before the Metropolitan Trial Court of Pasay City, Branch 45.2 On August 25, 1995, Dr.
Francis Gueco was served summons and was fetched by the sheriff and representative of the bank
for a meeting in the bank premises. Desi Tomas, the Bank's Assistant Vice President demanded
payment of the amount of P184,000.00 which represents the unpaid balance for the car loan. After
some negotiations and computation, the amount was lowered to P154,000.00, However, as a result
of the non-payment of the reduced amount on that date, the car was detained inside the bank's
compound.
On August 28, 1995, Dr. Gueco went to the bank and talked with its Administrative Support, Auto
Loans/Credit Card Collection Head, Jefferson Rivera. The negotiations resulted in the further
reduction of the outstanding loan to P150,000.00.
On August 29, 1995, Dr. Gueco delivered a manager's check in amount of P150,000.00 but the car
was not released because of his refusal to sign the Joint Motion to Dismiss. It is the contention of the
Gueco spouses and their counsel that Dr. Gueco need not sign the motion for joint dismissal
considering that they had not yet filed their Answer. Petitioner, however, insisted that the joint motion
to dismiss is standard operating procedure in their bank to effect a compromise and to preclude
future filing of claims, counterclaims or suits for damages.
After several demand letters and meetings with bank representatives, the respondents Gueco
spouses initiated a civil action for damages before the Metropolitan Trial Court of Quezon City,
Branch 33. The Metropolitan Trial Court dismissed the complaint for lack of merit.3
On appeal to the Regional Trial Court, Branch 227 of Quezon City, the decision of the Metropolitan
Trial Court was reversed. In its decision, the RTC held that there was a meeting of the minds
between the parties as to the reduction of the amount of indebtedness and the release of the car but
said agreement did not include the signing of the joint motion to dismiss as a condition sine qua
non for the effectivity of the compromise. The court further ordered the bank:

1. to return immediately the subject car to the appellants in good working condition; Appellee
may deposit the Manager's check - the proceeds of which have long been under the control
of the issuing bank in favor of the appellee since its issuance, whereas the funds have long
been paid by appellants to .secure said Manager's Check, over which appellants have no
control;
2. to pay the appellants the sum of P50,000.00 as moral damages; P25,000.00 as exemplary
damages, and P25,000.00 as attorney's fees, and
3. to pay the cost of suit.
In other respect, the decision of the Metropolitan Trial Court Branch 33 is hereby
AFFIRMED.4
The case was elevated to the Court of Appeals, which on February 17, 2000, issued the assailed
decision, the decretal portion of which reads:
WHEREFORE, premises considered, the petition for review on certiorari is hereby DENIED
and the Decision of the Regional Trial Court of Quezon City, Branch 227, in Civil Case No.
Q-97-31176, for lack of any reversible error, is AFFIRMED in toto. Costs against petitioner.
SO ORDERED.5
The Court of Appeals essentially relied on the respect accorded to the finality of the findings of facts
by the lower court and on the latter's finding of the existence of fraud which constitutes the basis for
the award of damages.
The petitioner comes to this Court by way of petition for review on certiorari under Rule 45 of the
Rules of Court, raising the following assigned errors:
I
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO AGREEMENT
WITH RESPECT TO THE EXECUTION OF THE JOINT MOTION TO DISMISS AS A
CONDITION FOR THE COMPROMISE AGREEMENT.
II
THE COURT OF APPEALS ERRED IN GRANTING MORAL AND EXEMPLARY DAMAGES
AND ATTORNEY'S FEES IN FAVOR OF THE RESPONDENTS.
III
THE COURT OF APPEALS ERRED IN HOLDING THAT THE PETITIONER RETURN THE
SUBJECT CAR TO THE RESPONDENTS, WITHOUT MAKING ANY PROVISION FOR THE
ISSUANCE OF THE NEW MANAGER'S/CASHIER'S CHECK BY THE RESPONDENTS IN
FAVOR OF THE PETITIONER IN LIEU OF THE ORIGINAL CASHIER'S CHECK THAT
ALREADY BECAME STALE.6
As to the first issue, we find for the respondents. The issue as to what constitutes the terms of the
oral compromise or any subsequent novation is a question of fact that was resolved by the Regional

Trial Court and the Court of Appeals in favor of respondents. It is well settled that the findings of fact
of the lower court, especially when affirmed by the Court of Appeals, are binding upon this
Court.7 While there are exceptions to this rule,8 the present case does not fall under anyone of them,
the petitioner's claim to the contrary, notwithstanding.
Being an affirmative allegation, petitioner has the burden of evidence to prove his claim that the oral
compromise entered into by the parties on August 28, 1995 included the stipulation that the parties
would jointly file a motion to dismiss. This petitioner failed to do. Notably, even the Metropolitan Trial
Court, while ruling in favor of the petitioner and thereby dismissing the complaint, did not make a
factual finding that the compromise agreement included the condition of the signing of a joint motion
to dismiss.
The Court of Appeals made the factual findings in this wise:
In support of its claim, petitioner presented the testimony of Mr. Jefferson Rivera who related
that respondent Dr. Gueco was aware that the signing of the draft of the Joint Motion to
Dismiss was one of the conditions set by the bank for the acceptance of the reduced amount
of indebtedness and the release of the car. (TSN, October 23, 1996, pp. 17-21, Rollo, pp. 18,
5). Respondents, however, maintained that no such condition was ever discussed during
their meeting of August 28, 1995 (Rollo, p. 32).
The trial court, whose factual findings are entitled to respect since it has the 'opportunity to
directly observe the witnesses and to determine by their demeanor on the stand the
probative value of their testimonies' (People vs. Yadao, et al. 216 SCRA 1, 7 [1992]), failed
to make a categorical finding on the issue. In dismissing the claim of damages of the
respondents, it merely observed that respondents are not entitled to indemnity since it was
their unjustified reluctance to sign of the Joint Motion to Dismiss that delayed the release of
the car. The trial court opined, thus:
'As regards the third issue, plaintiffs' claim for damages is unavailing. First, the
plaintiffs could have avoided the renting of another car and could have avoided this
litigation had he signed the Joint Motion to Dismiss. While it is true that herein
defendant can unilaterally dismiss the case for collection of sum of money with
replevin, it is equally true that there is nothing wrong for the plaintiff to affix his
signature in the Joint Motion to Dismiss, for after all, the dismissal of the case against
him is for his own good and benefit. In fact, the signing of the Joint Motion to Dismiss
gives the plaintiff three (3) advantages. First, he will recover his car. Second, he will
pay his obligation to the bank on its reduced amount of P150,000.00 instead of its
original claim of P184,985.09. And third, the case against him will be dismissed.
Plaintiffs, likewise, are not entitled to the award of moral damages and exemplary
damages as there is no showing that the defendant bank acted fraudulently or in bad
faith.' (Rollo, p. 15)
The Court has noted, however, that the trial court, in its findings of facts, clearly indicated
that the agreement of the parties on August 28, 1995 was merely for the lowering of the
price, hence 'xxx On August 28, 1995, bank representative Jefferson Rivera and plaintiff entered
into an oral compromise agreement, whereby the original claim of the bank of
P184,985.09 was reduced to P150,000.00 and that upon payment of which, plaintiff
was informed that the subject motor vehicle would be released to him.' (Rollo, p. 12)

The lower court, on the other hand, expressly made a finding that petitioner failed to include
the aforesaid signing of the Joint Motion to Dismiss as part of the agreement. In dismissing
petitioner's claim, the lower court declared, thus:
'If it is true, as the appellees allege, that the signing of the joint motion was a
condition sine qua non for the reduction of the appellants' obligation, it is only
reasonable and logical to assume that the joint motion should have been shown to
Dr. Gueco in the August 28, 1995 meeting. Why Dr. Gueco was not given a copy of
the joint motion that day of August 28, 1995, for his family or legal counsel to see to
be brought signed, together with the P150,000.00 in manager's check form to be
submitted on the following day on August 29, 1995? (sic) [I]s a question whereby the
answer up to now eludes this Court's comprehension. The appellees would like this
Court to believe that Dr Gueco was informed by Mr. Rivera Rivera of the bank
requirement of signing the joint motion on August 28, 1995 but he did not bother to
show a copy thereof to his family or legal counsel that day August 28, 1995. This part
of the theory of appellee is too complicated for any simple oral agreement. The idea
of a Joint Motion to Dismiss being signed as a condition to the pushing through a
deal surfaced only on August 29, 1995.
'This Court is not convinced by the appellees' posturing. Such claim rests on too
slender a frame, being inconsistent with human experience. Considering the effect of
the signing of the Joint Motion to Dismiss on the appellants' substantive right, it is
more in accord with human experience to expect Dr. Gueco, upon being shown the
Joint Motion to Dismiss, to refuse to pay the Manager's Check and for the bank to
refuse to accept the manager's check. The only logical explanation for this inaction is
that Dr. Gueco was not shown the Joint Motion to Dismiss in the meeting of August
28, 1995, bolstering his claim that its signing was never put into consideration in
reaching a compromise.' xxx.9
We see no reason to reverse.
Anent the issue of award of damages, we find the claim of petitioner meritorious. In finding the
petitioner liable for damages, both .the Regional Trial Court and the Court of Appeals ruled that there
was fraud on the part of the petitioner. The CA thus declared:
The lower court's finding of fraud which became the basis of the award of damages was
likewise sufficiently proven. Fraud under Article 1170 of the Civil Code of the Philippines, as
amended is the 'deliberate and intentional evasion of the normal fulfillment of obligation'
When petitioner refused to release the car despite respondent's tender of payment in the
form of a manager's check, the former intentionally evaded its obligation and thereby
became liable for moral and exemplary damages, as well as attorney's fees.10
We disagree.
Fraud has been defined as the deliberate intention to cause damage or prejudice. It is the voluntary
execution of a wrongful act, or a willful omission, knowing and intending the effects which naturally
and necessarily arise from such act or omission; the fraud referred to in Article 1170 of the Civil
Code is the deliberate and intentional evasion of the normal fulfillment of obligation.11 We fail to see
how the act of the petitioner bank in requiring the respondent to sign the joint motion to dismiss
could constitute as fraud. True, petitioner may have been remiss in informing Dr. Gueco that the
signing of a joint motion to dismiss is a standard operating procedure of petitioner bank. However,
this can not in anyway have prejudiced Dr. Gueco. The motion to dismiss was in fact also for the

benefit of Dr. Gueco, as the case filed by petitioner against it before the lower court would be
dismissed with prejudice. The whole point of the parties entering into the compromise agreement
was in order that Dr. Gueco would pay his outstanding account and in return petitioner would return
the car and drop the case for money and replevin before the Metropolitan Trial Court. The joint
motion to dismiss was but a natural consequence of the compromise agreement and simply stated
that Dr. Gueco had fully settled his obligation, hence, the dismissal of the case. Petitioner's act of
requiring Dr. Gueco to sign the joint motion to dismiss can not be said to be a deliberate attempt on
the part of petitioner to renege on the compromise agreement of the parties. It should, likewise, be
noted that in cases of breach of contract, moral damages may only be awarded when the breach
was attended by fraud or bad faith.12 The law presumes good faith. Dr. Gueco failed to present an
iota of evidence to overcome this presumption. In fact, the act of petitioner bank in lowering the debt
of Dr. Gueco from P184,000.00 to P150,000.00 is indicative of its good faith and sincere desire to
settle the case. If respondent did suffer any damage, as a result of the withholding of his car by
petitioner, he has only himself to blame. Necessarily, the claim for exemplary damages must fait. In
no way, may the conduct of petitioner be characterized as "wanton, fraudulent, reckless, oppressive
or malevolent."13
We, likewise, find for the petitioner with respect to the third assigned error. In the meeting of August
29, 1995, respondent Dr. Gueco delivered a manager's check representing the reduced amount of
P150,000.00. Said check was given to Mr. Rivera, a representative of respondent bank. However,
since Dr. Gueco refused to sign the joint motion to dismiss, he was made to execute a statement to
the effect that he was withholding the payment of the check.14 Subsequently, in a letter addressed to
Ms. Desi Tomas, vice president of the bank, dated September 4, 1995, Dr. Gueco instructed the
bank to disregard the 'hold order" letter and demanded the immediate release of his car,15 to which
the former replied that the condition of signing the joint motion to dismiss must be satisfied and that
they had kept the check which could be claimed by Dr. Gueco anytime.16 While there is controversy
as to whether the document evidencing the order to hold payment of the check was formally offered
as evidence by petitioners,17it appears from the pleadings that said check has not been encashed.
The decision of the Regional Trial Court, which was affirmed in toto by the Court of Appeals, orders
the petitioner:
1. to return immediately the subject car to the appellants in good working condition. Appellee
may deposit the Manager's Check - the proceeds of which have long been under the control
of the issuing bank in favor of the appellee since its issuance, whereas the funds have long
been paid by appellants to secure said Manager's Check over which appellants have no
control.18
Respondents would make us hold that petitioner should return the car or its value and that the latter,
because of its own negligence, should suffer the loss occasioned by the fact that the check had
become stale.19 It is their position that delivery of the manager's check produced the effect of
payment20 and, thus, petitioner was negligent in opting not to deposit or use said check. Rudimentary
sense of justice and fair play would not countenance respondents' position.
A stale check is one which has not been presented for payment within a reasonable time after its
issue. It is valueless and, therefore, should not be paid. Under the negotiable instruments law, an
instrument not payable on demand must be presented for payment on the day it falls due. When the
instrument is payable on demand, presentment must be made within a reasonable time after its
issue. In the case of a bill of exchange, presentment is sufficient if made within a reasonable time
after the last negotiation thereof.21

A check must be presented for payment within a reasonable time after its issue,22 and in determining
what is a "reasonable time," regard is to be had to the nature of the instrument, the usage of trade or
business with respect to such instruments, and the facts of the particular case.23 The test is whether
the payee employed such diligence as a prudent man exercises in his own affairs.24 This is because
the nature and theory behind the use of a check points to its immediate use and payability. In a
case, a check payable on demand which was long overdue by about two and a half (2-1/2) years
was considered a stale check.25 Failure of a payee to encash a check for more than ten (10) years
undoubtedly resulted in the check becoming stale.26 Thus, even a delay of one (1) week27 or two (2)
days,28 under the specific circumstances of the cited cases constituted unreasonable time as a
matter of law.
In the case at bar, however, the check involved is not an ordinary bill of exchange but a manager's
check. A manager's check is one drawn by the bank's manager upon the bank itself. It is similar to a
cashier's check both as to effect and use. A cashier's check is a check of the bank's cashier on his
own or another check. In effect, it is a bill of exchange drawn by the cashier of a bank upon the bank
itself, and accepted in advance by the act of its issuance.29 It is really the bank's own check and may
be treated as a promissory note with the bank as a maker.30The check becomes the primary
obligation of the bank which issues it and constitutes its written promise to pay upon demand. The
mere issuance of it is considered an acceptance thereof. If treated as promissory note, the drawer
would be the maker and in which case the holder need not prove presentment for payment or
present the bill to the drawee for acceptance.31
Even assuming that presentment is needed, failure to present for payment within a reasonable time
will result to the discharge of the drawer only to the extent of the loss caused by the delay.32 Failure
to present on time, thus, does not totally wipe out all liability. In fact, the legal situation amounts to an
acknowledgment of liability in the sum stated in the check. In this case, the Gueco spouses have not
alleged, much less shown that they or the bank which issued the manager's check has suffered
damage or loss caused by the delay or non-presentment. Definitely, the original obligation to pay
certainly has not been erased.
It has been held that, if the check had become stale, it becomes imperative that the circumstances
that caused its non-presentment be determined.33 In the case at bar, there is no doubt that the
petitioner bank held on the check and refused to encash the same because of the controversy
surrounding the signing of the joint motion to dismiss. We see no bad faith or negligence in this
position taken by the Bank.
1wphi1.nt

WHEREFORE, premises considered, the petition for review is given due course. The decision of the
Court of Appeals affirming the decision of the Regional Trial Court is SET ASIDE. Respondents are
further ordered to pay the original obligation amounting to P150,000.00 to the petitioner upon
surrender or cancellation of the manager's check in the latter's possession, afterwhich, petitioner is
to return the subject motor vehicle in good working condition.
SO ORDERED.
Davide, Jr., Puno, Pardo, and Ynares-Santiago, JJ., concur.

Footnotes
1

Rollo, p. 26.

This case was eventually dismissed for failure or lack of interest to prosecute (Annex
16), Id., at 158.
3

Rollo, p. 30.

Id., at 29.

Id., at 35.

Id., at 11.

Amigo, et al. v. Teves, 96 Phil. 252 (1954).

Ramos v. Pepsi Cola, 195 289 (1967).

Rollo, pp.31-33.

10

Id., at 34

11

Legaspi Oil Co., Inc. vs. CA, 224 SCRA 213, 216 (1993).

12

Article 2220 of the NEW CIVIL CODE.

13

Articles 2229 and 2232 of the NEW CIVIL CODE.

14

Rollo, p. 28.

15

Ibid.

16

Id, at 28, 30.

17

Id, at 112.

18

Id., at 29.

19

The check was issued sometime in August 1995. By current banking practice, a check
becomes stale after more than six (6) months. (Pacheco v. Court of Appeals, et al., G.R.
No.126670, December 2, 1999).
20

Citing New Pacific Timber and Supply Co., Inc. v. Severis, 101 SCRA 686 (1980); see
also Tan v. Court ofAppeals, 239 SCRA 310 (1994); Tibajio, Jr. v. Court of Appeals, 223
SCRA 163 (1993).
21

Section 71, Act No. 231, Negotiable Instruments Law (NIL).

22

Section 186, NIL.

23

Section 193, NIL.

24

Jeff Bras. Stones v. McCullough (1934) 188 Ark. 1108, 69 S.W. (2d) 863.

25

Montinola v. Philippine National Bank, 88 Phil. 178 (1951).

26

Papa v. A.U. Valencia and Co., Inc., 289 SCRA 643 (1998).

27

Parker v. Grav., 188 Ark., 68 S.W. (2) 1023.

28

National Plumbing Supple Co. v. Stevenson, 213 Ill. App. 49.

29

Anderson v. Bank of Tupelo, 135 Miss. 351, 100 So. 179; Republic of the Philippines v.
PNB, 3 SCRA 851, 856 (1961).
30

Section 130, NIL.

31

Ist National Bank v. Comm. Ins. Co.,113 Pac. 815.

32

Section. 186, NIL.

33

Crystal v. Court of Appeals, 71 SCRA 443 (1976).

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 142641

July 17, 2006

PACIFICO B. ARCEO, JR., petitioner,

vs.
PEOPLE OF THE PHILIPPINES, respondent.
DECISION
CORONA, J.:
This petition for review on certiorari assails the April 28, 1999 decision1 and March 27, 2000
resolution2 of the Court of Appeals in CA-G.R. CR No. 19601 affirming the trial courts judgment
finding petitioner Pacifico B. Arceo, Jr. liable for violation of Batas Pambansa Blg. (BP) 22, otherwise
known as the "Bouncing Checks Law."
The facts of the case as found by the trial court and adopted by the Court of Appeals follow.
On March 14, 1991, [petitioner], obtained a loan from private complainant Josefino Cenizal []
in the amount ofP100,000.00. Several weeks thereafter, [petitioner] obtained an additional
loan of P50,000.00 from [Cenizal]. [Petitioner] then issued in favor of Cenizal, Bank of the
Philippine Islands [(BPI)] Check No. 163255, postdated August 4, 1991, for P150,000.00, at
Cenizals house located at 70 Panay Avenue, Quezon City. When August 4, 1991 came,
[Cenizal] did not deposit the check immediately because [petitioner] promised [] that he
would replace the check with cash. Such promise was made verbally seven (7) times. When
his patience ran out, [Cenizal] brought the check to the bank for encashment. The head
office of the Bank of the Philippine Islands through a letter dated December 5, 1991,
informed [Cenizal] that the check bounced because of insufficient funds.
Thereafter, [Cenizal] went to the house of [petitioner] to inform him of the dishonor of the
check but [Cenizal] found out that [petitioner] had left the place. So, [Cenizal] referred the
matter to a lawyer who wrote a letter giving [petitioner] three days from receipt thereof to pay
the amount of the check. [Petitioner] still failed to make good the amount of the check. As a
consequence, [Cenizal] executed on January 20, 1992 before the office of the City
Prosecutor of Quezon City his affidavit and submitted documents in support of his complaint
for [e]stafa and [v]iolation of [BP 22] against [petitioner]. After due investigation, this case for
[v]iolation of [BP 22] was filed against [petitioner] on March 27, 1992. The check in question
and the return slip were however lost by [Cenizal] as a result of a fire that occurred near his
residence on September 16, 1992. [Cenizal] executed an Affidavit of Loss regarding the loss
of the check in question and the return slip.3
After trial, petitioner was found guilty as charged. Aggrieved, he appealed to the Court of Appeals.
However, on April 28, 1999, the appellate court affirmed the trial courts decision in toto. Petitioner
sought reconsideration but it was denied. Hence, this petition.

Petitioner claims that the trial and appellate courts erred in convicting him despite the failure of the
prosecution to present the dishonored check during the trial. He also contends that he should not be
held liable for the dishonor of the check because it was presented beyond the 90-day period
provided under the law. Petitioner further questions his conviction since the notice requirement was
not complied with and he was given only three days to pay, not five banking days as required by law.
Finally, petitioner asserts that he had already paid his obligation to Cenizal.
Petitioners contentions have no merit.
Significance of the 90-day Period
For Presentment of the Check
Petitioner asserts that there was no violation of BP 22 because the check was presented to the
drawee bank only on December 5, 1991 or 120 days from the date thereof (August 4, 1991). He
argues that this was beyond the 90-day period provided under the law in connection with the
presentment of the check. We disagree.
Section 1 of BP 22 provides:
SECTION 1. Checks without sufficient funds Any person who makes or draws and issues
any check to apply on account or for value, knowing at the time of issue that he does not
have sufficient funds in or credit with the drawee bank for the payment of such check in full
upon its presentment, which check is subsequently dishonored by the drawee bank for
insufficiency of funds or credit or would have been dishonored for the same reason had not
the drawer, without any valid reason, ordered the bank to stop payment, shall be punished
by imprisonment of not less than thirty days but not more than one (1) year or by a fine of not
less than but not more than double the amount of the check which fine shall in no case
exceed Two Hundred Thousand Pesos, or both such fine and imprisonment at the discretion
of the court.
The same penalty shall be imposed upon any person who, having sufficient funds in or credit
with the drawee bank when he makes or draws and issues a check, shall fail to keep
sufficient funds or to maintain a credit to cover the full amount of the check if presented
within a period of ninety (90) days from the date appearing thereon, for which reason it is
dishonored by the drawee bank.
Where the check is drawn by a corporation, company or entity, the person or persons who
actually signed the check in behalf of such drawer shall be liable under this Act.
In Wong v. Court of Appeals,4 the Court ruled that the 90-day period provided in the law is not an
element of the offense. Neither does it discharge petitioner from his duty to maintain sufficient funds
in the account within a reasonable time from the date indicated in the check. According to current
banking practice, the reasonable period within which to present a check to the drawee bank is six
months. Thereafter, the check becomes stale and the drawer is discharged from liability thereon to
the extent of the loss caused by the delay.
Thus, Cenizals presentment of the check to the drawee bank 120 days (four months) after its issue
was still within the allowable period. Petitioner was freed neither from the obligation to keep sufficient
funds in his account nor from liability resulting from the dishonor of the check.
Applicability of the
Best Evidence Rule

Petitioners insistence on the presentation of the check in evidence as a condition sine qua non for
conviction under BP 22 is wrong. Petitioner anchors his argument on Rule 130, Section 3, of the
Rules of Court, otherwise known as the best evidence rule. However, the rule applies only where the
content of the document is the subject of the inquiry. Where the issue is the execution or existence
of the document or the circumstances surrounding its execution, the best evidence rule does not
apply and testimonial evidence is admissible.5
The gravamen of the offense is the act of drawing and issuing a worthless check.6 Hence, the
subject of the inquiry is the fact of issuance or execution of the check, not its content.
Here, the due execution and existence of the check were sufficiently established. Cenizal testified
that he presented the originals of the check, the return slip and other pertinent documents before the
Office of the City Prosecutor of Quezon City when he executed his complaint-affidavit during the
preliminary investigation. The City Prosecutor found a prima facie case against petitioner for
violation of BP 22 and filed the corresponding information based on the documents. Although the
check and the return slip were among the documents lost by Cenizal in a fire that occurred near his
residence on September 16, 1992, he was nevertheless able to adequately establish the due
execution, existence and loss of the check and the return slip in an affidavit of loss as well as in his
testimony during the trial of the case.
Moreover, petitioner himself admited that he issued the check. He never denied that the check was
presented for payment to the drawee bank and was dishonored for having been drawn against
insufficient funds.
Presence of the
Elements of the Offense
Based on the allegations in the information,7 petitioner was charged for violating the first paragraph
of BP 22. The elements of the offense are:
1. the making, drawing and issuance of any check to apply to account or for value;
2. knowledge of the maker, drawer, or issuer that at the time of issue he does not have
sufficient funds in or credit with the drawee bank for the payment of the check in full upon its
presentment; and
3. subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit,
or dishonor of the check for the same reason had not the drawer, without any valid cause,
ordered the bank to stop payment.8
All these elements are present in this case.
Both the trial and appellate courts found that petitioner issued BPI check no. 163255 postdated
August 4, 1991 in the amount of P150,000 in consideration of a loan which he obtained from
Cenizal. When the check was deposited, it was dishonored by the drawee bank for having been
drawn against insufficient funds. There was sufficient evidence on record that petitioner knew of the
insufficiency of his funds in the drawee bank at the time of the issuance of the check. In fact, this
was why, on maturity date, he requested the payee not to encash it with the promise that he would
replace it with cash. He made this request and assurance seven times but repeatedly failed to make
good on his promises despite the repeated accommodation granted him by the payee, Cenizal.

Notice of Dishonor to Petitioner

And Payment of the Obligation
The trial court found that, contrary to petitioners claim, Cenizals counsel had informed petitioner in
writing of the checks dishonor and demanded payment of the value of the check. Despite receipt of
the notice of dishonor and demand for payment, petitioner still failed to pay the amount of the check.
Petitioner cannot claim that he was deprived of the period of five banking days from receipt of notice
of dishonor within which to pay the amount of the check.9 While petitioner may have been given only
three days to pay the value of the check, the trial court found that the amount due thereon remained
unpaid even after five banking days from his receipt of the notice of dishonor. This negated his claim
that he had already paid Cenizal and should therefore be relieved of any liability.
Moreover, petitioners claim of payment was nothing more than a mere allegation. He presented no
proof to support it. If indeed there was payment, petitioner should have redeemed or taken the check
back in the ordinary course of business.10 Instead, the check remained in the possession of the
payee who demanded the satisfaction of petitioners obligation when the check became due as well
as when the check was dishonored by the drawee bank.
These findings (due notice to petitioner and nonpayment of the obligation) were confirmed by the
appellate court. This Court has no reason to rule otherwise. Well-settled is the rule that the factual
findings of the trial court, when affirmed by the appellate court, are not to be disturbed.11
WHEREFORE, the petition is hereby DENIED. The April 28, 1999 decision and March 27, 2000
resolution of the Court of Appeals in CA-G.R. CR No. 19601 are AFFIRMED.
Costs against petitioner.
SO ORDERED.
Puno, Chairperson, Sandoval-Gutierrez, Azcuna, Garcia, J.J., concur.

Footnotes
1

Penned by Associate Justice Jainal D. Rasul (retired) and concurred in by Associate

Justices Conchita Carpio Morales (now a member of the Supreme Court) and Bernardo P.
Abesamis (retired) of the Third Division of the Court of Appeals; rollo, pp. 17-24.
2

Penned by Associate Justice Bernardo P. Abesamis (retired) and concurred in by Associate

Justices Conchita Carpio Morales (now a member of the Supreme Court) and Marina L.
Buzon of the Former Third Division of the Court of Appeals; rollo, p. 26.
3

CA decision, rollo, pp. 17-24.

G.R. No. 117857, 02 February 2001, 351 SCRA 100.

Florenz D. Regalado, Remedial Law Compendium, Volume II, Seventh Revised Edition,
1995, p. 555.

Tan v. Mendez, Jr., 432 Phil. 760 (2002).

The information read:

The undersigned Assistant City Prosecutor accuses PACIFICO B. ARCEO, JR. of
violation of Batas Pambansa Blg. 22, committed as follows:
That on or about the 15th day of April 1991, in Quezon City, Philippines, and within
the jurisdiction of this Honorable Court, the said accused, did then and there, willfully,
unlawfully and feloniously make, draw and issue in favor of JOSEFINO CENIZAL a
check no. 163255 drawn against the Bank of the Philippine Island[,] a duly
established domestic banking institution[,] in the amount in the amount
ofP150,000.00 Philippine Currency, postdated August 4, 1991, in payment of an
obligation, knowing fully well at the time of issue that [he] did not have the payment
of such check; that upon presentation of said check to said bank for payment, the
same was dishonored for the reason that the drawer thereof, accused Pacifico B.
Arceo, Jr., did not have sufficient funds therein, and despite notice of dishonor
thereof, accused failed and refused and still fails and refuses to redeem or make
good said check, to the damage and prejudice of the said Josefino Cenizal in the
amount aforementioned and in such other amount as may be awarded under the
provisions of the Civil Code.
CONTRARY TO LAW. (Rollo, pp. 17-18.)

Vaca v. Court of Appeals, 359 Phil. 187 (1998).

Section 2 of BP 22 provides:
Section 2. Evidence of knowledge of insufficient funds. 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, when presented within ninety (90) days
from the date of the check, shall be prima facie evidence of knowledge of such
insufficiency of funds or credit unless such maker or drawer pays the holder thereof
the amount due thereon, 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.

10

Tan v. Mendez, Jr., supra; Lim v. People, 420 Phil. 506 (2001).

11

Miranda v. Besa, G.R. No. 146513, 30 July 2004, 435 SCRA 532.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 125851

July 11, 2006

ALLIED BANKING CORPORATION, petitioner,

vs.
COURT OF APPEALS, G.G. SPORTSWEAR MANUFACTURING CORPORATION, NARI
GIDWANI, SPOUSES LETICIA AND LEON DE VILLA AND ALCRON INTERNATIONAL
LTD., respondents.
DECISION
QUISUMBING, J.:
This petition for review on certiorari assails (a) the July 31, 1996 Decision1 of the Court of Appeals,
ordering respondent G.G. Sportswear Manufacturing Corp. to reimburse petitioner US $20,085; and
exonerating the guarantors from liability; and (b) the January 17, 1997 Resolution2 denying the
motion for reconsideration.
The facts are undisputed.
On January 6, 1981, petitioner Allied Bank, Manila (ALLIED) purchased Export Bill No. BDO-81-002
in the amount of US $20,085.00 from respondent G.G. Sportswear Mfg. Corporation (GGS). The bill,
drawn under a letter of credit No. BB640549 covered Men's Valvoline Training Suit that was in transit
to West Germany (Uniger via Rotterdam) under Cont. #73/S0299. The export bill was issued by
Chekiang First Bank Ltd., Hongkong. With the purchase of the bill, ALLIED credited GGS the peso
equivalent of the aforementioned bill amounting to P151,474.52 and the receipt of which was
acknowledged by the latter in its letter dated June 22, 1981.
On the same date, respondents Nari Gidwani and Alcron International Ltd. (Alcron) executed their
respective Letters of Guaranty, holding themselves liable on the export bill if it should be dishonored
or retired by the drawee for any reason.
Subsequently, the spouses Leon and Leticia de Villa and Nari Gidwani also executed a Continuing
Guaranty/Comprehensive Surety (surety, for brevity), guaranteeing payment of any and all such
credit accommodations which ALLIED may extend to GGS. When ALLIED negotiated the export bill
to Chekiang, payment was refused due to some material discrepancies in the documents submitted
by GGS relative to the exportation covered by the letter of credit. Consequently, ALLIED demanded
payment from all the respondents based on the Letters of Guaranty and Surety executed in favor of
ALLIED. However, respondents refused to pay, prompting ALLIED to file an action for a sum of
money.
In their joint answer, respondents GGS and Nari Gidwani admitted the due execution of the export
bill and the Letters of Guaranty in favor of ALLIED, but claimed that they signed blank forms of the
Letters of Guaranty and the Surety, and the blanks were only filled up by ALLIED after they had
affixed their signatures. They also added that the documents did not cover the transaction involving
the subject export bill.

On the other hand, the respondents, spouses de Villa, claimed that they were not aware of the
existence of the export bill; they signed blank forms of the surety; and averred that the guaranty was
not meant to secure the export bill.
Respondent Alcron, for its part, alleged that as a foreign corporation doing business in the
Philippines, its branch in the Philippines is merely a liaison office confined to the following duties and
responsibilities, to wit: acting as a message center between its office in Hongkong and its clients in
the Philippines; conducting credit investigations on Filipino clients; and providing its office in
Hongkong with shipping arrangements and other details in connection with its office in Hongkong.
Respondent Alcron further alleged that neither its liaison office in the Philippines nor its then
representative, Hans-Joachim Schloer, had the authority to issue Letters of Guaranty for and in
behalf of local entities and persons. It also invoked laches against petitioner ALLIED.
GGS and Nari Gidwani filed a Motion for Summary Judgment on the ground that since the plaintiff
admitted not having protested the dishonor of the export bill, it thereby discharged GGS from liability.
But the trial court denied the motion. After the presentation of evidence by the petitioner, only the
spouses de Villa presented their evidence. The other respondents did not. The trial court dismissed
the complaint.
On appeal, the Court of Appeals modified the ruling of the trial court holding respondent GGS liable
to reimburse petitioner ALLIED the peso equivalent of the export bill, but it exonerated the
guarantors from their liabilities under the Letters of Guaranty. The CA decision reads as follows:
For the foregoing considerations, appellee GGS is obliged to reimburse appellant Allied Bank
the amount ofP151,474.52 which was the equivalent of GGS's contracted obligation of
US$20,085.00.
The lower court however correctly exonerated the guarantors from their liability under their
Letters of Guaranty. A guaranty is an accessory contract. What the guarantors guaranteed in
the instant case was the bill which had been discharged. Consequently, the guarantors
should be correspondingly released.
WHEREFORE, judgment is hereby rendered ordering defendant-appellee G.G. Sportswear
Mfg. Corporation to pay appellant the sum of P151,474.52 with interest thereon at the legal
rate from the filing of the complaint, and the costs.
SO ORDERED.3
The petitioner filed a Motion for Reconsideration, but to no avail. Hence, this appeal, raising a single
issue:
WHETHER OR NOT RESPONDENTS NARI, DE VILLA AND ALCRON ARE LIABLE
UNDER THE LETTERS OF GUARANTY AND THE CONTINUING GUARANTY/
COMPREHENSIVE SURETY NOTWITHSTANDING THE FACT THAT NO PROTEST WAS
MADE AFTER THE BILL, A FOREIGN BILL OF EXCHANGE, WAS DISHONORED.4
The main issue raised before us is: Can respondents, in their capacity as guarantors and surety, be
held jointly and severally liable under the Letters of Guaranty and Continuing
Guaranty/Comprehensive Surety, in the absence of protest on the bill in accordance with Section
152 of the Negotiable Instruments Law?5

The petitioner contends that part of the Court of Appeals' decision exonerating respondents Nari
Gidwani, Alcron International Ltd., and spouses Leon and Leticia de Villa as guarantors and/or
sureties. Respondents rely on Section 152 of the Negotiable Instruments Law to support their
contention.
Our review of the records shows that what transpired in this case is a discounting arrangement of
the subject export bill, between petitioner ALLIED and respondent GGS. Previously, we ruled that in
a letter of credit transaction, once the credit is established, the seller ships the goods to the buyer
and in the process secures the required shipping documents of title. To get paid, the seller executes
a draft and presents it together with the required documents to the issuing bank. The issuing bank
redeems the draft and pays cash to the seller if it finds that the documents submitted by the seller
conform with what the letter of credit requires. The bank then obtains possession of the documents
upon paying the seller. The transaction is completed when the buyer reimburses the issuing bank
and acquires the documents entitling him to the goods.6 However, in most cases, instead of going to
the issuing bank to claim payment, the buyer (or the beneficiary of the draft) may approach another
bank, termed the negotiating bank, to have the draft discounted.7 While the negotiating bank owes
no contractual duty toward the beneficiary of the draft to discount or purchase it, it may still do so.
Nothing can prevent the negotiating bank from requiring additional requirements, like contracts of
guaranty and surety, in consideration of the discounting arrangement.
In this case, respondent GGS, as the beneficiary of the export bill, instead of going to Chekiang First
Bank Ltd. (issuing bank), went to petitioner ALLIED, to have the export bill purchased or discounted.
Before ALLIED agreed to purchase the subject export bill, it required respondents Nari Gidwani and
Alcron to execute Letters of Guaranty, holding them liable on demand,in case the subject export bill
was dishonored or retired for any reason.8
Likewise, respondents Nari Gidwani and spouses Leon and Leticia de Villa executed Continuing
Guaranty/Comprehensive Surety, holding themselves jointly and severally liable on any and all credit
accommodations, instruments, loans, advances, credits and/or other obligation that may be granted
by the petitioner ALLIED to respondent GGS.9 The surety also contained a clause whereby said
sureties waive protest and notice of dishonor of any and all such instruments, loans, advances,
credits and/or obligations.10 These letters of guaranty and surety are now the basis of the petitioner's
action.
At this juncture, we must stress that obligations arising from contracts have the force of law between
the parties and should be complied with in good faith.11 Nothing can stop the parties from
establishing stipulations, clauses, terms and conditions as they may deem convenient, provided they
are not contrary to law, morals, good customs, public order, or public policy.12
Here, Art. 2047 of the New Civil Code is pertinent. Art. 2047 states,
Art. 2047. 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 observed. In such case the contract is called a
suretyship.
In this case, the Letters of Guaranty and Surety clearly show that respondents undertook and bound
themselves as guarantors and surety to pay the full amount of the export bill.

Respondents claim that the petitioner did not protest13 upon dishonor of the export bill by Chekiang
First Bank, Ltd. According to respondents, since there was no protest made upon dishonor of the
export bill, all of them, as indorsers were discharged under Section 152 of the Negotiable
Instruments Law.
Section 152 of the Negotiable Instruments Law pertaining to indorsers, relied on by respondents, is
not pertinent to this case. There are well-defined distinctions between the contract of an indorser and
that of a guarantor/surety of a commercial paper, which is what is involved in this case. The contract
of indorsement is primarily that of transfer, while the contract of guaranty is that of personal
security.14 The liability of a guarantor/surety is broader than that of an indorser. Unless the bill is
promptly presented for payment at maturity and due notice of dishonor given to the indorser within a
reasonable time, he will be discharged from liability thereon.15 On the other hand, except where
required by the provisions of the contract of suretyship, a demand or notice of default is not required
to fix the surety's liability.16 He cannot complain that the creditor has not notified him in the absence
of a special agreement to that effect in the contract of suretyship.17 Therefore, no protest on the
export bill is necessary to charge all the respondents jointly and severally liable with G.G.
Sportswear since the respondents held themselves liable upon demand in case the instrument was
dishonored and on the surety, they even waived notice of dishonor as stipulated in their Letters of
Guarantee.
As to respondent Alcron, it is bound by the Letter of Guaranty executed by its representative HansJoachim Schloer. As to the other respondents, not to be overlooked is the fact that, the "Suretyship
Agreement" they executed, expressly contemplated a solidary obligation, providing as it did that "
the sureties hereby guarantee jointly and severally the punctual payment of any and all such credit
accommodations, instruments, loans, which is/are now or may hereafter become due or owing
by the borrower".18 It is a cardinal rule that if the terms of a contract are clear and leave no doubt as
to the intention of the contracting parties, the literal meaning of its stipulation shall control.19 In the
present case, there can be no mistaking about respondents' intent, as sureties, to be jointly and
severally obligated with respondent G.G. Sportswear.
Respondents also aver that, (1) they only signed said documents in blank; (2) they were never made
aware that said documents will cover the payment of the export bill; and (3) laches have set in.
Respondents' stance lacks merit. Under Section 3 (d), Rule 131 of the Rules of Court, it is presumed
that a person takes ordinary care of his concerns. Hence, the natural presumption is that one does
not sign a document without first informing himself of its contents and consequences. Said
presumption acquires greater force in the case at bar where not only one document but several
documents were executed at different times and at different places by the herein respondent
guarantors and sureties.20
In this case, having affixed their consenting signatures in several documents executed at different
times, it is safe to presume that they had full knowledge of its terms and conditions, hence, they are
precluded from asserting ignorance of the legal effects of the undertaking they assumed thereunder.
It is also presumed that private transactions have been fair and regular21 and that he who alleges
has the burden of proving his allegation with the requisite quantum of evidence.22 But here the
records of this case do not support their claims.
Last, we find the defense of laches unavailing. The question of laches is addressed to the sound
discretion of the court and since laches is an equitable doctrine, its application is controlled by
equitable considerations.23Respondents, however, failed to show that the collection suit against them
as sureties was inequitable. Remedies in equity address only situations tainted with inequity, not
those expressly governed by statutes.24

After considering the facts of this case vis--vis the pertinent laws, we are constrained to rule for the
petitioner.
WHEREFORE, the instant petition is GRANTED.The assailed Decision of the Court of Appeals is
herebyMODIFIED, and we hold that respondent Alcron International Ltd. is subsidiarily liable, while
respondents Nari Gidwani, and Spouses Leon and Leticia de Villa are jointly and severally liable
together with G.G. Sportswear, to pay petitioner Bank the sum of P151,474.52 with interest at the
legal rate from the filing of the complaint, and the costs.
SO ORDERED.
Carpio, Carpio-Morales, Tinga, Velasco, Jr., J.J., concur.

Footnotes
1

Rollo, pp. 31-37. Penned by Associate Justice Alfredo L. Benipayo, with Associate Justices
Buenaventura J. Guerrero, and Romeo A. Brawner concurring.
2

Id. at 38. Penned by Associate Justice Romeo A. Brawner, with Associate Justices Minerva
P. Gonzaga Reyes, and Buenaventura J. Guerrero concurring.
3

Rollo, p. 36.

Id. at 23.

Sec. 152 In what cases protest necessary Where a foreign bill appearing on its face to
be such is dishonored by non-acceptance, it must be duly protested for non-acceptance, and
where such a bill which has not been previously been dishonored by non-acceptance is
dishonored by non-payment, it must be duly protested for non-payment. If it is not so
protested, the drawer and indorsers are discharged. Where a bill does not appear on its face
to be a foreign bill, protest thereof in case of dishonor is unnecessary.
5

Bank of America, NT & SA v. Court of Appeals, G.R. No. 105395, December 10, 1993, 228
SCRA 357, 366.
7

Id. at 369.

Records, p. 12. The Letters of Guaranty provides that,

xxxx
If for any reason, my/our draft is not finally honored or retired by the drawee, I/We
hereby further undertake and bind myself/ourselves to refund to you, on demand,
the full amount of this negotiation, together with the corresponding interest thereon
as well as your correspondent's charges and expenses thereon, if any; and to
compensate you fully for any damages that you might incur arising out of any suit,
action or proceedings, whether judicial or extra-judicial that might be instituted by the

buyer or importer on the ground of lack of faithful performance of the contract

between said buyer or importer and myself/ourselves. . . (Emphasis supplied.)
9

Id. at 14. Paragraph I of the surety provides:

I. For and in consideration of any accommodation which you have extended and/or
will extend to G.G. Sportswear Manufacturing Corporation (hereinafter called the
"Borrower") with or without security,singularly or jointly and severally with others, . . .
the undersigned agree(s) to guarantee, and does hereby guarantee jointly and
severally the punctual payment at maturity to you of any and all such credit
accommodations, instruments, loans, advances, credits and/or other obligations,
hereinbefore referred to, which is/are now or may hereafter become due or owing to
you by the Borrower . . .

10

Id. at 15. Paragraph VIII of the surety provides:

VIII. The undersigned hereby waives . . . protest and notice of dishonor of any and all
such instruments, loans, advances, credits or other indebtedness or obligation
herein-before referred to, . . .

11

New Civil Code, Art. 1159.

12

Id. at Art. 1306. The contracting parties may establish such stipulations, clauses, terms
and conditions as they may deem convenient, provided they are not contrary to law, morals,
good customs, public order, or public policy.
13

Rollo, p. 158.

14

Acme Shoe, Rubber & Plastic Corp. v. Court of Appeals, G.R. No. 103576, August 22,
1996, 260 SCRA 714, 719.
15

Supra note 5.

16

Umali v. Court of Appeals, G.R. No. 89561, September 13, 1990, 189 SCRA 529, 545.

17

Palmares v. Court of Appeals, G.R. No. 126490, March 31, 1998, 288 SCRA 422, 439.

18

Records, p. 14.

19

new civil code, Art. 1370.

20

Lee v. Court of Appeals, G.R. No. 117913, February 1, 2002, 375 SCRA 579, 601.

21

Revised Rules of Court, Rule 131, Sec. 3 (p).

22

Heirs of Basanes v. Cortes, OCA IPI No. 01-1065-P, March 31, 2003 citing People v.
Topaguen, G.R. Nos. 116596-98, March 31, 1997, 269 SCRA 601, 614.
23

Agra v. Philippine National Bank, G.R. No. 133317, June 29, 1999, 309 SCRA 509, 520.

24

Id.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 93048 March 3, 1994

BATAAN CIGAR AND CIGARETTE FACTORY, INC., petitioner,
vs.
THE COURT OF APPEALS and STATE INVESTMENT HOUSE, INC., respondents.
Teresita Gandiongco Oledan for petitioner.
Acaban & Sabado for private respondent.

NOCON, J.:
For our review is the decision of the Court of Appeals in the case entitled "State Investment House,
Inc. v. Bataan Cigar & Cigarette Factory Inc.," 1 affirming the decision of the Regional Trial Court 2 in a
complaint filed by the State Investment House, Inc. (hereinafter referred to as SIHI) for collection on three
unpaid checks issued by Bataan Cigar & Cigarette Factory, Inc. (hereinafter referred to as BCCFI). The
foregoing decisions unanimously ruled in favor of SIHI, the private respondent in this case.

Emanating from the records are the following facts. Petitioner, Bataan Cigar & Cigarette Factory, Inc.
(BCCFI), a corporation involved in the manufacturing of cigarettes, engaged one of its suppliers,
King Tim Pua George (herein after referred to as George King), to deliver 2,000 bales of tobacco
leaf starting October 1978. In consideration thereof, BCCFI, on July 13, 1978 issued crossed checks
post dated sometime in March 1979 in the total amount of P820,000.00. 3
Relying on the supplier's representation that he would complete delivery within three months from
December 5, 1978, petitioner agreed to purchase additional 2,500 bales of tobacco leaves, despite
the supplier's failure to deliver in accordance with their earlier agreement. Again petitioner issued
post dated crossed checks in the total amount of P1,100,000.00, payable sometime in September
1979. 4
During these times, George King was simultaneously dealing with private respondent SIHI. On July
19, 1978, he sold at a discount check TCBT 551826 5 bearing an amount of P164,000.00, post dated
March 31, 1979, drawn by petitioner, naming George King as payee to SIHI. On December 19 and 26,
1978, he again sold to respondent checks TCBT Nos. 608967 & 608968, 6 both in the amount of
P100,000.00, post dated September 15 & 30, 1979 respectively, drawn by petitioner in favor of George
King.

In as much as George King failed to deliver the bales of tobacco leaf as agreed despite petitioner's
demand, BCCFI issued on March 30, 1979, a stop payment order on all checks payable to George
King, including check TCBT 551826. Subsequently, stop payment was also ordered on checks

TCBT Nos. 608967 & 608968 on September 14 & 28, 1979, respectively, due to George King's
failure to deliver the tobacco leaves.
Efforts of SIHI to collect from BCCFI having failed, it instituted the present case, naming only BCCFI
as party defendant. The trial court pronounced SIHI as having a valid claim being a holder in due
course. It further said that the non-inclusion of King Tim Pua George as party defendant is
immaterial in this case, since he, as payee, is not an indispensable party.
The main issue then is whether SIHI, a second indorser, a holder of crossed checks, is a holder in
due course, to be able to collect from the drawer, BCCFI.
The Negotiable Instruments Law states what constitutes a holder in due course, thus:
Sec. 52 A holder in due course is a holder who has taken the instrument under the
following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it
had been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
Section 59 of the NIL further states that every holder is deemed prima facie a holder in due course.
However, when it is shown that the title of any person who has negotiated the instrument was
defective, the burden is on the holder to prove that he or some person under whom he claims,
acquired the title as holder in due course.
The facts in this present case are on all fours to the case of State Investment House, Inc. (the very
respondent in this case) v. Intermediate Appellate Court 7 wherein we made a discourse on the effects
of crossing of checks.

As preliminary, a check is defined by law as a bill of exchange drawn on a bank payable on

demand. 8 There are a variety of checks, the more popular of which are the memorandum check,
cashier's check, traveler's check and crossed check. Crossed check is one where two parallel lines are
drawn across its face or across a corner thereof. It may be crossed generally or specially.

A check is crossed specially when the name of a particular banker or a company is written between
the parallel lines drawn. It is crossed generally when only the words "and company" are written or
nothing is written at all between the parallel lines. It may be issued so that the presentment can be
made only by a bank. Veritably the Negotiable Instruments Law (NIL) does not mention "crossed
checks," although Article 541 9 of the Code of Commerce refers to such instruments.
According to commentators, the negotiability of a check is not affected by its being crossed, whether
specially or generally. It may legally be negotiated from one person to another as long as the one
who encashes the check with the drawee bank is another bank, or if it is specially crossed, by the
bank mentioned between the parallel lines. 10This is specially true in England where the Negotiable
Instrument Law originated.

In the Philippine business setting, however, we used to be beset with bouncing checks, forging of
checks, and so forth that banks have become quite guarded in encashing checks, particularly those
which name a specific payee. Unless one is a valued client, a bank will not even accept second
indorsements on checks.
In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of
a check should have the following effects: (a) the check may not be encashed but only deposited in
the bank; (b) the check may be negotiated only once to one who has an account with a bank; (c)
and the act of crossing the check serves aswarning to the holder that the check has been issued for
a definite purpose so that he must inquire if he has received the check pursuant to that purpose,
otherwise, he is not a holder in due course. 11
The foregoing was adopted in the case of SIHI v. IAC, supra. In that case, New Sikatuna Wood
Industries, Inc. also sold at a discount to SIHI three post dated crossed checks, issued by Anita
Pea Chua naming as payee New Sikatuna Wood Industries, Inc. Ruling that SIHI was not a holder
in due course, we then said:
The three checks in the case at bar had been crossed generally and issued payable
to New Sikatuna Wood Industries, Inc. which could only mean that the drawer had
intended the same for deposit only by the rightful person, i.e. the payee named
therein. Apparently, it was not the payee who presented the same for payment and
therefore, there was no proper presentment, and the liability did not attach to the
drawer. Thus, in the absence of due presentment, the drawer did not become liable.
Consequently, no right of recourse is available to petitioner (SIHI) against the drawer
of the subject checks, private respondent wife (Anita), considering that petitioner is
not the proper party authorized to make presentment of the checks in question.
xxx xxx xxx
That the subject checks had been issued subject to the condition that private
respondents (Anita and her husband) on due date would make the back up deposit
for said checks but which condition apparently was not made, thus resulting in the
non-consummation of the loan intended to be granted by private respondents to New
Sikatuna Wood Industries, Inc., constitutes a good defense against petitioner who is
not a holder in due course. 12
It is then settled that crossing of checks should put the holder on inquiry and upon him devolves the
duty to ascertain the indorser's title to the check or the nature of his possession. Failing in this
respect, the holder is declared guilty of gross negligence amounting to legal absence of good faith,
contrary to Sec. 52(c) of the Negotiable Instruments Law, 13 and as such the consensus of authority is
to the effect that the holder of the check is not a holder in due course.

In the present case, BCCFI's defense in stopping payment is as good to SIHI as it is to George King.
Because, really, the checks were issued with the intention that George King would supply BCCFI
with the bales of tobacco leaf. There being failure of consideration, SIHI is not a holder in due
course. Consequently, BCCFI cannot be obliged to pay the checks.
The foregoing does not mean, however, that respondent could not recover from the checks. The
only disadvantage of a holder who is not a holder in due course is that the instrument is subject to
defenses as if it were
non-negotiable. 14 Hence, respondent can collect from the immediate indorser, in this case, George King.

WHEREFORE, finding that the court a quo erred in the application of law, the instant petition is
hereby GRANTED. The decision of the Regional Trial Court as affirmed by the Court of Appeals is
hereby REVERSED. Cost against private respondent.
SO ORDERED.
Narvasa, C.J., Regalado and Puno, JJ., concur.
Padilla, J., took no part.

#Footnotes
1 CA-G.R. CV No. 03032, Justice Jorge R. Coquia, ponente, Justices Josue N.
Bellosillo and Venancio D. Aldecoa, Jr., concurring, November 13, 1987.
2 Judge Agusto E. Villarin, presiding, Branch XL, National Capital Region, Manila.
3 Exhibit "1", Folder of Exhibits, p. 11.
4 Exhibit "4", Folder of Exhibits, p. 14.
5 Annex "A", Folder of Exhibits, p. 3.
6 Annexes "B" and "C", Folder of Exhibits, pp. 4-5.
7 G.R. No. 72764, 175 SCRA 310.
8 Sec. 185, Negotiable Instruments Law.
9 Article 541 -- The maker of 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".
10 CAMPOS AND LOPEZ-CAMPOS, Negotiable Instruments Law, p. 574-575;
AGBAYANI, AGUEDO, Commercial Laws of the Philippines, Vol. 1, 1987 Ed., p. 446.
11 Ocampo v. Gatchalian, G.R. No. L-15126, 3 SCRA 603 (1961); Associated Bank
v. Court of Appeals, G.R. No. 89802, 208 SCRA 465; SIHI v. IAC, supra.
12 Id. at pp. 316-317.
13 quoted supra.
14 Chan Wan v. Tan Kim and Chen So, L-15380, 109 Phil., 706 (1960); SIHI v.
IAC, supra.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 148211

July 25, 2006

SINCERE Z. VILLANUEVA, petitioner,

vs.
MARLYN P. NITE,* respondent.
DECISION
CORONA, J.:
In this petition for review on certiorari under Rule 45, petitioner submits that the Court of Appeals
(CA) erred in annulling and setting aside the Regional Trial Court (RTC) decision on the ground of
extrinsic fraud.
The facts follow.1
Respondent allegedly took out a loan of P409,000 from petitioner. To secure the loan, respondent
issued petitioner an Asian Bank Corporation (ABC) check (Check No. AYA 020195) in the amount
of P325,500 dated February 8, 1994. The date was later changed to June 8, 1994 with the consent
and concurrence of petitioner.
The check was, however, dishonored due to a material alteration when petitioner deposited the
check on due date. On August 24, 1994, respondent, through her representative Emily P. Abojada,
remitted P235,000 to petitioner as partial payment of the loan. The balance of P174, 000 was due on
or before December 8, 1994.
On August 24, 1994, however, petitioner filed an action for a sum of money and damages (Civil
Case No. Q-94-21495) against ABC for the full amount of the dishonored check. And in a decision
dated May 23, 1997, the RTC of Quezon City, Branch 101 ruled in his favor.2 When respondent went
to ABC Salcedo Village Branch on June 30, 1997 to withdraw money from her account, she was
unable to do so because the trial court had ordered ABC to pay petitioner the value of respondents
ABC check.
On August 25, 1997, ABC remitted to the sheriff a managers check amounting to P325,500 drawn
on respondents account. The check was duly received by petitioner on the same date.
Respondent then filed a petition in the CA seeking to annul and set aside the trial courts decision
ordering ABC to pay petitioner the value of the ABC check.3 The CA ruled:
WHEREFORE, premises considered, the petition is GRANTED and the Decision dated May
23, 1997 of the public respondent is hereby ANNULLED and SET ASIDE for extrinsic fraud.
[Petitioner] Villanueva is hereby ordered to pay [Nite]

1) the sum of [P146,500] as actual damages plus interest at 12% per annum from August 25,
1997 until full payment;
2) the sum of [P75,000] as moral damages;
3) the sum of [P50,000] as exemplary damages; and
4) the sum of [P50,000] as attorneys fees and cost of suit.
SO ORDERED.4
Thus, this petition. We find for respondent.
Annulment of judgment is a remedy in law independent of the case where the judgment sought to be
annulled is promulgated. It can be filed by one who was not a party to the case in which the assailed
judgment was rendered.Section 1 of Rule 47 provides:
Section 1. Coverage. This Rule shall govern the annulment by the Court of Appeals of
judgments or final orders and resolutions in civil actions of Regional Trial Courts for which
the ordinary remedies of new trial, appeal, petition for relief or other appropriate remedies
are no longer available through no fault of the petitioner.
Respondent may avail of the remedy of annulment of judgment under Rule 47. The ordinary
remedies of new trial, appeal and petition for relief were not available to her for the simple reason
that she was not made a party to the suit against ABC. Thus, she was neither able to participate in
the original proceedings nor resort to the other remedies because the case was filed when she was
abroad.
Annulment of judgment may be based only on extrinsic fraud and lack of jurisdiction.5 Extrinsic or
collateral fraud pertains to such fraud which prevents the aggrieved party from having a trial or
presenting his case to the court, or is used to procure the judgment without fair submission of
the controversy.6 This refers to acts intended to keep the unsuccessful party away from the courts as
when there is a false promise of compromise or when one is kept in ignorance of the suit.7
We uphold the appellate courts finding of extrinsic fraud:
Barely 6 days after receipt of the partial payment of P235,000.00 and agreeing that the
balance of P174,000.00 shall be paid on or before December 8, 1994, [Sincere] filed his
complaint against [ABC] for the full amount of the dishonored check in the sum of
P320,500.00 without impleading petitioner. The apparent haste by which [Sincere] filed his
complaint and his failure to implead [Marlyn] clearly shows his intent to prevent [Marlyn] from
opposing his action.
[A]t the time news about [Marlyn] having left the country was widespread, appearing even in
print media as early as May 1994, [Marlyn] paid [Sincere] the amount of P235,000.00 as
partial payment on [August 18, 1994], through a representative.
Notwithstanding the foregoing, SIX (6) days later or on [August 24, 1994, Sincere] instituted
an action for collection with damages for the whole amount of the issued check.

[Sincere] does not deny knowledge of such payment neither of the fact that he concurred in
settling the balance of P174,000.00 on December 8, 1994.
[His] actuation and pronouncement shows not only bad faith on his part but also of his
fraudulent intention to completely exclude [Marlyn] from the proceedings in the court a
quo. By doing what he did he prevented the [trial court] from fully appreciating the particulars
of the case.8
In any event, the RTC decision may be annulled for lack of jurisdiction over the person of
respondent. The pertinent provisions of the Negotiable Instruments Law are enlightening:
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.9 (emphasis ours)
SEC. 189. When check operates as an assignment. A check of itself does not operate as
an assignment of any part of the funds to the credit of the drawer with the bank, and the
bank is not liable to the holder, unless and until it accepts or certifies the
check. (emphasis ours)
If a bank refuses to pay a check (notwithstanding the sufficiency of funds), the payee-holder cannot,
in view of the cited sections, sue the bank. The payee should instead sue the drawer who might in
turn sue the bank. Section 189 is sound law based on logic and established legal principles: no
privity of contract exists between the drawee-bank and the payee. Indeed, in this case, there was no
such privity of contract between ABC and petitioner.
Petitioner should not have sued ABC. Contracts take effect only between the parties, their assigns
and heirs, except in cases where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law.10 None of the foregoing
exceptions to the relativity of contracts applies in this case.
The contract of loan was between petitioner and respondent. No collection suit could prosper without
respondent who was an indispensable party. Rule 3, Sec. 7 of the Rules of Court states:
Sec. 7. Compulsory joinder of indispensable parties. Parties in interest without whom no
final determination can be had of an action shall be joined either as plaintiffs or
defendants. (emphasis ours)
An indispensable party is one whose interest in the controversy is such that a final decree will
necessarily affect his rights. The court cannot proceed without his presence.11 If an indispensable
party is not impleaded, any judgment is ineffective.12 On this, Aracelona v. Court of
Appeals13 declared:
Rule 3, Section 7 of the Rules of Court defines indispensable parties as parties-in-interest
without whom there can be no final determination of an action. As such, they must be joined
either as plaintiffs or as defendants. The general rule with reference to the making of parties
in a civil action requires, of course, the joinder of all necessary parties where possible, and
the joinder of all indispensable parties under any and all conditions, their presence
being sine qua non for the exercise of judicial power. It is precisely "when an indispensable
party is not before the court (that) the action should be dismissed." The absence of an
indispensable party renders all subsequent actions of the court null and void for want of
authority to act, not only as to the absent parties but even as to those present.

WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals in CA-G.R. SP
No. 44971 isAFFIRMED in toto.
Costs against petitioner.
SO ORDERED.
Puno, Chairperson, Sandoval-Gutierrez, Azcuna, Garcia, J.J., concur.

Footnotes
*

Some parts of the records refer to respondent as "Marilyn Nite."

CA Decision in CA-G.R. SP No. 44971, rollo, pp. 29-30.

Penned by Judge Pedro T. Santiago.

CA-G.R. SP No. 44971: Marlyn P. Nite v. Hon. Pedro T. Santiago, as Judge of the RTC, Br.
101, Quezon City, Sincere Z. Villanueva and Asian Bank Corporation.
4

Decision penned by Associate Justice Eliezer R. De Los Santos and concurred in by

Associate Justices Godardo A. Jacinto and Bernardo P. Abesamis of the Ninth Division of
the Court of Appeals; rollo, p. 35.
5

Rules of Court, Rule 47, Sec. 2.

Regalado, Remedial Law Compendium (1999), National Bookstore, Inc., Manila, pp. 380
and 557.
7

Id., pp. 380-381.

Rollo, pp. 32-33.

See Negotiable Instruments Law, Sections 126-183.

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 or order or to bearer.
SEC. 127. Bill not an assignment in hands of drawee. A bill of itself does not
operate as an assignment of the funds in the hands of the drawee available for the
payment thereof, and the drawee is not liable on the bill unless and until he
accepts the same. (emphasis ours)

10

Civil Code, Art. 1311.

11

Regalado, supra note 6, at 83.

12

Id.

13

345 Phil. 250, 267 (1997).

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 156207

September 15, 2006

EQUITABLE PCI BANK (the Banking Entity into which Philippine Commercial International
Bank was merged), petitioner,
vs.
ROWENA ONG, respondent.
DECISION
CHICO-NAZARIO, J.:
On 29 November 1991, Warliza Sarande deposited in her account at Philippine Commercial
International (PCI) Bank Magsaysay Avenue, Santa Ana District, Davao City Branch, under Account
No. 8502-00347-6, a PCI Bank General Santos City Branch, TCBT1 Check No. 0249188 in the
amount of P225,000.00. Upon inquiry by Serande at PCI Bank on 5 December 1991 on whether
TCBT Check No. 0249188 had been cleared, she received an affirmative answer. Relying on this
assurance, she issued two checks drawn against the proceeds of TCBT Check No. 0249188. One of
these was PCI Bank Check No. 073661 dated 5 December 1991 for P132,000.00 which Sarande
issued to respondent Rowena Ong Owing to a business transaction. On the same day, Ong
presented to PCI Bank Magsaysay Avenue Branch said Check No. 073661, and instead of
encashing it, requested PCI Bank to convert the proceeds thereof into a manager's check, which the
PCI Bank obliged. Whereupon, Ong was issued PCI Bank Manager's Check No. 10983 dated 5
December 1991 for the sum of P132,000.00, the value of Check No. 073661.
The next day, 6 December 1991, Ong deposited PCI Bank Manager's Check No. 10983 in her
account with Equitable Banking Corporation Davao City Branch. On 9 December 1991, she received
a check return-slip informing her that PCI Bank had stopped the payment of the said check on the
ground of irregular issuance. Despite several demands made by her to PCI Bank for the payment of
the amount in PCI Bank Manager's Check No. 10983, the same was met with refusal; thus, Ong was
constrained to file a Complaint for sum of money, damages and attorney's fees against PCI Bank.2
From PCI Bank's version, TCBT-General Santos City Check No. 0249188 was returned on 5
December 1991 at 5:00 pm on the ground that the account against which it was drawn was already
closed. According to PCI Bank, it immediately gave notice to Sarande and Ong about the return of
Check No. 0249188 and requested Ong to return PCI Bank Manager's Check No. 10983 inasmuch
as the return of Check No. 0249188 on the ground that the account from which it was drawn had
already been closed resulted in a failure or want of consideration for the issuance of PCI Bank
Manager's Check No. 10983.3
After the pre-trial conference, Ong filed a motion for summary judgment.4 Though they were duly
furnished with a copy of the motion for summary judgment, PCI Bank and its counsel failed to
appear at the scheduled hearing.5Neither did they file any written comment or opposition thereto.
The trial court thereafter ordered Ong to formally offer her exhibits in writing, furnishing copies of the
same to PCI Bank which was directed to file its comment or objection.6

Ong complied with the Order of the trial court, but PCI Bank failed to file any comment or objection
within the period given to it despite receipt of the same order.7 The trial court then granted the motion
for summary judgment and in its Order dated 2 March 1995, it held:
IN THE LIGHT OF THE FOREGOING, the motion for summary judgment is GRANTED,
ordering defendant Philippine Commercial International Bank to pay the plaintiff the amount
of ONE HUNDRED THIRTY-TWO THOUSAND PESOS (P132,000.00) equivalent to the
amount of PCIB Manager's Check No. 10983.
Set the reception of the plaintiff's evidence with respect to the damages claimed in the
complaint.8
PCI Bank filed a Motion for Reconsideration which the trial court denied in its Order dated 11 April
1996.9 After the reception of Ong's evidence in support of her claim for damages, the trial court
rendered its Decision10 dated 3 May 1999 wherein it ruled:
IN LIGHT OF THE FOREGOIN CONSIDERATION, and as plaintiff has preponderantly
established by competent evidence her claims in the Complaint, judgment in hereby
rendered for the plaintiff against the defendant-bank ordering the latter:
1. To pay the plaintiff the sum of FIFTY THOUSAND PESOS (P50,000.00) in the
concept of moral damages;
2. To pay the plaintiff the sum of TWENTY THOUSAND PESOS (P20,000.00) as
exemplary damages;
3. To pay the plaintiff the sum of THREE THOUSAND FIVE HUNDRED PESOS
(P3,500.00) representing actual expenses;
4. To pay the plaintiff the sum of TWENTY THOUSAND PESOS (P20,000.00) as and
for attorney's fee's; and
5. To pay the costs.11
From this decision, PCI Bank sought recourse before the Court of Appeals. In a Decision12 dated 29
October 2002, the appellate court denied the appeal of PCI Bank and affirmed the orders and
decision of the trial court.
Unperturbed, PCI Bank then filed the present petition for review before this Court and raised the
following issues:
1. WHETHER OR NOT THE COURT OF APPEALS COMMITTED A GRAVE AND
REVERSIBLE ERROR WHEN IT SUSTAINED THE LOWER COURT'S ORDER DATED 2
MARCH 1999 GRANTING RESPONDENT'S MOTION FOR SUMMARY JUDGMENT
NOTWITHSTANDING THE GLARING FACT THAT THERE ARE GENUINE, MATERIAL
AND FACTUAL ISSUES WHICH REQUIRE THE PRESENTATION OF EVIDENCE.
2. WHETHER OR NOT THE COURT OF APPEALS WAS IN ERROR WHEN IT
SUSTAINED THE LOWER COURT'S DECISION DATED 3 MAY 1999 GRANTING THE
RELIEFS PRAYED FOR IN RESPONDENT ONG'S COMPLAINT INSPITE OF THE FACT
THAT RESPONDENT ONG WOULD BE "UNJUSTLY ENRICHED" AT THE EXPENSE OF

PETITIONER BANK, IF PETITIONER BANK WOULD BE REQUIRED TO PAY AN

UNFUNDED CHECK.
3. WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE ERRORS
WHEN IT AFFIRMED THE COURT A QUO'S DECISIION DATED 3 MAY 1999 AWARDING
DAMAGES TO RESPONDENT ONG AND HOLDING THAT RESPONDENT ONG HAD
PREPONDERANTLY ESTABLISHED BY COMPETENT EVIDENCE HER CLAIMS IN THE
COMPLAINT INSPITE OF THE FACT THAT THE EVIDENCE ON RECORD DOES NOT
JUSTIFY THE AWARD OF DAMAGES.
4. WHETHER OR NOT THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR
WHEN IT AFFIRMED THE LOWER COURT'S FACTUAL FINDING IN ITS DECISION
DATED 3 MAY 1999 HOLDING RESPONDENT ONG A "HOLDER IN DUE COURSE"
INSPITE OF THE FACT THAT THE REQUISITE OF "GOOD FAITH" AND FOR VALUE IS
LACKING AND DESPITE THE ABSENCE OF A PROPER TRIAL TO DETERMINE SUCH
FACTUAL ISSUE.
5. WHETHER OR NOT THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR
WHEN IT UPHELD THE LOWER COURT'S DECISION DATED 3 MAY 1999 DENYING
PETITIONER EPCI BANK'S COUNTERCLAIM INSPITE OF THE FACT THAT IT WAS
SHOWN THAT RESPONDENT ONG'S COMPLAINT LACKS MERIT.13
We affirm the Decision of the trial court and the Court of Appeals.
The provision on summary judgment is found in Section 1, Rule 35 of the 1997 Rules of Court:
SECTION 1. Summary judgment for claimant. A party seeking to recover upon a claim,
counterclaim, or cross-claim or to obtain a declaratory relief may, at any time after the
pleading in answer thereto has been served, move with supporting affidavits, depositions or
admissions for a summary judgment in his favor upon all or any part thereof.
Thus, it has been held that a summary judgment is proper where, upon a motion filed after the
issues had been joined and on the basis of the pleadings and papers filed, the court finds that there
is no genuine issue as to any material fact to except as to the amount of damages. A genuine issue
has been defined as an issue of fact which calls for the presentation of evidence, as distinguished
from an issue which is sham, fictitious, contrived and patently unsubstantial so as not to constitute a
genuine issue for trial.14
A court may grant summary judgment to settle expeditiously a case if, on motion of either party,
there appears from the pleadings, depositions, admissions, and affidavits that no important issues of
fact are involved, except the amount of damages.15 Rule 35, Section 3, of the Rules of Court
provides two requisites for summary judgment to be proper: (1) there must be no genuine issue as to
any material fact, except for the amount of damages; and (2) the party presenting the motion for
summary judgment must be entitled to a judgment as a matter of law.16
Certainly, when the facts as pleaded appear uncontested or undisputed, then there's no real or
genuine issue or question as to the facts, and summary judgment is called for.17
By admitting it committed an error, clearing the check of Sarande and issuing in favor of Ong not just
any check but a manager's check for that matter, PCI Bank's liability is fixed. Under the
circumstances, we find that summary judgment was proper and a hearing would serve no purpose.

That summary judgment is appropriate was incisively expounded by the trial court when it made the
following observation:
[D]efendant-bank had certified plaintiff's PCIB Check No. 073661 and since certification is
equivalent to acceptance, defendant-bank as drawee bank is bound on the instrument upon
certification and it is immaterial to such liability in favor of the plaintiff who is a holder in due
course whether the drawer (Warliza Sarande) had funds or not with the defendant-bank
(Security vs. State Bank, 154 N.W. 282) or the drawer was indebted to the bank for more
than the amount of the check (Nat. Bank vs. Schmelz, Nat. Bank, 116 S.E. 880) as the
certifying bank as all the liabilities under Sec. 62 of the Negotiable Instruments Law which
refers to liability of acceptor (Title Guarantee vs. Emadee Realty Corp., 240 N.Y. 36).
It may be true that plaintiff's PCIB Check No. 073661 for P132,000.00 which was paid to her
by Warliza Sarande was actually not funded but since plaintiff became a holder in due
course, defendant-bank cannot interpose a defense of want or lack of consideration because
that defense is equitable or personal and cannot prosper against a holder in due course
pursuant to Section 28 of the Negotiable Instruments Law. Therefore, when the
aforementioned check was endorsed and presented by the plaintiff and certified to and
accepted by defendant-bank in the purchase of PCIB Manager's Check No. 1983 in the
amount of P132,000.00, there was a valid consideration.18
The property of summary judgment was further explained by this Court when it pronounced that:
The theory of summary judgment is that although an answer may on its face appear to
tender issues requiring trial yet if it is demonstrated by affidavits, depositions, or
admissions that those issues are not genuine, but sham or fictitious, the Court is unjustified
in dispensing with the trial and rendering summary judgment for plaintiff. The court is
expected to act chiefly on the basis of the affidavits, depositions, admissions submitted by
the movant, and those of the other party in opposition thereto. The hearing contemplated
(with 10-day notice) is for the purpose of determining whether the issues are genuine or not,
not to receive evidence on the issues set up in the pleadings. A hearing is not thus de riguer.
The matter may be resolved, and usually is, on the basis of affidavits, depositions,
admissions. This is not to say that a hearing may be regarded as a superfluity. It is not, and
the Court has plenary discretion to determine the necessity therefore.19
The second and fourth issues are inter-related and so they shall be resolved together. The second
issue has reference to PCI Bank's claim of unjust enrichment on the part of Ong if it would be
compelled to make good the manager's check it had issued. As asserted by PCI Bank under the
fourth issue, Ong is not a holder in due course because the manager's check was drawn against a
closed account; therefore, the same was issued without consideration.
On the matter of unjust enrichment, the fundamental doctrine of unjust enrichment is the transfer of
value without just cause or consideration. The elements of this doctrine are: enrichment on the part
of the defendant; impoverishment on the part of the plaintiff; and lack of cause. The main objective is
to prevent one to enrich himself at the expense of another.20 It is based on the equitable postulate
that it is unjust for a person to retain benefit without paying for it.21 It is well to stress that the check of
Sarande had been cleared by the PCI Bank for which reason the former issued the check to Ong. A
check which has been cleared and credited to the account of the creditor shall be equivalent to a
delivery to the creditor of cash in an amount equal to the amount credited to his account.22

Having cleared the check earlier, PCI Bank, therefore, became liable to Ong and it cannot allege
want or failure of consideration between it and Sarande. Under settled jurisprudence, Ong is a
stranger as regards the transaction between PCI Bank and Sarande.23
PCI Bank next insists that since there was no consideration for the issuance of the manager's check,
ergo, Ong is not a holder in due course. This claim is equally without basis. Pertinent provisions of
the Negotiable Instruments Law are hereunder quoted:
SECTION 52. What constitutes a holder in due course. A holder in due course is a holder
who has taken the instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice it had been
previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
The same law provides further:
Sec. 24. Presumption of consideration. Every negotiable instrument is deemed prima facie
to have been issued for a valuable consideration; and every person whose signature
appears thereon to have become a party thereto for value.
Sec. 26. What constitutes holder for value. Where value has at any time been given for the
instrument, the holder is deemed a holder for value in respect to all parties who become
such prior to that time.
Sec. 28. Effect of want of consideration. Absence or failure of consideration is a matter of
defense as against any person not a holder in due course; and partial failure of consideration
is a defense pro tanto, whether the failure is an ascertained and liquidated amount or
otherwise.
Easily discernible is that what Ong obtained from PCI Bank was not just any ordinary check but a
manager's check. A manager's check is an order of the bank to pay, drawn upon itself, committing in
effect its total resources, integrity and honor behind its issuance. By its peculiar character and
general use in commerce, a manager's check is regarded substantially to be as good as the money
it represents.24
A manager's check stands on the same footing as a certified check.25 The effect of certification is
found in Section 187, Negotiable Instruments Law.
Sec. 187. Certification of check; effect of. Where a check is certified by the bank on which
it is drawn, the certification is equivalent to an acceptance.26
The effect of issuing a manager's check was incontrovertibly elucidated when we declared that:

A manager's check is one drawn by the bank's manager upon the bank itself. It is similar to a
cashier's check both as to effect and use. A cashier's check is a check of the bank's cashier
on his own or another check. In effect, it is a bill of exchange drawn by the cashier of a bank
upon the bank itself, and accepted in advance by the act of its issuance. It is really the
bank's own check and may be treated as a promissory note with the bank as a maker. The
check becomes the primary obligation of the bank which issues it and constitutes its written
promise to pay upon demand. The mere issuance of it is considered an acceptance thereof.
x x x.27
In the case of New Pacific Timber & Supply Co., Inc. v. Seneris28:
[S]ince the said check had been certified by the drawee bank, by the certification, the funds
represented by the check are transferred from the credit of the maker to that of the payee or
holder, and for all intents and purposes, the latter becomes the depositor of the drawee
bank, with rights and duties of one in such situation. Where a check is certified by the bank
on which it is drawn, the certification is equivalent to acceptance. Said certification "implies
that the check is drawn upon sufficient funds in the hands of the drawee, that they have been
set apart for its satisfaction, and that they shall be so applied whenever the check is
presented for payment. It is an understanding that the check is good then, and shall continue
good, and this agreement is as binding on the bank as its notes circulation, a certificate of
deposit payable to the order of depositor, or any other obligation it can assume. The object of
certifying a check, as regards both parties, is to enable the holder to use it as money." When
the holder procures the check to be certified, "the check operates as an assignment of a part
of the funds to the creditors." Hence, the exception to the rule enunciated under Section 63
of the Central Bank Act to the effect "that a check which has been cleared and credited to
the account of the creditor shall be equivalent to a delivery to the creditor in cash in an
amount equal to the amount credited to his account" shall apply in this case x x x.
By accepting PCI Bank Check No. 073661 issued by Sarande to Ong and issuing in turn a
manager's check in exchange thereof, PCI Bank assumed the liabilities of an acceptor under Section
62 of the Negotiable Instruments Law which states:
Sec. 62. Liability of acceptor. The acceptor by accepting the instruments engages that he
will pay it according to the tenor of his acceptance; and admits
(a) The existence of the drawer, the genuineness of his signature, and his capacity and
authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
With the above jurisprudential basis, the issues on Ong being not a holder in due course and failure
or want of consideration for PCI Bank's issuance of the manager's check is out of sync.
Section 2, of Republic Act No. 8791, The General Banking Law of 2000 decrees:
SEC. 2. Declaration of Policy. The State recognizes the vital role of banks in providing an
environment conducive to the sustained development of the national economy and the
fiduciary nature of banking that requires high standards of integrity and performance. In
furtherance thereof, the State shall promote and maintain a stable and efficient banking and
financial system that is globally competitive, dynamic and responsive to the demands of a
developing economy.

In Associated Bank v. Tan,29 it was reiterated:

"x x x the degree of diligence required of banks is more than that of a good father of a family
where the fiduciary nature of their relationship with their depositors is concerned." Indeed,
the banking business is vested with the trust and confidence of the public; hence the
"appropriate standard of diligence must be very high, if not the highest degree of diligence."
Measured against these standards, the next question that needs to be addressed is: Did PCI Bank
exercise the requisite degree of diligence required of it? From all indications, it did not. PCI Bank
distinctly made the following uncontested admission:
1. On 29 November 1991, one Warliza Sarande deposited to her savings account with PCI
Bank's Magsaysay Avenue Branch, TCBT-General Santos Branch Check No. 0249188
for P225,000.00. Said check, however, was inadvertently sent by PCI Bank through
local clearing when it should have been sent through inter-regional clearing since the
check was drawn at TCBT-General Santos City.
2. On 5 December 1991, Warliza Sarande inquired whether TCBT Check No. 0249188 had
been cleared. Not having received any advice from the drawee bank within the regular
clearing period for the return of locally cleared checks, and unaware then of the error of not
having sent the check through inter-regional clearing, PCI Bank advised her that
Check No. 024188 is treated as cleared. x x x.30 (Emphasis supplied.)
From the foregoing, it is palpable and readily apparent that PCI Bank failed to exercise the highest
degree of care31required of it under the law.
In the case of Philippine National Bank v. Court of Appeals,32 we declared:
The banking system has become an indispensable institution in the modern world and plays
a vital role in the economic life of every civilized society. Whether as mere passive entities
for the safe-keeping and saving of money or as active instruments of business and
commerce, banks have attained an ubiquitous presence among the people, who have come
to regard them with respect and even gratitude and, most of all, confidence.
Having settled the other issues, we now resolve the question on the award of moral and exemplary
damages by the trial court to the respondent.
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.33 The requisites for an award of moral damages are welldefined, thus, firstly, evidence of besmirched reputation or physical, mental or psychological
suffering sustained by the claimant; secondly, a culpable act or omission factually
established; thirdly, proof that the wrongful act or omission of the defendant is the proximate cause
of the damages sustained by the claimant; and fourthly, that the case is predicated on any of the
instances expressed or envisioned by Article 221934 and Article 222035 of the Civil Code. All these
elements are present in the instant case.36
In the first place, by refusing to make good the manager's check it has issued, Ong suffered
embarrassment and humiliation arising from the dishonor of the said check.37 Secondly, the culpable
act of PCI Bank in having cleared the check of Serande and issuing the manager's check to Ong is
undeniable. Thirdly, the proximate cause of the loss is attributable to PCI Bank. Proximate cause is

defined as 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.38 In
this case, the proximate cause of the loss is the act of PCI Bank in having cleared the check of
Sarande and its failure to exercise that degree of diligence required of it under the law which
resulted in the loss to Ong.
On exemplary damages, Article 2229 of the Civil Code states:
Art. 2229. Exemplary or corrective damages are imposed, by way of example or correction
for the public good, in addition to the moral, temperate, liquidated or compensatory
damages.
The law allows the grant of exemplary damages to set an example for the public good. The banking
system has become an indispensable institution in the modern world and plays a vital role in the
economic life of every civilized society. Whether as mere passive entities for the safe-keeping and
saving of money or as active instruments of business and commerce, banks have attained an
ubiquitous presence among the people, who have come to regard them with respect and even
gratitude and most of all, confidence. For this reason, banks should guard against injury attributable
to negligence or bad faith on its part.39 Without a doubt, it has been repeatedly emphasized that
since the banking business is impressed with public interest, of paramount importance thereto is the
trust and confidence of the public in general. Consequently, the highest degree of diligence is
expected, and high standards of integrity and performance are even required of it.40 Having failed in
this respect, the award of exemplary damages is warranted.
Article 2216 of the Civil Code provides:
ART. 2216. No proof of pecuniary loss is necessary in order that moral, nominal, temperate,
liquidated or exemplary damages may be adjudicated. The assessment of such damages,
except liquidated ones, is left to the discretion of the court, according to the circumstances of
each case.
Based on the above provision, the determination of the amount to be awarded (except liquidated
damages) is left to the sound discretion of the court according to the circumstances of each
case.41 In the case before us, we find that the award of moral damages in the amount of P50,000.00
and exemplary damages in the amount of P20,000.00 is reasonable and justified.
With the above disquisition, there is no necessity of further discussing the last issue on the PCI
Bank's counterclaim based on the supposed lack of merit of Ong's complaint.
WHEREFORE, premises considered, the Petition is DENIED and the Decision of the Court of
Appeals dated 29 October 2002 in CA-G.R. CV No. 65000 affirming the Decision dated 3 may 1999,
of the Regional Trial Court of Davao City, Branch 14, in Civil Case No. 21458-92, are AFFIRMED.
SO ORDERED.
Panganiban, C.J., Chairperson, Ynares-Santiago, Austria-Martinez, Callejo, Sr., J.J., concur.

Footnotes

The Consolidated Bank and Trust Corporation.

Docketed as Civil Case No. 21458-92 filed before the Regional Trial Court of Davao City
Branch 14.
3

Records, p. 25.

Id. at 54.

Id. at 60.

Id.

Id. at 72.

Rollo, p. 268.

Records, p. 106.

10

Penned by Judge William M. Layague.

11

Records, pp. 192-198.

12

Penned by Associate Justice Elvi John S. Asuncion with Associate Justice Conrado M.
Vasquez, Jr. and Sergio L. Pestano, concurring; rollo, pp. 255-262.
13

Id. at 471-472.

14

Ley Construction and Development Corporation v. Union Bank of the Philippines, 389 Phil.
788, 798 (2000).
15

Cotabato Timberland Co. Inc. v. C. Alcantara and Sons, Inc., G.R. No. 145469, 28 May
2004, 430 SCRA 227, 223.
16

Monetary Foods Corporation v. Eserjose, G.R. No. 153126, 11 September 2003, 410
SCRA 627, 633, citing Solidbank Corporation v. Court of Appeals, 439 Phil. 23, 34 (2002).
17

Evadel Realty and Development Corporation v. Soriano, G.R. No. 144291, 20 April 2001,
357 SCRA 395, 401.
18

Records, p. 77.

19

Carcon Development Corporation v. Court of Appeals, G.R. No. 88218, 19 December

1989, 180 SCRA 348, 352.
20

P.C. Javier and Sons, Inc. v. Court of Appeals, G.R. No. 129552, 29 June 2005, 462
SCRA 36, 47, citing De Leon v. Santioago Syjuco, Inc., 90 Phil. 311 (1951).
21

Soler v. Court of Appeals, G.R. No. 123892, 21 May 2001, 358 SCRA 57, 64.

22

Section 32 of Presidential Decree No. 72 (Amending Republic Act Numbered Two

Hundred and Sixty-Five, entitled, "The Central Bank Act"), states:
SEC. 32 . Section sixty-three of the same Act is hereby amended to read as follows:
"SEC. 63. Legal character . Checks representing deposit money do not have legal
tender power and their acceptance in the payment of debts, both public and private,
is at the option of the creditor: Provided, however, that a check which has been
cleared and credited to the account of the creditor shall be equivalent to a delivery to
the creditor of cash in an amount equal to the amount credited to his account. (O.G.
No. 50, Vol. 68, p. 46; emphasis supplied.)
23

Hector M. De Leon, Jr., THE PHILIPPINE NEGOTIABLE INSTRUMENTS LAW (and Allied
Laws) Annotated (2004 ed.), p. 223, citing National Bank v. Picornell, 46 Phil. 716 (1922).
24

Tan v. Court of Appeals, G.R. No. 108555, 20 December 1994, 239 SCRA 310, 322, cited
in BPI v. Court of Appeals, G.R. No. 112392, 29 February 2000, 326 SCRA 41.
25

Supra note 21 at 411.

26

Id.

27

International Corporate Bank v. Gueco, G.R. no. 141968, 12 February 2001, 351 SCRA
516, 528.
28

G.R. No. L-41764, 19 December 1980, 101 SCRA 686, 693.

29

G.R. No. 156940, 14 December 2004, 446 SCRA 282, 291, citing Philippine Bank of
Commerce v. Court of Appeals, 336 Phil. 667, 681 (1997).
30

Records, p. 24.

31

Philippine Bank of Commerce v. Court of Appeals, supra not 27.

32

326 Phil. 326, 347 (1996), citing Bautista v. Mangaldan Rural Bank, Inc., G.R. No. 100755,
10 February 1994, 230 SCRA 16, 21 and Simex International (Manila), Inc. v. Court of
Appeals, G.R. No. 88013, 19 March 1990, 183 SCRA 360, 366-367.
33

Article 2217, Civil Code.

34

Art. 2219. Moral damages may be recovered in the following and analogues cases:
(1) A criminal offense resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;

(5) Illegal or arbitrary detention or arrest;

(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in article 309;
(10) Acts and actions referred to in articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
35

Art. 2220. Willful injury to property may be a legal ground for awarding moral damages if
the court should find that, under the circumstances, such damages are justly due. The same
rule applies to breaches of contract where the defendant acted fraudulently or in bad faith.
36

Cagungun v. Planters Development Bank, G.R. No. 158674, 17 October 2005, 473 SCRA
259, 272-273.
37

TSN, 28 August 1997, p. 11; records, p. 171.

38

Phil. Bank of Commerce v. Court of Appeals, supra note 27, cited in Bank of the Philippine
Islands v. Casa Montessori Internationale, G.R. No. 149454, 28 May 2004, 430 SCRA 261,
287.
39

Cagungun v. Planters Development Bank, supra not 34 at 273-274.

40

Bank of the Philippine Islands v. Casa Montessori Internationale, supra note 36.

41

Simex International (Manila), Inc. v. Court of Appeals, supra note 30.